{"id":7082,"date":"2021-08-11T06:00:58","date_gmt":"2021-08-11T13:00:58","guid":{"rendered":"http:\/\/www.trulioo.com\/?p=7082"},"modified":"2023-09-06T19:52:08","modified_gmt":"2023-09-06T19:52:08","slug":"top-10-questions-beneficial-owners","status":"publish","type":"post","link":"https:\/\/www.trulioo.com\/blog\/top-10-questions-beneficial-owners","title":{"rendered":"Top 10 Questions About Beneficial Ownership for AML\/KYC Compliance"},"content":{"rendered":"\n

The requirement to discover the beneficial ownership of business customers, partners, suppliers and other business relationships is growing. Regulations, such as the 6th<\/sup> AML Directive<\/a> in Europe and the Corporate Transparency Act<\/a> in the U.S., require understanding who you\u2019re doing business with and the risks they pose. But compliance staff and senior executives often have many questions around regulatory requirements for onboarding business customers, so we\u2019ve rounded them up here.<\/p>\n\n\n\n

What is a beneficial owner?<\/strong><\/h2>\n\n\n\n

A beneficial owner is a real person that owns or controls the business (or legal entity). To ensure Anti-Money Laundering<\/a> (AML) compliance and deter financial crimes, it\u2019s essential to understand the actual person who you\u2019re doing business with, regardless of the business structure. The only way to truly assess business risk is to understand who profits from and actually operates the business.<\/p>\n\n\n\n

According to the Financial Action Task Force (FATF<\/a>),<\/p>\n\n\n\n

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beneficial owner refers to the natural person(s) who ultimately own(s) or control(s) a customer and\/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.<\/p>\n<\/blockquote>\n\n\n\n

What is Customer Due Diligence (CDD)?<\/strong><\/h2>\n\n\n\n

Customer Due Diligence<\/a> (CDD) is a critical element of effectively managing your organization\u2019s risks and protecting it against potential financial crimes and nefarious activities. There are two steps in CDD: understanding the customer activities and assessing the money laundering risk.<\/p>\n\n\n\n

When onboarding a new customer (or if the customer\u2019s activities substantially change), an analysis of the source of funds and risk associated with those funds is prudent and, in most countries, a legal requirement.<\/p>\n\n\n\n

If, during the initial risk assessment, the customer is determined to be a higher risk, Enhanced Due Diligence<\/a> <\/strong>(EDD) procedures and the collection of additional information to provide a deeper understanding of customer activity might be required. In many cases, there are explicit legal specifications that automatically call for EDD (for example, the business is located on the High-Risk Third Countries list, or it\u2019s associated with politically exposed persons).<\/p>\n\n\n\n

Industries like gambling, which often have a higher money-laundering risk, usually have EDD requirements. Many jurisdictions have threshold limits for transaction amounts that, if exceeded, trigger EDD. Certain relationships (like with shell banks) also call for EDD \u2014 and there are many other situations where local regulations for EDD come into play, so knowing the exact details of your jurisdiction is sensible.<\/p>\n\n\n\n

Who is the  Ultimate Beneficial Owner (UBO) for KYC purposes?<\/strong><\/h2>\n\n\n\n

KYC is an acronym for Know Your Customer<\/a>, a legal requirement to perform identity checks and undertake Customer Due Diligence. While KYC laws differ from country to country, the general principle involves collecting enough information to properly identify an individual and ensure that their activities are legitimate.<\/p>\n\n\n\n

Any individual determined to be a UBO of the account should have a KYC check performed on their identity. While the exact determination of who qualifies as a UBO varies by jurisdiction, the U.S. (as an example) considers a beneficial owner as:<\/p>\n\n\n\n

\u201cA natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:<\/p>\n\n\n\n

(i) Exercises substantial control over a corporation or limited liability company;<\/p>\n\n\n\n

(ii) Owns 25% or more of the equity interests of a corporation or limited liability company; or<\/p>\n\n\n\n

(iii) Receives substantial economic benefits from the assets of a corporation or limited liability company.\u201d<\/p>\n\n\n\n

\"What<\/figure>\n\n\n\n

What is AML?<\/strong><\/h2>\n\n\n\n

AML is an acronym for Anti-Money Laundering<\/a>. AML laws are designed to prevent illegal funds (for example, funds obtained from crime, corruption, and tax evasion) from entering the financial system. Financial institutions are required to have procedures like KYC in place to discover high-risk clients, monitor transactions and report suspicious activities.<\/p>\n\n\n\n

But properly assessing business accounts is just as important. Corporate KYC<\/a> (or Know Your Business \u2014 KYB), which vets the business or corporate entity and any beneficial owners trying to establish a relationship with a financial institution, helps uncover shell companies and other corporate structures that enable the normalization of illicit funds.<\/p>\n\n\n\n

Who do these laws apply to?<\/strong><\/h2>\n\n\n\n

As UBO, CDD, KYC and AML processes generally refer to financial transactions, financial institutions (FIs) are the primary targets for these laws. FIs include commercial banks, investment banks, insurance companies, brokerages and investment companies. Other companies that deal with money are also generally covered (for example, credit unions, money transfer firms, payment services, marketplaces, gambling and gaming companies).<\/p>\n\n\n\n

However, as money launderers have exploited various loopholes, the scope of the laws has expanded to include other types of companies. Retailers often have threshold limits, wherein any transaction above a certain amount triggers the requirements.<\/p>\n\n\n\n

Each jurisdiction will have its specific requirements, so it\u2019s necessary to check local regulations to get the full scope of the rules.<\/p>\n\n\n\n

When do these rules come into effect?<\/strong><\/h2>\n\n\n\n

While AML and KYC laws have been in effect for years, beneficial ownership laws are a more recent development. In Europe, the 4th<\/sup> AML Directive<\/a> came into effect June 26, 2017 and contained provisions regarding beneficial ownership. Additional Directives since then have refined UBO requirements, the latest being 6AMLD, which the EU began enforcing as of June 3, 2021.<\/p>\n\n\n\n

In the U.S., the FinCEN CDD Final Rule, which also covers beneficial ownership, took effect May 11, 2018. The Corporate Transparency Act comes into effect in 2022.<\/p>\n\n\n\n

What does our company need to do?<\/strong><\/h2>\n\n\n\n

Your organization needs procedures and processes to collect information about beneficial ownership. When opening business accounts, in addition to collecting the usual business information (for example, name of business, place of business, type of business, business registration number), you will need to obtain the identity of all individuals who have a significant ownership or control position. Also, if there is a significant change on the account, collect the beneficial ownership information.<\/p>\n\n\n\n

The beneficial ownership information includes:<\/p>\n\n\n\n