03/10/2022 Alexander

UBOs are about to become a key requirement in US compliance

On September 29, 2022, U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) took a historic step in support of U.S. government efforts to crack down on illicit finance and enhance transparency by issuing a final rule establishing a beneficial ownership information reporting requirement, pursuant to the bipartisan Corporate Transparency Act (CTA). To protect U.S. national security and strengthen the integrity and transparency of the U.S. financial system, the rule will help stop criminal actors, including oligarchs, kleptocrats, drug traffickers, and human traffickers who use anonymous shell companies to hide their illicit proceeds. Source: (FinCen)

What is a UBO?

UBO stands for the ultimate beneficial owner. The Financial Action Task Force (FATF) defines a beneficial owner as the natural person(s) who ultimately owns or controls 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.

Who is affected and what is required?

Most corporations, limited liability companies, and other entities created in or registered to do business in the United States will have to report information about their beneficial owners (UBOs), persons who ultimately own or control the company, to FinCEN.

Why is this a big deal for corporate KYC?

Currently, UBO information is not publicly required.The requirement for UBO disclosure only comes into force on January 1, 2024 but nevertheless signifies the importance of collecting UBO information in the fight against criminal actors.

FinCEN will also continue to develop the infrastructure to administer these requirements, including the information technology system that will be used to store beneficial ownership and who may access them in accordance with the strict security and confidentiality requirements of the CTA.

How do we find a UBO?

UBO stands for the ultimate beneficial owner, in principle, someone who owns or controls the company. In practical terms, who can influence its daily decisions or directions.

The guidance states that these are:

  • Persons that own at least 25% of share capital
  • Persons that exercise at least 25% of voting rights
  • Beneficiaries of at least 25% of an entity’s capital
  • Persons with power of attorney
  • Guardians of minors
  • Corporate directors or nominee directors are appointed to conceal the true owners of a given firm
  • Shareholders, including the holders of bearer shares that may be transferred anonymously

How does UBO information fit into current corporate KYC requirements?

  1. Sanction compliance requirements overview

    The Office of Foreign Assets Control (OFAC), the US body that administers and enforces economic sanctions programs primarily against countries and groups of individuals, such as terrorists and narcotics traffickers, has a list of Specially Designated Nationals and Blocked Persons (“SDN list”) which includes approximately 6,400 names of companies and individuals who are connected with the sanctions targets. U.S. persons are prohibited from dealing with SDNs wherever they are located and all SDN assets are blocked. Entities that a person on the SDN List owns (defined as a direct or indirect ownership interest of 50% or more) are also blocked, regardless of whether that entity is separately named on the SDN List.
  2. UBO information is required to define direct or indirect ownership of entities

    For a long time, individuals connected with the sanctions targets have been able to hide behind shell companies and other corporate structures in the United States. To combat this, entities that have a direct or indirect ownership interest of 50% or more from a person on the SDN list are also blocked. To comply with the rule on entities, U.S. persons now need to check every individual that has a direct or indirect ownership interest of 50% or more in the entities they want to engage with against the SDN list.
    In addition, OFAC urges caution when considering a transaction with an entity that is not a blocked person (a non-blocked entity) in which one or more blocked persons have a significant ownership interest that is less than 50 percent or which one or more blocked persons may control by means other than a majority ownership interest. Such non-blocked entities may become the subject of future designations or enforcement actions by OFAC. Thus, it would be prudent to check UBOs against the SDN List as well.