Ultimate Beneficial Owners (UBOs) are the individuals who have the final authority over a legal company and directly benefit from its operations or revenue. Due to the complex ownership structure, it is crucial to understand that UBO is not always the same person as the company director or shareholder. In some cases, they are not even officially listed on the public registries, but they still enjoy all the economic perks and benefits of an organization.
Standard KYB procedures may not be efficient enough to reduce all the risks of potential threats. This is why UBO screening is very important to safeguard trade partners, enabling them to collaborate with legal businesses only. The comprehensive UBO screening uncovers the identities of UBOs and ensures they are verified against the government databases.
Importance of UBO Screening
UBO identification and screening are important as they prevent money laundering and terrorist funding by maintaining compliance with relevant regulations to avoid financial losses and fines. Criminals and money launderers often deliberately make the ownership structure complicated and use shell companies to transfer money from illegal to legal routes. UBO screening is the essential component of the business verification procedure, ensuring the compliance of all major individuals associated with a specific corporation.
One of the main reasons for UBO screening is verifying individuals for Anti Money Laundering (AML) checks. Failure to adapt to the automated and tech-integrated screening methods can result in fines, penalties, and sanctions. While corporate onboarding, a business may unknowingly partner up with another entity whose UBOs may be sanctioned. Dealing with such companies is lethal and often results in bad circumstances. Because of this reason, companies should watch for the potential UBO red flags to suspect money laundering and other financial crimes. Some key red flags of UBOs are the following:
- Individuals who do not provide accurate or sufficient data on their transactions.
- Organizations that ship wire transfers with an oddly high frequency or large number of people.
- Businesses that deal in operations outside of their niche.
- Companies that usually do infrequent transactions.
- Non-alignment of the transactions and the wealth profile of an organization.
- Transactions that are directed to the senders that are located in regions with high-risk AML states.
- Payments that are not linked to a bank account.
Companies should prioritize compliance systems and technology to detect and prevent unlawful activities. Banks and other finance bodies are seeking solutions that incorporate machine learning and other analytic approaches to analyze the bulk of complicated data required to address UBO challenges.
Challenges in UBO Screening
While the significance of UBO screening is clear, companies still have various challenges during the procedure. Ownership arrangements are complex and usually involve various jurisdictions, entity types, and different levels of structures to conceal the criminal’s real identity. Other challenges of UBO identification include:
- Manual Data Procedures: Manual data collection of the ultimate beneficial owners is likely to have human errors and is usually time-consuming and inefficient.
- High cost: Conducting comprehensive UBO screening methods can be quite expensive for organizations. This is a huge problem for companies that do not have a significant budget.
- Incomplete and insufficient data One of the biggest hurdles to successful UBO screening is inaccurate, outdated, and insufficient data. Organizations go through a change of ownership often, which requires the updated availability of their data.
- Lack of collaboration: Effective UBO screening calls for cooperation between states. However, this is difficult to achieve. Some jurisdictions may be reluctant to share data, making it difficult for the legal authorities to establish a robust screening procedure.
Key Practices for Effective UBO Screening
- Incorporation of Technology
Companies can utilize technology and advanced systems to enhance the efficiency of their UBO screening procedures. From the collection of the Ultimate Beneficial Owner data to their analysis, everything can be done with machine learning integrated software.
- Risk-Based Approach
One of the best practices for effective UBO screening is the risk-based approach. Companies can tailor their screening procedure to the perceived level of the potential business relationship. High-risk profiles require Enhanced Due Diligence (EDD).
- Ongoing Monitoring
As mentioned earlier, the UBO framework keeps on changing because a company’s beneficiaries change often. Hence, a company should not rely on one-time UBO screening. Regular monitoring is crucial to mitigate the potential risk of partnering up with an illegal third party.
- Effective Collaboration
Establishing a harmonious and smooth relationship between businesses and regulatory bodies is essential for combating financial crimes like terrorist funding and money laundering. It helps create an effective UBO screening framework.
Concluding Thoughts
In the contemporary business ecosystem, UBO screening is not only an option but also a necessity for ensuring transparency. With strong UBO screening methods, organizations can actively contribute to building a secure and reliable financial system. Companies should prioritize compliance systems and technology to detect and prevent unlawful activities. Smart banks and other finance bodies are seeking solutions that incorporate machine learning and other analytic approaches to analyze the bulk of complicated data required to address UBO challenges.
