Complying with ultimate beneficial ownership regulations

By Jordan Owen, Head of Global Entity Management

When you discover characters like Santa Claus as a company director and ultimate beneficial ownership with a registered office at the North Pole, you cannot help but think something is broken.

Having found other names in public registers that would be even more unlikely as a director, they are symptoms of a global framework still struggling to live up to its own aims.

Ultimate beneficial ownership (UBO) refers to one or more individuals who own or control a company, even if they are not the registered owners on file. These individuals benefit from the activities the companies take part in, and often exert significant control over their practices.

UBO regulations are repeatedly updated with the ultimate goal of both transparency and consistency for businesses globally.

Despite this being a worthwhile goal, there are occasionally moments of conflicting reports, records, and a big burden placed on compliance that all companies worldwide must adhere to. The implementation of UBO initiatives around the world has increased the burden on corporate secretarial and compliance teams.

However, the burden to gather information and evidence versus the actual transparency delivered is questionable.

With emerging technologies in their infant stages, we are at a precipice that could help ease the burden of filing UBO when required, making the compliance process more proactive than reactive in the coming years.

Experts in the global corporate secretarial space should be aware of the ever-changing role that UBO has had for small and large companies around the world. With this in mind, this article will lay out where we stand with UBO and where it could go with a strong set of regulatory requirements that could benefit all of us, for the long term.

What are the challenges of UBO?
The main problem with the majority of UBO initiatives is that they have not been built with large corporations or complex ownership structures in mind. It leaves grey areas for interpretation and application, and ultimately does not provide the transparency desired.

Governments, regulators, and banks need to be informed of what is behind a company so they can look at the following potential areas:

• terrorist financing;
• tax evasion;
• sanctions evasion; and
• corruption and fraud.

It may seem unlikely in many cases, but the risk remains nonetheless. But UBO regulations worldwide usually assume simple structures that are local only and nothing more. Law Debenture had clients with more than 150 entities globally, each required to respond to UBO obligations in various ways. The criteria for a UBO can vary greatly between countries, interpretation of control can take different forms, and the reporting process can be simple, extensive, or somewhere in between.

It is important, however, not to underestimate the burden of resources that UBO can require from a business, both from human and technological perspectives. Language barriers, different deadlines, or a limited understanding of UBO’s exacting requirements can result in inaccuracies when filing UBO information, despite companies having well-intentioned compliance strategies.

Errors can happen, we are only human, but the regulatory requirements hold significant pressure to make sure several departments within companies get UBO right.

For some, filings are public, but for others, they can be private or court-sealed. This is where the UBO’s global inconsistency can be an ever-frustrating task. Where large corporations are going through painful processes to identify their UBOs, only to confirm the local directors (information that is already publicly available), you have to ask, what has been gained?

Ultimately, these factors highlight a simple truth for companies worldwide: that while the intention of transparency of company ownership is needed, the execution of UBO reporting is questionable. It creates administrative headaches and countless methods of obligations with pay-offs that can be limited in the long run.

Cost implications of non-compliance with UBO
As regulatory scrutiny increases for UBO worldwide, so does the cost of businesses getting UBO wrong, both in financial and reputational ways.

Governments and international watchdogs are increasing scrutiny on corporate ownership structures that can combat money laundering, terrorist financing, and tax evasion. If these regulations are not complied with, it can result in long-term consequences for businesses and individuals.

During the implementation phases of UBO legislation, the threat of consequences for non-compliance is minimal. Once UBO criteria and requirements have matured, authorities can utilise the expansive and substantial penalties at their disposal more frequently, catching many corporations off guard with the level of fines being implemented, and bringing compliance to the fore.

The most immediate consequence of non-compliance is financial. Jurisdictions around the world can levy substantial fines when UBO laws are breached. For example, the anti-money laundering directives in the EU ensure that companies have accurate and up-to-date UBO information. Failure to do so can result in fines in the millions, depending on how severe the violation is.

In this decade alone, multiple investigations have led to significant fines due to inaccurate or late UBO filings. For example, some companies have been fined thousands for solely failing to update their UBO information, with a risk of more fines if it is not rectified quickly. Fines like these can be devastating, especially for small businesses, but it is crucial that UBO is filed correctly and on time.

Another consequence can be reputational harm, which can arguably be more damaging to companies. Those found to violate UBO practices could face negative media attention, public criticism, and loss of trust among employees, investors, partners, and more. Being non-compliant with UBO can lead to a business losing important relationships that could help it thrive, and could take years to get its reputation back.

When found to be non-compliant, investigations and audits can divert resources from daily operations, too. Staff in the business may have to switch responsibilities to focus on the regulatory enquiries, responding to legal teams, and even look at overhauling certain business practices.

In some countries, companies may be struck off a business register, or individuals may be banned from becoming a director for a certain amount of time, directly impacting how a business has been operating for years.

There can also be serious legal repercussions for these directors and senior executives. Some may be held liable if found to be negligent in maintaining records that relate to UBO, and even some severe cases can lead to criminal prosecution.

Finally, businesses that are found to be non-compliant with UBO practices can find themselves falling behind their competitors, failing to compete in growing markets, as well as working with potential partners to help grow the business.

It is these factors that make UBO compliance crucial in business affairs at all times. Not complying with UBO can result in both short-term and long-term consequences across departments. It is why there has to be clear transparency and trust across the board; otherwise, compliance cannot be implemented.

What is next for UBO worldwide?
Transparency obligations are only going to increase throughout the decade. As we speak, the regulatory tide is changing for UBO no matter how many incarnations there are.

Trust in the data may increase moving forwards, but the complexity of companies needing to comply with the different jurisdictions remains the same. Clearer definitions of who owns what, how much control a registered name has on a company, and more factors are all vital to ensure consistency and transparency in the data.

One turning point for UBO could be an increase in cross-border alignment, especially as global organisations like the OECD and the Financial Action Task Force play major roles in shaping UBO regulations and initiatives for clear transparency in companies worldwide.

Having new technologies like centralised UBO databases and machine learning models could help streamline the process for accurate UBO information, reducing the burden for departments. Granted, these tools are still in their early stages, but their potential could mean that data quality is high and potential duplication when filing UBO is low, resulting in no consequences for the company and individuals.

Another key area is the formal process for verifying individuals, supporting existing UBO verification. In the UK, Companies House is introducing a new process for individual identity verification, applied to those linked to companies, including directors and UBOs.

This is something that should curb some of the worst examples, like Santa Claus. When anyone can register names like that or Darth Vader, it could not be clearer that this system needs major improvement, which is why the efforts made by the UK can only be a good thing for everyone going forward.

The introduction of more formal verification of individuals, like the aforementioned UK verification processes, demonstrates more processes to come, but perhaps these endeavours will deliver their intentions more accurately.

Improved UBO regulation is moving in the right direction, but there is still a long way to go. For companies like Law Debenture dealing with multiple jurisdictions worldwide, the complexities of compliance will still be greater than the value of the data being given.

In summary, there is a clear understanding of the need for UBO regulation. Transparency and consistency will help to build trust for businesses, clients, governments, and more globally. But it is the how that still needs a lot of work.

Failure to do so can result in significant fines that will harm a business for the long term, so it is important to get the basics right, and then make sure that all departments are at least aware of UBO and how to be compliant with it.

Support is available across every major jurisdiction when it comes to UBO, to help understand what is entailed in every country companies must register in, without getting lost in the details.

UBO is not disappearing any time soon — instead, it is going to evolve, especially with emerging technologies like machine models. If regulators and businesses can help the cause with better systems, clearer definitions for the data, and better co-ordination, there is a chance that both consistency and transparency will thrive.

This article was originally published by FT Adviser and can be used for CPD on their website.