Significance of UBO Check in Business Onboarding

UBO Check

Verifying the ultimate beneficial owner of UBO is a crucial part of the business verification process. An organization has to apply a UBO check on the ultimate beneficial owner to understand that they are dealing with legitimate businesses and upright owners. Companies hiding names and details of beneficial owners are prone to financial risks. The company’s ultimate beneficial owner (UBO) may be engaged in illicit activities such as money laundering or financing terrorism. These risks badly affect the bottom line of the business and its reputation as well. A corporation must apply a UBO check over the companies while making bonds as this saves from threats and risks in future relationships.  

What is UBO?

The ultimate beneficial owner is the person who controls or owns the company assets at least 25%. He may take benefits directly or indirectly along with 25% of the voting rights in decision-making. In a company with a multi-layered structure, the entity behind the business can hide its identity to do criminal activities. In different regions of the world, the legislation for the ultimate beneficial owner UBO check varies. Sometimes, the guidelines for UBO legislation make UBO identification harder. Therefore, the FATF has designed specific requirements for the ultimate beneficial owner UBO Verification. 

  • Holds at least 25% of the asset
  • Exercise a minimum of 25% of the voting rights
  • Is the guardian of minors
  • Has a power of attorney
  • Indirect beneficiary of at least 25% of the company’s capital
  • Is a shareholder who could’ve been transferred anonymously

Generally, FATF sets the guideline of 10 to 25% for the ultimate beneficial owner UBO of the company. However, a UBO check for the bank that he must have 10% of the company’s capital.

UBOs and Shell Companies

Shell companies are notorious for being involved in money laundering, bankruptcy, terrorist financing, and other criminal activities. Politically exposed persons (PEPs), as well as criminal and sanctioned persons, find channels of money laundering in shell companies. The policy of the shell company that hides the UBO details helps watchlisted people conceal them from investigators. Lax regulations within the company encourage more criminals to do business there.

US Senate approves AML Act 2020, which bans shell companies. UBO checks have introduced new obligations to fight against money laundering and other financial activities. Companies have to disclose their Ultimate beneficial owner’s information to the government. The currently designed UBO check are helping legal authorities in detecting money laundering risks associated with shell companies.

Organizations Responsible for Identifying UBO

Anti-money laundering AML regulations specify which organizations identify the ultimate beneficial owner. UBO non-compliance with AML and CTF regulations results in legal consequences such as hefty fines and sentences. These specified organizations are mentioned below:

  • Commercial and investment banks
  • Insurance firms
  • Brokerages and investment firms

An incomplete disclosed information of the UBO creates hindrances in opening a business account and securing the corporation’s financing. It is crucial for businesses to take Ultimate Beneficial Owner UBO checks seriously.

Risks of UBOs

In the corporate structure, ultimate beneficial owners (UBOs) play a significant role in business operations. However, UBOs also pose risks like money laundering, terrorism financing, and other financial crimes. Some of the common risks with UBO for companies are as follows:

  • UBO, whether a group or a person, may be involved in money laundering to hide their illegal funding. Hiding the ultimate beneficial ownership helps money launderers do business without being detected.
  • If the owner of the company is detected as involved in financial crime, it will lead to penalties such as fines and sanctions. This ultimately creates bad effects on the company’s reputation in the market.
  • A corporation that onboard the company without performing UBO check is constantly exposed to potential risks. The delay or suspicious payments may lead to fraud and other financial crimes. 

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Must Perform UBO Check

Ultimate beneficial owner UBO is an important part of business verification while onboarding. According to FATF, UBO holds 25% of the company’s assets and 25% of voting rights. The shell companies hiding UBO details are always exposed to money laundering and other financial risks. These risks badly affect the company’s bottom line, reputation, and business operations. UBO must comply with AML and CTF regulations to combat illicit activities. Corporations must apply UBO checks during third-party due diligence to identify that UBO must be legitimate. Also, this helps in risk assessment and mitigation without any significant loss.