Understanding UBO structures

UBOs are often concealed by complex legal structures, which makes it difficult to identify a UBO. In this article, we will help you better understand the complexities of legal UBO structures and provide examples (halfway through the article) of different types of UBO structures.

UBO structures


The complexities of ownership and control

Identifying and verifying ultimate beneficial owners (UBOs) is an essential component of both the Know Your Customer (KYC) onboarding and monitoring process. Moreover, it is central to the latest set of international sanctions and regulations in the areas of Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) as well as tax compliance laws and standards such as FATCA and CRS. The impact of this on the financial sector is great, but also other organisations with Know Your Vendor (KYV) and Know Your Third Party (KYTP) obligations are affected.

Scandals surrounding the Panama Papers, Unaoil and VimpelCom underscore the dire need for robust Customer Due Diligence (CDD). And have additionally created momentum for lawmakers to set rules for the publication and disclosure of UBOs. Companies and individuals who do not comply with the stricter regime, risk hefty financial and reputational risks.

While the penalties don't lie, uncovering complex legal structures designed to conceal UBOs is a huge challenge.
Confusion over different UBO definitions, a lack of accurate UBO registries, disclosure fatigue and willful refusal to cooperate are also hurdles that must be overcome.

This article helps to better understand complexities of legal beneficial ownership structures. It also provides insight into how data and analytics can improve the speed and accuracy of UBO identification, as well as how you as an organization can benefit from improved knowledge management to reallocate resources.

Shrouded in mist

Millions of new companies are registered worldwide each year, for which often very little information is needed. Due to these huge numbers alone, identifying UBOs should never be underestimated. Complex UBO structures, such as jurisdictions with a high degree of secrecy and many letterbox firms (such as the Cayman Islands) make identifying and verifying UBOs even more difficult.

While offshore tax havens have been the focus of public anger due to numerous scandals, it took the publication of the infamous Panama Papers were the target of public anger, it took the publication of the infamous Panama Papers to show how flexible legal structures - in combination with the protection offered by offshore jurisdictions - make it difficult to identify (ultimate) beneficial owners.

To date, few jurisdictions have defined beneficial ownership. Although various regulations and standards in the areas of AML and CTF are largely unified on a definition that
based on the G20/OECD/FATF principles, each jurisdiction has its own threshold. Which therefore requires organizations to adopt different beneficial ownership approaches.

Disclosure of beneficial ownership is not a new phenomenon. Legal frameworks that oversee the disclosure of ownership and governance structures have long existed as a foundation for the prevention and detection of fraud, corruption, tax evasion and criminal activity. Although most customers and third parties are legitimate businesses, terrorism and geopolitical instability on the world stage have shown how terrorists, human traffickers and corrupt officials finance themselves through financial networks. In response, governments and lawmakers have recently stepped up efforts to eliminate financial support for these criminals, including by requiring organizations to find out who actually owns the company they are dealing with and make sure they are reliable.

For many organizations, getting down to the level of detail is by no means child's play. It often takes days to identify manually entered information such as company name, address and registration details.

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A regulatory catch 22

It may be known by now that the new regulations brings with it a problematic paradox. Requirements for identification and verification have increased, while access to information is still limited and legal cloaking strategies are multi-layered and complex. Indeed, determining (ultimate) beneficial ownership relies heavily on self-certification, but also on information in company registries and financial institutions, Trust and Company Service Providers (TCSP), regulators and authorities.

Yet most of these sources have no or limited access to offshore entities, or they contain unreliable and incomplete data. According to the World Bank, to the extent that public registers already exist (such as the Persons of Significant Control register in the United Kingdom)
- detailed information on UBOs is only rarely included because it is not mandatory. Despite the efforts of governments and regulators around disclosure and transparency, information on UBOs of offshore entities is not included in central registries for AML and CTF.

While there is a trite set of rules, it is not wise to rely on one beneficial ownership definition. For example, financial institutions of the FinCen Final Rule not to verify that individuals who are on a beneficial owner list based on self-certification are actually stakeholders of a legal entity. Without further steps to verify beneficial ownership, financial institutions may not be fully compliant with laws implemented in other jurisdictions, such as the EU's Fourth AML Directive.

The biggest challenges of beneficial ownership

A risk-based approach to beneficial ownership

As the regulatory landscape and the nature of available information change, UBO identification seems like an insurmountable task. A risk-based approach with standard lower limits for UBO identification and three lines of defense strategies is standard practice for low risk compliance teams.

Beneficial ownership falls into three categories: executive directors (and/or senior officers), major shareholders (owning at least 3 percent of an organization's securities), and de facto third-party shareholders. Calculating UBO is relatively straightforward for a publicly listed company with direct shareholders.

However, it gets trickier when ownership is disguised by multiple layers of indirect ownership. These ownership structures pose hefty risks and therefore require greater diligence on the part of compliance teams so that they can demonstrate that they have taken all possible steps to identify UBO.

Direct and indirect ownership: put the puzzle pieces together.
Beneficial ownership is best visualized as a series of direct or indirect relationships. In the following diagrams, we have depicted the different levels of ownership between stakeholders and entities.

In this example P1 is the direct owner of enterprise C1 and posseses 30% of the shares.
Person P2 is a direct owner of enterprise C1 and posseses 70% of the shares.

Simple indirect shareholdings

This diagram visualizes a typical scenario that illustrates how organizations determine the UBO of a target company. In this situation, the shares are owned by multiple individuals. In this example, Person 2 owns 81,33% of the shares of A Holdings Ltd.
The level and lower limit of ownership that an organization wants to work with depends, among other things, on its risk appetite. Thorough identification of UBOs requires reliable information and, to the extent necessary, detailed research.

Different levels of indirect shareholding

In this scenario, there are multiple levels of indirect ownership. The three interest holders are clearly marked in orange boxes. In this case, Mr. Vos has an interest of 32% in target company A. (50% x 65% = 32%), Mr. de Wit has 32% in target company A. (50% x 65% = 32%), Mr. de Wit has 14% and Mr. Maas 50%. Note: Mr. de Wit has both a direct and an indirect interest in Company B.

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Circular relationships (indirect shareholding on multiple levels)

Within this construction, organizations create a loop in which they own interests in other companies in the same loop as well as possibly owning shares in themselves. By adding up the percentage of ownership in each company, many organizations
will in the loop 100% of their ownership back to other companies in the loop. If not, then the shortfall represents the percentage owned by individuals according to the shareholder register. These reported percentages will be lower than what the individuals actually own and manage when they are the only individuals involved in the loop.
In the above example, we see a shareholder who, by owning only 1% of the shares is seemingly of no great importance. In reality, however, the individual in this construction appears to be the sole UBO. All profits are then transferred to this UBO in 1% shares paid out. If the company makes a profit, the UBO receives the entire profit - but in 1 percent increments.

A data-inspired UBO approach

For many organizations, getting down to the level of detail is by no means child's play. It often takes days to identify manually submitted information such as company name, address and registration details, verify this information and - where appropriate - conduct Enhanced Due Diligence (EDD). To calculate UBO, compliance teams often work in silos and in different jurisdictions often rely on different reports and spreadsheets, as well as an array of online business intelligence reports. These reports are rigid, potentially inaccurate and do not necessarily integrate with other systems and data sources.

The traditional group structure approach would fail for multi-level indirect shareholding. This is because there is not one global parent, but two entities with an equal share of 50%. To accurately verify and calculate actual ownership, it is essential that the available data connects both global concern structures and personal share ownership. This can be done
by leveraging data and analytics to automate the identification and verification of beneficial ownership.

The most common approach is to bring workflow and content together through Application Programming Interface technology. This speeds up the the data collection process enormously and ensures that workflows can be built correctly. This allows for immediate processing and for complex cases to be quickly routed to the right teams. Instead of calculating the UBO via online business intelligence reports and spreadsheets, the analyst creates a query for the business entity in question via the API. In this way, he initiates an analysis of the direct, indirect and circular ownership structures of the business entity, knowing within seconds who the relevant the relevant shareholders and what their ownership percentage is. It also becomes possible to build a notification methodology for ownership changes. This will free up resources to focus on the right customers and investigate important changes.

The most common approach is to bring workflow and content together through Application Programming Interface technology.

Being able to identify ultimately beneficials in a few clicks not only helps to speed up the standard onboarding process, but it also frees up internal resources to focus on more complex investigations. Moreover, by storing data centrally and using visualization software, other business units are able to use the same information.
In this way, you create a supply chain of relationship data that speeds decision making and increases organizational efficiency. But a data-inspired approach has other benefits. Besides a lower risk of reputational risk from engaging with potentially flawed PEPs, companies can reduce the number of errors caused by manual input, Improve company-wide knowledge management as well as improve competitiveness by reducing operational costs.

Beneficial ownership recommendations


There is no doubt that confusion over different UBO definitions, a lack of public records, disclosure fatigue and intentional non-cooperation are major challenges faced by organizations regarding AML and CTF regulations. The globalization of beneficial ownership, the complexity of legal corporate vehicles and the use of offshore financial centers require that data originating from different jurisdictions be forensically examined. Currently, however, transparency around beneficial ownership is still the exception rather than the rule in many jurisdictions.

The challenges are great, but data analytics are easing the pain of beneficial ownership identification. Through the use of technology and on-demand, timely, accurate and reliable data sources that provide information about global
tying together corporate structures and personal shareholdings, organizations can be confident that they are achieving the single customer view needed to be compliant and nip reputational risks in the bud.

Ultimately, the benefits of a data-inspired approach can only be realized by partnering with a respected data provider capable of verifying large amounts of information - obtained through a reliable, transparent data supply chain. The "all necessary means" test is a regulatory minimum standard, but with relevant and high-quality data that is shared company-wide shared, organizations can go beyond compliance. To become more agile and improve competitiveness.

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