The Uniform Beneficial Ownership Rule- Big Changes

A Three-part Series- Part One-The UBO Comes of Age

 

 

Introduction

There are many things that the United States has done to respond to the war in Ukraine.  Among the responses has been to impose sanctions on many parts of the Russian economy, government offices and high-profile individuals.  Once the sanctions had been imposed, the results have brought to attention many of the “holes” that exist in the AML framework. 

One of the main tools that are being used to avoid sanctions is shell corporations.  A shell corporation is a corporation without active business operations or significant assets. These types of corporations are not all necessarily illegal, but they are sometimes used illegitimately, such as to disguise business ownership from law enforcement or the public.

Shell corporations have been the main vehicle that has been used to launder money in contravention of the US sanctions against Russia and its supporters. ^[1]  There is a reason that shell corporations became a favorite tool for money launderers and terrorism financiers that what to avoid sanctions. These corporations make it very difficult to determine the true ownership of the company and are equally opaque when it comes to the sources of funding. 

Although the war in Ukraine has highlighted certain weaknesses in our AML regime, the use of shell corporations to hide the  sources and uses of funds has been a concern of regulators for many years.  The original uniform Beneficial Ownership Rule was passed to start to address the concerns with these companies.

This rule currently requires covered institutions to obtain information about any owner of a corporation that owns more than 25% of the company.  In addition, any person who is considered a controlling person should also give background information.   

The Rule Itself 

The final rule creates a “fifth pillar” in the standard group of expectations for a comprehensive BSA/AML compliance program.  Ongoing and risk based due diligence for customers will now be considered an essential part of the compliance program.   The rule makes due-diligence a dynamic process rather than the traditional process that essentially ended at the time the account was opened.  Financial institutions are expected to stay abreast of who the beneficial owners of a legal entity are and how their ownership might impact ongoing monitoring of the account.   As the beneficial owners change, then the manner in which the account is viewed should change accordingly. 

Beneficial Ownership is a broad definition that includes both ownership and control.  

Ownership – is denied as any person who directly or indirectly owns more than 25 percent of the equity of a legal entity

 

Control 

 Beneficial ownership is determined under both a control prong and an ownership prong. Under the control prong, the beneficial owner is a single individual with significant responsibility to control, manage or direct a legal entity customer.  This includes an executive officer or senior manager (Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, President), or any other individual who regularly performs similar functions. One beneficial owner must be identified under the control prong for each legal entity customer.

These two prongs are critical because there are many times when a person or persons could actually have a minimal ownership stake in a firm or even no actual legal ownership, but still have the ability to control the firm.   The rule requires all covered institutions to obtain information on all people who own or control a legal entity.  

Financial institutions are expected to design policies and procedures that detail how staff will use their best efforts to establish and maintain written procedures that are reasonably designed to identify and verify beneficial owners of a legal entity customer. The procedures must allow the financial institution to identify all beneficial owners of each legal entity customer at the time of account opening unless an exclusion or exemption applies to the customer or account. 

In part Two- we will discuss the changes to the regulation that have been implemented.  

***James DeFrantz is Principal at Virtual Compliance Management.  For More information please visit our website at www.vcm4you.com ***

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[1] https://www.independent.co.uk/news/world/europe/russia-oligarch-sanctions-suleiman-kerimov-pandora-papers-b2056144.html