Risk Mitigation Strategy: Deeper UBO Due Diligence

In recent years, one of the most significant developments in Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations has been an intensifying emphasis on identifying and verifying legal entities’ Ultimate Beneficial Owners (UBOs). Financial institutions and banks have come to appreciate that thorough due diligence to identify and verify who their customers are and where their funding originates is crucial to a successful KYC/AML framework. Proper UBO identification can substantially mitigate a company’s risk exposure and ensure compliance with KYC/AML regulations.

However, obtaining and verifying complex ownership structures is challenging and often requires nuanced regional knowledge and resource-intensive tools. Financial institutions must peel back the layers of  UBO and complete comprehensive inquiries to obtain accurate UBO information, both for direct and indirect ownership of entities.

Improved Data Accessibility

A major challenge for beneficial ownership inquiries is the difficulty finding and accessing relevant data, especially in opaque jurisdictions or those without digitized records. Recent changes in UBO guidance from the SEC and Financial Crimes Enforcement Network (FinCEN) make UBO data more accessible. These changes are providing financial institutions with better resources to verify customer information. Consequently, the transparency in financial transactions is increasing, making it more challenging for individuals and entities to hide behind complex ownership structures for illicit purposes.

This year, the Financial Action Task Force (FATF) updated its UBO guidance to address data transparency concerns. New guidance from the FATF centers on enhancing and verifying data feeds into UBO databases. It also requires that UBO information about businesses be “timely,” “adequate,” and “up to date.”

In the US, the Corporate Transparency Act (CTA) takes effect in January 2024; once enforced, nearly every private company in the US will be obligated to file a beneficial ownership report that meets specific data requirements. It’s worth noting that this requirement has roughly two dozen exemptions, such as businesses with more than 20 employees and over $5 million in annual revenue.

Regulators in India, Singapore, and Australia are also aligning their regulations with international initiatives to advance transparency in beneficial ownership, extending their focus to sectors such as law, real estate, and accounting.

The UAE’s Fight Against Money Laundering

The UAE is an essential financial hub in the Gulf region, with Dubai positioned as a growing international banking hub. However, the country’s growing offshore sector, the significant influx of people and capital, as well as the local money exchange system, known as hawala, continue to raise concerns about its potential as a money laundering hub.

One contributing factor relating to the concern for increased money laundering is the region’s large population of expatriates, many of whom engage in trade or send remittances to their home countries. Approximately 80 percent of the UAE’s population comprises non-nationals, and the government has recently expanded trade ties with Russia, which is seeking to circumvent sanctions.

In March 2022, FATF added the UAE to its “grey list” of countries with strategic deficiencies in AML protocols. This listing was a blow to the UAE’s reputation as a significant financial and business hub–especially since the UAE has clear ambitions to become a permanent member of FATF.

The UAE has taken significant steps in strengthening its financial crime framework since its last evaluation with the enactment of AML laws and by undertaking a National Risk Assessment. In July 2023, FATF reported on the UAE’s progress in improving its compliance with FATF Standards. The report revealed improved ratings and acknowledged the country’s commitment to tackling money laundering and terrorist financing.

Room for Improvement in the Gulf Region

Geographically, the Gulf region poses unique challenges when making financial disclosures, including KYC and UBO-centered measures. Simple data collection and verification can be daunting due to regional, cultural, and language differences and data accessibility, requiring vigilance in conducting interviews and verifying customer information.

In addition, many businesses in the Gulf are family-owned and operated, with intricate ownership structures that can be difficult to decipher. The region’s rapid economic growth, fueled by oil and gas revenues, has led to the establishment of numerous holding companies, joint ventures, and cross-border partnerships, further complicating the ownership landscape. Cultural norms around privacy and a preference for discretion in business matters can sometimes be at odds with the transparency required by recently updated financial disclosure standards.

Furthermore, Gulf countries have diverse regulatory frameworks, and while there have been significant strides in recent years to align with international best practices, variations still exist. These factors make obtaining clear and comprehensive financial disclosures, including KYC and UBO data, particularly challenging in the Gulf region.

Meeting Regulatory Demands for Beneficial Ownership Transparency

Complying with new beneficial ownership regulations requires access to comprehensive information sources and robust research processes. IntegrityRisk leverages its extensive, long-standing experience and regional expertise in all the prevailing mechanisms and protocols to assist businesses and financial institutions in navigating the intricacies of KYC onboarding/remediation, UBO identification, and the broad spectrum of regulatory demands encompassing beneficial ownership and associated entities.

Our deep expertise empowers us to help clients uncover elusive information, particularly in challenging markets with scant public records. Furthermore, this wealth of experience is the foundation for our ability to effectively manage the evolving landscape of Ultimate Beneficial Ownership within our clients’ operational domains.

For information about IntegrityRisk’s approach to beneficial ownership compliance, learn more about IntegrityRisk OwnerCheck.

By Svetlana Milbert, Vice President, Integrity Risk International

Svetlana Milbert, Vice President, leads IntegrityRisk’s due diligence and client success efforts. Previously, she held positions at a global regulatory and financial crime, risk and compliance company and at the US Treasury’s department of international affairs working on the Gulf and Yemen. Svetlana has a  Master of Arts in Economics & Conflict Management from the Johns Hopkins School of Advanced International Studies (SAIS) and a Bachelor of Arts in Government & Politics from the University of Maryland.