Beneficial Ownership Structure in KYC
In the intricate world of business operations, understanding the ownership structure of a company is paramount for regulatory compliance, risk management, and fostering transparent business relationships. The KYC and AML process is a critical mechanism that uncovers the ultimate beneficial owners (UBOs) and delineates the corporate ownership structure.
This comprehensive guide delves into the complexities of ownership structures within the KYC framework, the importance of UBO verification, and how tools like Binderr can help you map corporate structures and verify UBOs in seconds.
What is an Ownership Structure?
An ownership structure refers to the way a company is owned and controlled. It outlines the hierarchy of ownership, detailing who owns what percentage of the company and how control is distributed among shareholders. Understanding the ownership structure is essential for various reasons, including compliance with KYC (Know Your Customer) and AML regulations.
Key Components of an Ownership Structure
- Shareholders: Individuals or entities that own shares in the company.
- Directors: Individuals responsible for managing the company.
- Ultimate Beneficial Owner (UBO): The natural person(s) who ultimately owns or controls the company.
A corporate ownership structure chart is prepared that visually outlines the relationships between parent companies, subsidiaries, and other affiliated entities. The purpose of ownership structure char is essential for UBO identification and KYC procedures.
The Importance of Ownership Structure in KYC
The Financial Action Task Force (FATF) and other regulatory bodies have identified sectors such as banks, financial services, luxury items, etc that are vulnerable to money laundering and terrorist financing. Consequently, these sectors must implement robust KYC procedures, including customer due diligence, anti-money laundering (AML)/counter-financing of terrorism (CFT) programs, and enhanced due diligence based on risk assessments.
Determining the ownership structure is a critical component of these procedures, as it helps identify the individuals who ultimately benefit from the business activities and may pose potential risks.
In the context of KYC, understanding the ownership structure of a company is vital for several reasons:
- Risk Assessment: Identifying the UBO helps in assessing the risk associated with a business relationship.
- Regulatory Compliance: Many jurisdictions require companies to disclose their UBOs to comply with AML regulations.
- Transparency: A clear ownership structure promotes transparency and helps in preventing financial crimes like money laundering and terrorist financing.
What are Ultimate Beneficial Owners (UBOs)?
According to FATF, a UBO is a natural person who ultimately owns or controls a legal entity and/or the person on whose behalf a business is conducted. This includes individuals who exercise ultimate effective control over a legal entity or who ultimately enjoy a share of its profits.
UBOs must always be natural persons, not legal entities, and the ownership chain must be traced upwards until all relevant individuals are identified.
A UBO is a natural person who:
- Owns or controls ≥25% of a company’s shares or voting rights (EU standard).
- Holds significant influence over the entity’s operations, even without direct ownership.
- Receives primary economic benefits from the entity.
Key Characteristics:
- Direct or indirect control through layered structures.
- Authority to make major financial decisions.
- Residency in high-risk jurisdictions may raise red flags.
Direct Ownership vs. Indirect Ownership
Direct Ownership
Direct ownership occurs when an individual or entity holds shares or is a partner in a legal entity without any intermediaries. For example, if you own 10% of the shares in a company, you are a direct owner. Direct owners can be individuals or other companies, as seen in parent-subsidiary relationships.
Indirect Ownership
Indirect ownership arises when an individual's ownership is through additional entities. For instance, if person X owns 50% of company A, which in turn owns 20% of company B, X is an indirect owner of company B. This type of ownership is common in large corporate groups with complex structures.
Regulatory bodies across the globe mandate UBO identification as part of broader compliance frameworks. UBO verification meshes with KYC, Customer Due Diligence (CDD), and AML processes.
What is the UBO Structure Chart?
A UBO structure chart is a visual representation of the ownership hierarchy of a company. It maps out and breaks down the layers of ownership, and helps you to identify the UBOs. This chart is an invaluable tool for compliance officers and financial institutions.
Effective UBO identification and screening help financial institutions mitigate risks associated with money laundering and financial crime. Clear visibility into the UBO ownership structure allows organisations to:
- Detect hidden risks
- Ensure compliance with global regulatory standards
How to Find the Ownership Structure of a Company?
Step 1: Map the Ownership Structure
Create a UBO structure chart to visualize relationships between entities and individuals. For example:
- Direct ownership: Individual X owns 30% of Company Y.
- Indirect ownership: Company Z (owned by Individual X) holds 40% of Company Y.
To ensure the accuracy of the ownership structure, banks may verify the information through public data sources, in-house legal teams, qualified accountants, or external professional advisors. Independent verification is crucial to prevent fraudulent activities and maintain the integrity of the KYC process.
Step 2: Calculate Beneficial Ownership Percentages
Add direct and indirect stakes to determine if thresholds (e.g., 25%) are met. Tools like Binderr.com automate this process, generating corporate ownership structure charts in seconds. Determining UBO holdings involves analyzing the ownership structure and calculating the percentage of ownership each individual has, either directly or indirectly.
For example, in a structure where Mr. X owns 25% of company XYZ, which in turn owns 40% of company ABC, Mr. X's UBO holding in company ABC would be 10% (25% of 40%). Similarly, if Mr. A owns 20% directly in company ABC and 28% through companies PQR and XYZ, his total UBO holding would be 48%, making him the highest shareholder and a UBO.
Step 3: Conduct KYC Verification
The next critical step is to verify the identities of each ultimate beneficial owner. This involves gathering and government IDs, such as passports or national IDs, along with supporting documents like proof of address and tax records.
For UBOs classified as high risk, Enhanced Due Diligence (EDD) is conducted. EDD goes beyond standard verification by conducting in-depth background investigations, and cross-referencing with multiple data sources.
Step 4: Screen Against Sanctions and PEP Lists
After verifying UBO identities, it is essential to screen them against various sanctions databases, politically exposed persons (PEP) lists, and criminal watchlists. This step utilises comprehensive, up-to-date global databases to check for any red flags, such as involvement in money laundering, terrorism financing, or other criminal activities.
Step 5: Ongoing Monitoring
Ownership structures are dynamic and subject to change due to mergers, acquisitions, or shifts in shareholding. Continuous monitoring is therefore vital to maintaining an accurate and up-to-date KYC record.
Streamline Corporate Mapping and UBO Verification
Modern KYC solutions like Binderr have transformed the way organisations map and verify their corporate structures. Binderr can generate a detailed corporate ownership structure chart in seconds, ensuring that every layer of ownership is thoroughly examined.
Binderr allows you to:
- Map your corporate structure with a single click
- Identify UBOs quickly and accurately
- Verify UBOs with an advanced ID verification solution
- Screen UBOs against sanctions, watchlists, PEPs, and adverse media
KYC Requirements for Ownership Structure
When onboarding a new business, banks and financial institutions require detailed information about the ownership structure to comply with KYC regulations. This includes:
Structure Chart
A visual representation of the ownership structure, often in a family tree format, showing all entities and individuals involved, their ownership percentages, and the flow of control. The chart should include the full name of all entities and individuals, country of registration, registered number, and the breakdown of share capital at each level.
Key Account Parties and Controllers
Information about the individuals holding senior positions in the organization, such as the Chairman, CEO, CFO, and other executive directors. Additionally, details about individuals with a significant controlling stake (10% or more of shares, equity, or voting rights) must be provided, including their personal information, identification documents, and source of wealth.
KYC and Due Diligence for UBOs
To ensure the accuracy of the ownership structure, banks may verify the information through public data sources, in-house legal teams, qualified accountants, or external professional advisors. Independent verification is crucial to prevent fraudulent activities and maintain the integrity of the KYC process.
KYC regulations require businesses to gather detailed information about their clients. Without proper KYC procedures, companies are at risk of engaging in business with high-risk or fraudulent entities.
CDD goes beyond basic KYC by requiring businesses to conduct ongoing monitoring of their clients. This involves tracking changes in ownership or control to ensure that the ultimate beneficial owner remains transparent over time.
Challenges in UBO Identification
UBO identification can be challenging, particularly when dealing with complex corporate structures, offshore entities, or nominee shareholders. Businesses need to stay ahead by leveraging the right tools and processes.
Complex Corporate Structures
Large corporate groups with multiple layers of ownership can obscure the identity of UBOs. Tracing the ownership chain through various entities requires meticulous analysis. Circular ownership (Company A → B → A) or nominee directors obscure true control.
Offshore Entities
Offshore jurisdictions often provide limited transparency, making it difficult to identify UBOs. Businesses must navigate through complex legal frameworks to uncover the true owners.
Nominee Shareholders
Nominee shareholders can add another layer of complexity by holding shares on behalf of others. Identifying the actual beneficial owners behind nominees requires additional due diligence.
Lack of Public Data
In many jurisdictions with lax regulations, companies are not required to disclose their UBOs on public registers. This absence of information hampers transparency and makes it much harder for due diligence teams to trace real ownership in complex corporate structures.
UBO Verification Requirements by Region
- EU: ≥25% ownership or control.
- US: ≥50% control or significant influence (FinCEN rules).
- UK: ≥25% shares, voting rights, or control over board decisions.
Bottom Line
Understanding the ownership structure in KYC is essential for businesses operating in regulated industries. By accurately mapping the corporate structure and identifying UBOs, companies can comply with regulatory requirements, build trust with financial institutions, and protect themselves from financial crimes.
KYC and AML Solutions like Binderr offer a powerful solution for businesses to map their corporate structure and verify UBOs efficiently. With Binderr, you can:
Create Detailed Structure Charts: Easily build and visualize your company's ownership structure using intuitive tools. The platform allows you to add entities, individuals, ownership percentages, and relationships, creating a comprehensive family tree that meets the requirements of financial institutions.
Streamline UBO Verification: Binderr simplifies the process of identifying and verifying UBOs by automating calculations and ensuring compliance with regulatory standards. The platform can quickly determine the ultimate beneficial owners based on direct and indirect ownership percentages, providing you with accurate and reliable information.
Enhance Compliance and Risk Management: By using Binderr, businesses can maintain up-to-date ownership records, monitor changes in the structure, and ensure timely reporting of any modifications. This helps in adhering to KYC regulations and mitigating potential risks associated with non-compliance.
