Identifying the Ultimate Beneficial Owners

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In the face of terrorist financing and drug trafficking, money laundering is becoming a growing concern for the financial institutions across the world. These activities are compelling the banks and financial institutions (FIs) to take the Ultimate Beneficial Ownership (UBO) compliance seriously.

What is UBO ?

Ultimate Beneficial Owner refers to any person with even indirect ownership or control of an entity. In order to hide the origin of the criminal proceeds, complex structure of legal entities is created.

Financial Action Task Force defines Ultimate Beneficial owner as the natural person who ultimately owns or controls a customer or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.

UBO in United Arab Emirates

However, in the Mutual evaluation of United Arab Emirates it found that there are multiple definitions of UBO across the Country. There are different free trade zones in the country. Separate commercial laws apply to the Dubai Development Authority, DIFC, JAFZA, and Dubai International Airport Free Zone.

According to Dubai Development Authority beneficial owner is anyone who controls 25% or more than shares, but the DIFC regulations requires the owner to control relevant percentage of shares.

In the Jabel Ali Free Trade Zone (JAFZA), there is no requirements about beneficial ownership. This creates the regulatory arbitrage. The international certification program designed by Indiaforensic for the Middle East countries address these issues.

UBO Compliance in India

Latest in the bandwagon to control the UBO misuse is India. In 2018, Ministry of Company Affairs notified the Significant Beneficial Ownership Rules in 2018. To determine the natural persons who hold ‘ultimate’ control over companies, the SBO Rules have prescribed piercing through the veil of non-individual shareholders. The term ‘beneficial interest’ has now been defined under Section 89 of the Act.

Indian companies will now be required to identify, verify and report the Significant Beneficial Owners to the RoC. It has to be reported in the specially designed form called BEN-II. This will increase the responsibility of the financial institutions to carry out the customer due diligence. Banks would be able to trace the natural person who owns the business, however multiple layers of ownership will definitely increase the cost of compliance with the Anti Money Laundering (AML) rules.

In 2019, Ministry of Corporate Affairs (MCA) has amended the existing rules by introducing, Companies (Significant Beneficial Owners) Amendment Rules, 2019. All the provisions from 2018 bill are replaced by the new one except Rule 5 (Register of significant beneficial owners) and Rule 6 (Notice seeking information about significant beneficial owners). 

But further, Rule 2A has been introduced which bestows responsibility upon the Reporting Company,

  1. To find out if there is any Significant Beneficial Owner in the relation to the Reporting Company,
  2. Identify the individual and cause such individual to make a declaration to the Reporting Company in Form No. BEN-1 (a Physical Form).
  3. The form shall be filed to Reporting Company within 90 days from the commencement of these Rules (i.e., by 10th May, 2019) and for subsequent changes or acquiring the status of SBO, within 30days of such change or acquiring the SBO by the individual who is identified as SBO in relation to the Reporting Company. 
  4. Every Company shall send notice in Form No. BEN-4 to all its members(other than individuals) holding not less than 10% of the company’s shares/voting rights/right to receive/participate in the dividend or any other distribution payable in a financial year.

Global Ultimate Beneficiary Owner Compliance

UBO Compliance in many countries require the financial institutions to understand who runs this chain and who exercise the control over the entities.

Obtaining accurate beneficial ownership information is crucial for the financial institution to:

  • Ensure that the Financial Institutions perform screening and provide risk rating for all the required parties against Politically Exposed Persons (PEPs). These parameters may also include factoring negative information in public domain associated with the Ultimate Beneficial Owners.
  • Ensure Banks do not do business with sanctioned customers associated with the Ultimate Beneficial Owners.
  • Understand the potential risk that a Ultimate Beneficial Owners pose to a bank through its relationship with multiple customer and vendors.

Not only is knowing your business clients an important risk mitigation strategy, it also is increasingly becoming a legal requirement such as the 4AMLD requirements in Europe, or the Financial Crimes Enforcement Network (FinCEN) Final Rule in the US.