The pressure on companies to identify and verify ultimate beneficial ownership or UBO information is growing, with more legal requirements being imposed, first by FinCEN, and most recently by the UK, which particularly targeted the British Overseas Territories.
Given the complex structures of UBO information and its decentralized accessibility, how do we comply with the new rules?
Some jurisdictions such as the EU have central repositories or UBO registers where, under certain circumstances, UBO information must be shared and reported. This protocol provides transparency and access those seeking the information. But most other jurisdictions don’t impose formal requirements for the disclosure of UBO information, let alone require public visibility.
Another major challenge companies face is identifying UBO information for entities that have multiple layers of ownership, which may in turn include a combination of UBO companies and individuals.
In its FAQ guidance issued on April 3, 2018 regarding its new Customer Due Diligence (CDD) requirements, FinCEN confirmed that covered financial institutions are required to identify and verify UBO individuals, whether such individuals meet the definition of a beneficial owner directly or indirectly. So if a customer entity is owned by another entity, a covered financial institution is obligated to obtain information from the customer entity regarding the individual beneficial owners of the controlling entity.
Under the FinCEN rule, financial institutions have some flexibility about the methods they can use to achieve compliance. As stated in the FAQ, “financial institutions should conduct their own risk-based analysis to determine the appropriate method(s) of verification and the appropriate documents or types of photocopies or reproductions to accept in order to comply with the beneficial owner verification requirement.”
While methodology is open-ended, in practice the options for complying with UBO requirements are still limited,mainly by the challenges described above. Not surprisingly, in an effort to find a simple and automated process, compliance officers are actively searching for vendors who can meet their UBO needs.
As of today, providers can congregate UBO information where it is available and screen against a robust and consolidated data source. But they aren’t able to promise that they this methodology can be relied upon as a sole solution.
Another option is to implement protocols for collecting UBO information during the customer on-boarding process. This can supplement an automated solution. While this onboarding approach may be a good way to directly collect and access information, it may not be well received by customers, who view UBO information as private and sensitive, or by relationship managers dealing with the customers. Moreover, collection of UBO information during onboarding lengthens the process, which can delay productivity of operations and engagement with the client.
Until there is more transparency and consistency in the requirements for collecting UBO information — ideally at the time of entity formation — companies will likely be forced to use multiple procedures that are less than optimal to achieve compliance with the new UBO regulations.
Lindsay Columbo, Esq. is a founder of eSpear LLC, a developer of due diligence and screening solutions, where she serves as the Global VP of Compliance & Support Services. She previously served as Associate Corporate Counsel, Global Ethics & Compliance for Brightstar Corp. a SoftBank company headquartered in Miami, Florida. She can be contacted here.