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It Is Time to Open Up: YouControl Developed an Algorithm for Identifying Real Beneficiaries

29 November 2019
It Is Time to Open Up: YouControl Developed an Algorithm for Identifying Real Beneficiaries

YouControl analysts proposed an innovative solution for identifying ultimate beneficial owners of legal entities. Its implementation will allow to increase the transparency of the business environment and to reduce the level of corruption in Ukraine.

On November 22 representatives of YouControl, an analyst Yurii Tomin and a GR-manager Natalia Chornohub, presented a new business process for identifying ultimate beneficial owners (UBOs) at the meeting of the working group “Do100%virno” (“Up to 100% True”) on the development of a mechanism for checking information about UBOs. The working group was formed to implement the Memorandum of Cooperation signed on 18 July 2019. The Government of Ukraine is obliged to create such a mechanism in accordance with the Action Plan for the implementation of the International Initiative “Partnership “Open Government” which includes 78 countries and 20 subnational governments as its participants.

Already since 2014 the legislative provisions have obliged to specify beneficiaries of businesses and politically exposed persons when registering in the United State Register of Legal Entities, Individual Entrepreneurs and Public Organizations (USR). However, according to preliminary data of the research conducted by the NGO “Anti Corruption Action Centre”, 27,2% of legal entities did not specify them at all, although they were obliged to do that.

Nevertheless, it affects the image of our country and even the interest rate of external credit. The International Monetary Fund, the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) and the Financial Action Task Force on Money Laundering (FATF) draw attention of Ukrainian financial regulators to this problem. As a result, the National Bank and the State Financial Monitoring Service oblige reporting entities (banks, non-banking financial institutions, insurance companies, etc.) to check counterparties more closely. They have to manually collect information in different registers, to compare data. But do they manage to identify real beneficiaries on their own?

According to the results of the survey conducted by YouControl experts, the picture is far from ideal. “The result depends on how thoroughly a company is analyzed and the level of access to data”, Yurii Tomin comments. “In addition, there is a great influence of human reliability”.

How to Automate the Identification of Beneficiaries

YouControl experts have proposed the solution that will allow to get rid of the routine and the influence of human reliability and to increase the efficiency of UBOs checking.

The proposed scheme of comprehensive checking of beneficiaries

The essence of the proposal consists in prompt gathering of information from data owners and data administrators (the Ministry of Justice, the State Tax Service, the State Migration Service, the State Judicial Administration of Ukraine, the National Bank of Ukraine, etc.) and its instant analysis.

A client application in the form of an electronic account can help in the efficient implementation of this scheme. It can be used for the registration of a business and it can contain services for the already existing one.

If you want to register a business, you just enter data, and the system directs inquiries to various sources, compares data. If they are valid, it shows the result of successful registration,Yurii says.

As for the business that is already registered but has not been checked, the experts suggest to assign it a special status that will be displayed in the USR and will signal a problem. In addition, every businessman or businesswoman will be able to introduce changes and monitor them on his/her own. But for this liability will be introduced: sanctions may be imposed if data on UBOs are not entered within the determined period. The account can additionally receive notifications of tax debt from the State Tax Service or, for example, letters about accounting innovations.

The developers of the methodology offer different levels of access to this account:

• for the executives (authorized persons) of legal entities – to register a legal entity and introduce changes, to receive important notifications and be able to use state services;

• for the state authorities to better communicate with each other (for example, an employee of the State Tax Service will be able to check information with a legal entity and to transfer the status of the issue to the next level);

• for the reporting entities, as an opportunity to give a notification of inconsistencies of UBOs. The corresponding alert or status will appear in the USR and the reporting entity (RE) will automatically forward this information to the Ministry of Justice. The Ministry of Justice will conduct an audit and if the provision of false information about UBOs is detected, the information will be forwarded to the law enforcement agencies.

• for ordinary citizens and public organizations to understand the status according to the results of the comprehensive checking of beneficiaries and the date of relevance of such data.

The Implementation of the Model Can Influence the Improvement of Life Quality

The developers are convinced that the implementation of the proposed business process for comprehensive checking of beneficial owners can solve a number of issues:

• The only source for reliable and up-to-date information;

• A transparent and convenient procedure for introducing changes to the USR (appeal, amending);

• A convenient procedure for obtaining information about UBOs in order to cooperate with honest partners;

• Reduction and simplification of resources for checking the authenticity of information;

• Increasing trust and investment attractiveness on the part of external investors;

• Conforming rules and procedures to international standards.

We believe that high-quality and verified data on beneficiaries will reduce the level of corruption due to the fact that it will be impossible or significantly more difficult to hide real owners of businesses and legal entities related to them,Nataliia Chornohub adds.

In addition, the state authorities, the Ministry of Internal Affairs, the Public Prosecutor’s Office, the Security Service of Ukraine can use it to obtain information regarding the accused.

It will become easier for banks to comply with the regulator’s requirements concerning better quality of borrowers checking. And decreasing the problem portfolio of the bank will enable to reduce the interest rate of credit, and, therefore, will provide citizens with more opportunities for development and a high-quality life.

The anti-corruption authorities will be able to more easily identify the inconsistencies of incomes to wealth and assets owned by an individual or his or her relatives. The model involves checking whether an ultimate beneficiary or persons related to him/her have earned enough money to acquire assets (movables or real estate, a deposit, etc.).

You can read the report on the conducted testing of business processes of checking data on ultimate beneficial owners at this link.

The expert public discussion of the Concept and Action Plan for the implementation of the mechanism for checking the authenticity of information about ultimate beneficial owners for the period of 2020-2023 years will be held in January 2020.

Have something to add? Send your suggestions to the co-chair of the working group “Do100%virno” (“Up to 100% True”) Olesia Arkhypska arkolesya@ukr.net.

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With the support of the Ukraine-EU Association Consultancy Fund

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