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Beneficial ownership - the term that can be found on the lips of AML Compliance professionals across the globe at the moment. It isn’t a new concept but between the 4th EU Money Laundering Directive and the US FinCEN CDD Rule it has become the topic du jour. While there is much discussion about the requirements and advice to get programs to address the UBO requirements, there don’t seem to be many practical solutions being put forth. With FinTech and RegTech solutions saturating the market at the moment, it is high time that financial institutions take a modern technological approach to meeting these regulatory challenges – which I will explore below.
What Do We Have to Find?
While both regulations cover a variety of requirements, we will be focusing on those that relate to beneficial ownership. Essentially both regulations require the identification of beneficial ownership of entity customers based on a threshold of ownership basis. It should be noted that this is something that was already a regulatory expectation of financial institutions, but now is a regulatory requirement with less room for interpretation.
In the US, the requirement is to identify individuals who own (directly or indirectly) 25% or more of the customer entity AND one individual with control over the entity.
Slightly different than the US FinCEN requirements, the EU requirement is to identify individuals who own (directly or indirectly) more than 25% of the customer entity. There is no requirement to identify a controlling party.
These are just the US and EU requirements. These percentage of ownership thresholds and requirements are different in many other jurisdictions.
Why are they hard to find?
The difficulty in identifying the beneficial owners of entities is that this ownership is usually indirect and hidden within multiple layers of ownership. This creates two levels of difficulty:
To address the second problem noted above, the EU and US have taken different approaches:
How can technology be leveraged to identify beneficial ownership?
Given the changes noted above and the effectiveness of RegTech solutions, manual investigation and research should be the absolute last resort in identifying beneficial ownership. While it’s still not just as simple as pushing a button and having the requirements completed, there are ways to streamline and automate this process to ensure compliance and reduce the time and effort involved in the due diligence process. One thing that makes this process more complex is that global financial institutions have to meet the regulatory requirements of each jurisdiction they do business in. As noted above, there are different approaches as to how beneficial ownership can be identified in the US, the EU, and across the globe. How can these be reconciled? Well, below is a potential technological approach to solving this issue by setting up a digitized onboarding process that automates the process of identifying beneficial ownership. In doing so, there are several steps that should be worked through by the solution:
A key to this process working is having an onboarding/due diligence technology that allows you to orchestrate and automate the processes described above. You don’t want your analysts deciding which source to go to and in which order. Rather, you want the application to make those decisions in a pre-determined way, allowing for consistency in the process.
What are the Benefits of a Technological Approach
The direct effects of this sort of process are fairly obvious – increased consistency, increased accuracy, reduced operational costs, reduced client onboarding times, and increased customer satisfaction. What is less obvious are some of the downstream benefits:
While there is clearly a cost associated with a technological process detailed above, it will pale in comparison to the time and effort required by analysts to do the work manually and it will be dwarfed by the fines imposed when this manual process leads to errors and incomplete beneficial ownership information.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Nick Green Director at Purple Patch Broking Ltd
22 August
Oleg Stefanet Chief Risk Officer at payabl.
20 August
Venkatesh P Co-Founder and Director at Maveric Systems
19 August
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