UBO verification is crucial in this digital age, where fraud is happening at the cost of making new partnerships with companies or financial institutions. Companies are required to verify the business partners in order to ascertain their identity. Specifically, the person who benefits most from the business is the UBO.
According to Javelin Research, the total losses from traditional identity fraud reached almost $23 billion in 2023, leading to a 13% rise in overall losses for American adults affected by identity fraud. Since Javelin started monitoring financial losses linked to scams in 2021, there has been a gradual but almost unnoticeable decrease in financial losses. Criminals directing scams caused just over $20 billion in fraud losses to victims.
This highlights the need for effective KYB verification protocols to ensure security and compliance with the regulation. This verifies that the company is adhering to Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT). Jurisdictions have varying definitions and requirements for UBOs, but it is crucial for financial institutions to authenticate company information. It is crucial to comprehend corporate hierarchies and ascertain the ultimate beneficial owner for due diligence in adhering to AML and KYB regulations.
This article will explore the comprehensive term of UBO, what it is, and why it is essential to verify it. Further, the UBO requirements for the EU and the U.S. also, most importantly, how it deters financial fraud are discussed.
What is UBO?
Ultimate Beneficial Owner or UBO refers to the individual who ultimately owns or controls a company, even if the ownership is held indirectly through a chain of entities. UBOs typically have significant influence or control over the organization, often owning at least 25% of the shares or voting rights.
Identifying the UBO is essential for compliance with Anti-Money Laundering (AML) and Know Your Business (KYB) regulations. It helps prevent illegal activities such as money laundering, tax evasion, and fraud. UBO transparency enhances financial security and promotes accountability within corporate structures.
UBO Verification For Deterring Potential Fraud
UBO verification helps prevent fraudsters from hiding behind the corporate entity and draws out the actual owners. Hence, the companies should observe the AML and KYC laws by identifying the Ultimate Beneficial Owner (UBO). They might prevent fraudsters from dealing with layers of ownership complexity. Money laundering, tax evasion, and other financial crimes are reduced in that way. Verification against UBO helps organizations determine dubious activities, thus providing transparency and ensuring accountability. Organizations can then protect their business operations, build trust, and minimize the possibilities of fraudulent transactions flowing through their corporate networks by knowing the people in control.
EU UBO identification Requirements
The EU’s Ultimate Beneficial Owner (UBO) identification requirements for financial institutions doing business with commercial clients stem from the 4th AML Directive (4AMLD), which first required UBO identification. In fact, most member states have made domestic laws implementing such reporting requirements. Sweden is one such example that mandates reporting of the beneficial owners on behalf of the company to the Swedish Companies Registration Office. A beneficial owner is anybody who, directly and indirectly, exercises control over the board or owns more than 25% of it. Public UBO registers have been added under the 5th AML Directive, but all EU states have not joined hands with this practice yet. Under the 6th AML Directive, criminal liability can be attached against the employees and officers for non-compliance.
U.S. UBO Checks— FINCEN
UBO checks in the United States are governed by FinCEN under the CDD rule that was implemented in 2018. The CDD regulation requires U.S. financial institutions, banks, and broker-dealers to identify the UBOs of legal entity customers, such as corporations and partnerships. UBOs usually include individuals who own 25% or more of an entity and those in control with significant influence over it. Under the Corporate Transparency Act, U.S. companies are required to report UBO details that include a legal name, date of birth, address, and also a number for a government-issued ID to the FinCEN.
Read more: how to check if a company is legitimate
Benefits of Identifying the Ultimate Beneficial Owner
Identifying the Ultimate Beneficial Owner (UBO) offers numerous advantages for businesses and financial institutions, particularly in terms of compliance or risk management. The key benefits include:
- Enhanced Regulatory Compliance: Meeting Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations help businesses avoid legal penalties.
- Fraud Prevention: UBO identification ensures transparency, reducing the risk of fraudulent activities like money laundering and tax evasion.
- Improved Trust and Transparency: Businesses like financial institutions can build stronger relationships by demonstrating accountability and transparency to regulators and clients.
- Risk Mitigation: Identifying UBOs helps assess potential risks associated with business partnerships, minimizing exposure to high-risk entities.
- Streamlined Due Diligence: Knowing the UBO enables faster and more efficient due diligence processes, facilitating smoother business operations by reducing compliance delays.
Final Words
The identification of the Ultimate Beneficial Owner is essential in order to encourage safe partnerships and avoid any sort of regulatory non-compliance. As financial fraud keeps growing with each passing day, verification of the UBO has emerged as a crucial control against fraud schemes that promote responsibility and transparency in corporate structure.
Businesses that strictly abide by anti-money laundering and know-your-customer rules avoid all sorts of risks to facilitate due diligence procedures, thus gaining trust from clients and regulators. An emphasis on UBO compliance will incorporate a component of organizational integrity and ultimately contribute to the overall safe financial environment.
