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Understanding UBO. Why it's necessary?
10 min

Beneficial ownership is an essential part of client due diligence. It is also one of the main elements considered in the international anti-money laundering and counter-terrorism financing laws, sanctions and regulations, as well as regulations related to fiscal matters. Legislators and international organizations are increasingly aware that adopting laws, regulations, and mechanisms to gather and exchange information about ultimate beneficial owners is crucial for combating financial crime. In present days disclosure of beneficial ownership information is a key requirement of international and local regulators.

Of course, understanding ultimate beneficial ownership is an extremely important skill for a compliance officer, but it is also handy for professionals from other walks of life, such as civil servants, lawyers, investors and others.

Ultimate beneficial owner (“UBO”) is commonly defined as “the natural, living person who ultimately owns, benefits from or controls (directly or indirectly) a company or legal arrangement”.[1]

As mentioned in OECD paper on Beneficial Ownership Toolkit the UBO is the individual or individuals who effectively owns or controls a company or a legal arrangement. This ownership or control can be exercised in different ways, e.g. holding ownership interest (e.g. 10 per cent or more) of a legal person. Other ways include control of a significant percentage of voting rights, or the ability to exercise influence by appointing or removing the members of an entity’s board of directors.[2]

Effective control can be exercised in other ways.[3] For example, control may be evident in influence over or a veto of the decisions that an entity makes, through agreements among shareholders or members, through family links or other types of connections with decision makers, or by holding negotiable shares or convertible stock from an entity.

Given that beneficial ownership can be exercised in many ways, determining the UBO can be a challenging process that must take into account the specifics of the case that is being analyzed. Local laws and regulations usually establish the criteria for deciding who should be regarded as UBO. An important consideration to keep in mind is that determining the UBO is independent of the nationality of such person or their place of residence.[4] To perform a correct assessment of the ownership structure it is important to consider not only the international standards, but also the jurisdictions involved in the structure as well as their policies on ultimate beneficial ownership.

Correctly identifying the UBO is very important, as the transparency of ownership is essential for ensuring that the proceeds of corruption are not hidden and laundered and no taxes are evaded through anonymous shell companies, orphan structures, trusts and other legal structures.

It is crucial to mention here the Panama Papers, a leak of 11.5m files from the database of the world’s fourth biggest offshore law firm, Mossack Fonseca. The documents show the ways in which secretive offshore tax regimes can be exploited. It is now public knowledge that more than a hundred politically exposed persons (“PEPs”), their families and close associates from around the world have been using offshore tax havens. According to Stolen Asset Recovery Initiative (StAR) more than 70% of a group of 200 corrupt politicians used anonymous companies and trusts to obscure their identities.[5] Panama Papers were obtained by the German newspaper Süddeutsche Zeitung and shared by the International Consortium of Investigative Journalists (ICIJ). The ICIJ website still serves as an important database and is accessible publically at icij.org.

The aforementioned practices result in losses of tax revenue for authorities, while honest tax payers must “pick up the bill”. According to the research published by Transparency International, in many cases the wrongdoers are assisted by financial and legal service providers, such as the Panamanian Mossack Fonseca, which are more focused on generating revenue than on respecting globally accepted standards of client due dilignece and integrity.[6] Not only does anonymity enable tax evasion, many other illegal activities take place hidden from law enforcement authorities, such as corruption, money laundering, and financing of terrorism. For example, money laundering can involve complex transactions so that the money from illicit sources, such as drug trafficking or tax evasion, appear legal.[7]

It is therefore important to know the UBOs of legal entities and arrangements to prevent the misuse and financial crime. That is why FATF has included beneficial ownership requirements in their standards and conduct assessments across jurisdictions on availability of beneficial ownership information in their systems. Efforts are being made around the globe ensure that information about the beneficial ownership is sufficiently transparent and that complex structures are not being used to disable identification of the beneficial owners, especially those with PEP status. Determining whether the countries have access to information on the UBOs of legal entities and arrangements still remains an important tool in combatting tax evasion, corruption, money laundering, and the financing of terrorism.

 


 

[1] Beneficial ownership registers: Progress to date. Theo Van der Merwe, Transparency International. 2020. Available at: https://knowledgehub.transparency.org/assets/uploads/helpdesk/Beneficial-ownership-registers_2020_PR.pdf

[2] A Beneficial Ownership Implementation Toolkit by The Secretariat of the Global Forum on Transparency and Exchange of Information for Tax Purposes Inter-American Development Bank.  March 2019. Copyright © 2019. Inter-American Development Bank ("IDB") and the Organisation for Economic Cooperation and Development. Available at: https://www.oecd.org/tax/transparency/beneficial-ownership-toolkit.pdf

[3] FATF 2014: 15.

[4] A Beneficial Ownership Implementation Toolkit by The Secretariat of the Global Forum on Transparency and Exchange of Information for Tax Purposes Inter-American Development Bank.  March 2019. Copyright © 2019. Inter-American Development Bank ("IDB") and the Organisation for Economic Cooperation and Development. Available at: https://www.oecd.org/tax/transparency/beneficial-ownership-toolkit.pdf

[5] Stolen Asset Recovery Initiative (StAR), G20 High-Level Principles on Beneficial Ownership Transparency (StAR,2014), http://star.worldbank. org/star/sites/star/files/g20_high-level_principles_beneficial_ownership_transparency.pdf

[6] Behind the Scenes - Beneficial Ownership Transparency in the Netherlands - Fritz Streiff and Anne Scheltema Beduin. 2017. Transparency International Nederland (TI-NL). Available at: https://www.transparency.nl/wp-content/uploads/2017/04/TI-netherland-UBO-web.pdf

[7] A Beneficial Ownership Implementation Toolkit by The Secretariat of the Global Forum on Transparency and Exchange of Information for Tax Purposes Inter-American Development Bank.  March 2019. Copyright © 2019. Inter-American Development Bank ("IDB") and the Organisation for Economic Cooperation and Development. Available at: https://www.oecd.org/tax/transparency/beneficial-ownership-toolkit.pdf

 

The author of the lesson: Myroslava Makarchuk, Business Compliance Manager, Amsterdam, Netherlands

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