What is an ultimate beneficial owner (UBO)?

AML/CTF regulations require that you screen ultimate beneficial owners (UBO). So what is a UBO? Let's look at definitions globally and in the US, France, Netherlands, and the UK

Published 30/12/2022

What is a ultimate beneficial owner (UBO)?

Revelations from the Panama Papers threw light on how powerful figures and sanctioned entities conceal their ownership or control of wealth by hiding their true ownership behind legal owners.

In light of these revelations, governments now require that businesses perform due diligence on the true owners of companies also known as ultimate beneficial owners (UBO). So what is a UBO?

"In summary, a UBO is a natural person who owns or controls, indirectly or directly, 25% or more of the company's financial value or voting rights; or has significant influence over the company's daily operations; or is the person on whose behalf a transaction is being made."

Here are some common questions that we will answer in this article:

Is there a global definition of an ultimate beneficial owner?

There is no global AML/CTF definition of a UBO, however regulations converge between countries.

Regulations converge on the ownership and control prongs, though legislation defining the two prongs are diverge.

Countries tend to have different ownership thresholds.

The EU followed early implementations of public UBO registries and adopted a 25% threshold while countries like Argentina set no threshold. Other countries, like Nigeria, Paraguay, Kenya, and Armenia have tresholds below 25% whereas Liberia, Ghana, and Armenia set different thresholds for different sectors of the economy.

In Liberia, for example, the threshold for significant ownership is at 5% in the oil and gas sectors of the economy whereas the threshold in forestry is more lenient at 10% .

The Financial Action Task Force recommends against thresholds as they exclude many relevant beneficial owners, and note that the global trend is towards lower thresholds.

AML/CTF regulations in the United States require businesses to identify, verify, and screen potential and existing business relationships for risks. Complying with Know Your Customer regulations have been standard AML obligation in the United States since the Bank Secrecy Act became law in 1970. The bill was created as the War on Drugs began and its purpose was to stop cartels from laundering money.

When the War on Terror began in 2001, the US Patriot Act sought to strenghten KYC requirements. However, the Patriot Act left a loophole. Since the act dealt with KYC, businesses did not have to perform the same AML/CTF checks on businesses.

Financial Crimes Enforcement Network (finCEN) addressed this AML blind spot by introducing KYB requirements in the Due Diligence Requirements for Financial Institutions (CDD).

In the CDD, a beneficial owner is a natural person who directly or indirectly, through any contract, agreemnt or understanding, exercises substantial control over a corporation or limited company.

What is notable about the CDD's definition is that it defines influence and control without specifying capacity as is the case in the UK and EU where control and influence are either 25% of voting rights or the ability to influence or remove a majority of the board.

In finCEN's consultation papers on establishing a US beneficial ownership register, finCEN explains that a majority of the board was not included as a requirement because of the uncertainty about what a minority would look like and why this would make a difference to an individual's influence over the company.

Article 5333(A) of the CDD also creates a broad definition of ownership that includes 'anyone who owns 25% or more of the equity interests of a corporation' or 'recieves substantial economic benefits from the assets of a the company'

As a result of 5333(A), an individual can be a UBO if they directly or indirectly own equity, profit sharing, or instruments such as debt that can be converted to ownership, control, or influence.

As a business operating in France, you must identify, verify, and screen the UBOs of potential and current business relationships.

French AML requlations require that you perform due diligence on individuals in the ownership tree who own, directly or indirectly, more than 25% of the company's equity or voting rights; or is able to dismiss a majority of the company's board or upper management.

As a member of the European Union, France implemented the 6th Anti-Money Laundering Directive into their national legislation: the Monetary and Financial Code (MFC).

Anti-money laundering regulations are enforced by a number of institutions in France. The Processing and Action against Illicit Financial Networks Unit (TRACFIN) is France's designated financial intelligence unit and responsible for setting reporting requirements, collecting, enriching, and analysing businesses subject to AML requirements.

The institutions that deal with companies that manage portolios, crowdfunding, insurances, credit, payment, and and money exchanges are: Procureur de la Republique Financier (PNF), the Autorite des marches Financiers (AMF), and the Autorite de Controle Prudential et de Resolution (ACPR).

Article L561-2-2 of the Monetary and Financial Code defines ultimate beneficial owners as:

"the individuals who, directly or indirectly, control the client or the individual from whom a transaction is executed or an activity is carried out."

The guidelines issued by the Autorite Des Marches Financiers interprets Article L561-2-2.

According to the guidelines, an individual exercises control if they own more than 25% of voting rights through their equity stake or if they are able to exercises power of control as a partner or by being able to dismiss the majority of the company's administration, management, or supervisory body.

What is notable about the guidelines is that it leaves the "for whom a transaction is being made or an activity carried out" undefined, which has caused concern among legislators in France.

Given the regulatory interpretation of the Monetary and Financial Code, as a business in France you must take a risk based approach that identifies, verifies, and screens UBOs of potential and current business relationships.

Regulations require that you do due diligence on individuals in the ownership tree who own, directly or indirectly more than 25% of equity or voting rights or is able to dismiss a majority of the company's board or upper management.

Who is a UBO in the Netherlands?

If your business operates in the Netherlands, you must identify, verify, and screen the UBOs of current and potential business relationships for AML/CTF risks.

Dutch UBO regulations require that you do due diligence on individuals who, directly or indirectly, own or control more than 25% of the company's assets, equity, or voting rights. You are only required to screen officers as part of UBO screenings if no UBOs can be found.

The Money Laundering and Terrorism Financing (Prevention Act) (WWFT) became effective in 2008 and defines what a beneficial owner is in its due diligence requirements. The act was ammended in 2018 to accomodate EU directives.

In the ammendment of 2018 and the WWFT Implementation Decree that accompanied the ammendment, Dutch regulators defined ultimate beneficial owners as:

A natural person who owns more than 25% of shares or assets and has more than 25% of voting rights.

Ownership is indirect or direct ownership of the company's financial assets or the right to distribution of assets including profit, reserves, or suplus after liquidation. Control is, on the other hand, the right to more than 25% of the votes in the event of amendment to articles or the capacity to exercise control of the legal entity.

Unlike in the US, the capacity to exercise control is not extended to officers. An officer is only a UBO in the Netherlands if a UBO cannot be found on the basis of shareholding or voting-rights.

When an officer becomes a UBO they are referred to as "pseudo-UBOs."

In conclusion, then, if you operate in the Netherlands you should identify, verify, and screen individuals who own or control, directly or indirectly, more than 25% of voting rights, equity, or the company's assets. There is no obligation to do due diligence on officers as part of UBO screenings unless you cannot find a UBO.

Companies operating in the UK must must identify, verify, and screen any individuals who own or control directly or indirectly 25% or more of shares or voting rights, participates in the management and direction of the company, or has the right to veto, appoint, or remove a majority of the board of directors.

It is important to remember that the UK's People of Significant Control register is self-declared and that it is, therefore, inadecuate as a source to satisfy AML/CTF requirements.

KYC requirements were first introduced in the UK in 1994 by the EU's 1st Anti-Money Laundering Directive. The Terrorism Act 2000, the Anti-Terrorism, Crime and the Security Act (ACTSA) in 2001 expanded KYC requirement beyond the financial sector. Then, in 2002, the Proceeds of Crime Act (POCA) merged previous regulations and criminalised acquiring, transferring, and concealing proceeds of crime. POCA is the basis of all AML regulations today.

In 2006, the Companies Act introduced Persons of Significant Control (PSCs), which establsihed the UK's PSC registry. KYB and UBO requirements were included in Companies Act in 2007 when the 3rd Anti-Money Laundering Directive was introduced,

The definition of a UBO was updated by the Anti-Money Laundering, Terrorist Financing Act of 2017.

PSCs and UBOs are two overlapping concepts in UK legislation. One way to think of it is this: in the UK, a UBO is an individual who fulfils one or more criteria in either the AML/CTF ACT of 2017 or one or more of the PSC requirements in Companies Act 2006.

In the AML/CTF Act 2017, a UBO is:

An individual who ultimately owns or controls, directly or indirectly, 25% or more of the shares or voting rights or controls the company by satisfying one or more conditions set out in Companies Act 2006, Schedule 1, People with Significant Control

An individual satisfies one or more of the conditions set out in the Companies Act 2006 if they have the right to veto decisions, appoint or remove a majority of the board of directors or has the right to exercise or actually exercises significant control or influence over the company.

Influence brings officers into the fold of PSCs as inforluence is any significant involvement in the management and direcion of the company.

A company in the UK must, then, identify, verify, and screen any individuals who own or control directly or indirectly 25% or more of shares or voting rights, participates in the management and direction of the company, or has the right to veto, appoint, or remove a majority of the board of directors.

There is very little publically available data on ultimate beneficial owners. Of the 309 corporate registers in the world, only 36 have public UBO registers.

The United States has no public UBO register and remained the world's foremost secrecy jurisdiction according to the Financial Secrecy Index 2022 published by the Tax Justice Network.

France has a public UBO register called INIP that is free to search as does the UK which has the Person of Significant Control Register on Companies House.

In the Netherlands, the UBO register is the KVK. You used to be able to access the Dutch UBO register for a fee, but the register closed to the public after the European Court of Justice's ruling that UBO registers should be closed to the public.

The ruling poses a serious problem as more EU members may follow the Dutch example and close their registers to the public. Alternative sources of data on ultimate beneficial owners are open data sources and KYB providers such as Dun and Bradstreet or CreditSafe .

Open Ownership is a free register with UBOs from 200 jurisdictions. Their register aggregateds UBO data from the Ukrainian, Danish, Czech and UK UBO registers.

There is also the International Consortium of Investigative Journalist's offshore leaks database that covers linkages and ownership data found in the Panama Papers among other leaks.

Finally, it is always worth browsing the company websites where large corporations publish financial and annual reports that often contain UBOs.