A Technological Approach to Identifying Beneficial Ownership

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:

1. Indirect ownership makes calculating ownership percentage difficult. It isn’t as simple as Person A and Person B each owning 50% of Company C. Instead, Company C may be owned by Companies D, E, and F, which are in turn owned by Companies G and H, with Person A and Person B owning parts of Companies D, E, F, G, and H. To figure out the ownership of Company C one would need to aggregate Person A and B’s ownership of all the underlying companies.
2. Documentation and information related to legal entity ownership is rarely, if ever, kept in a centralized place and is notoriously hard to find. Instead, it has been the task of compliance analysts at financial institutions to investigate formation documents, shareholder registries, company records, and other sources to piece together the ownership structure of an entity. This is a time consuming and manual process that can lead to inconsistent results based on who did the investigation and what documentation it was based on.

To address the second problem noted above, the EU and US have taken different approaches:

• The EU has required that each member state set up a centralized government registry of beneficial ownership information. This provides a centralized, official source of this information for use by financial institutions.
• The approach is different in the US. Rather than centralizing the information, FinCEN has allowed for financial institutions to obtain the beneficial ownership information directly from the legal entity itself, along with a certification as to the accuracy of the information. Financial institutions only have to do manual investigation if they have reason to believe that the beneficial ownership information received from the legal entity is unreliable or inaccurate.

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:

1. Automatically determine the applicable regulatory requirements based on the customer being onboarded – US or EU or some other jurisdiction.
2. Depending upon which jurisdictional requirements apply, the system should automatically identify which of the following steps should be taken.

• If US AML regulations apply, first attempt to obtain the identity of beneficial owners and controlling party information and attestation of the information’s accuracy from the customer themselves.
• If US regulations do not apply or the customer does not provide the information, the next step would be to use an API to collect the data from a government registry (in those jurisdictions in which they exist).
• If a government registry is not available or the information provided is incomplete, then the application should then request the information from a data utility. The bank may choose to use different utilities in different jurisdictions, decisioning that can and should be automated by the system.
• If the information is not available through a data utility or the information is thought to be unreliable or incomplete, then the application would kick off a manual investigation to identify the beneficial ownership information.

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:

• There will be an increase the effectiveness of your sanctions and screening program by feeding it accurate and complete information. This is incredibly important in relation to the US Office of Foreign Asset Control’s sectoral sanctions and 50% ownership rule.
• Same goes for your transaction monitoring program. This detailed information will allow your investigators and potentially your transaction monitoring systems (can anyone say AI?) to identify complex patterns of suspicious activity.
• In addition, you will have a clearer understanding of a customer’s overall risk to your institution by being able to identify connections they have to other customers through shared beneficial ownership.

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.