Verify the Ultimate Beneficial Owners of your Business Customers

Mitchell
MitchellJune 7, 2019

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UBO bronID

In 2014 changes were made to the Australian AML/CTF Rules which impacted the customer due diligence (CDD) obligations for reporting entities in relation to verifying ultimate beneficial ownership (UBOs) and identifying politically exposed persons (PEPs). Changes to the AUSTRAC AML/CTF Rules was in response to FATF updating their guidelines

Reporting entities should have implemented these changes by the beginning of 2016.

Verifying your business customers can be a difficult task, especially if the chain of ownership is layered and crosses borders internationally.

In some cases, navigating corporate structures and identifying the UBOs can be so complex that reporting entities will either have to reject working with business customers or be willing to take higher risks to serve these new customers.

Internationally there has been a push by organisations such as FATF to improve regulatory systems and transparency with regards to business customers and their beneficial owners, with the overall aim to increase coordination in the fight against financial crime globally.

In response, the Minister for Revenue and Financial Services at the time, The Hon Kelly O’Dwyer MP, in a 2017 Consultation Paper: Increasing Transparency of the Beneficial Ownership of Companies quotes;

“Improving transparency around who owns, controls and benefits from companies will assist with preventing the misuse of companies for illicit activities including tax evasion, money laundering, bribery, corruption and terrorism financing.”

bronID is offering a pay as you go, software as a service solution for verifying your business customers. Use the bronID Portal to verify organisations down to the ultimate beneficial owner level in a gracefully compliant manner.

What is Beneficial Ownership?

As defined in the AUSTRAC website section on beneficial owners

A beneficial owner of a customer is defined as an individual (a natural person or persons) who ultimately owns or controls (directly or indirectly) the customer.

Ownership for the purposes of determining a beneficial owner means owning 25% or more of the customer. Therefore, the beneficial ownership of an entity can be divided by up to four individuals. (4x25%=100%). Note that this threshold might be different in different countries.

The definition of 'control' includes whether the control is exerted by means of trusts, agreements, arrangements, understandings or practices and whether or not the individual has control based on legal or equitable rights. It includes where an individual can exercise control by making decisions about financial and operating policies.

What is the difference between indirect and direct beneficial ownership?

Direct beneficial ownnership is more simple to navigate. Direct ownership means that the ‘natural person’ is a beneficial owner, in the example below Individual A is a direct beneficial owner because they directly own 26% of KYB PTY LTD.

indirect beneficial ownership can be more difficult and requires for you to delve into corporate structures with multiple layers. In the example below, both Individual B & D are indirect beneficial owners. This is because each of them owns 25% or more of KYB PTY LTD through other entities.

bronID ubo flowchart

Try identifying the beneficial owners of KYB PTY LTD

Identifying the beneficial owners of KYB PTY LTD

Individual A = 26% ownership

Individual A is a beneficial owner because they directly own 26% of KYB PTY LTD.

Individual B = 27% ownership

Individual B is a beneficial owner because they have two interests that collectively amount to an indirect 27% of KYB PTY LTD: The first is their 30% interest in X PTY LTD, which owns 50% of KYB PTY LTD (providing an indirect .3 x .5 = 15% ownership of KYB PTY LTD).

The second is their 60% interest in Y PTY LTD, which owns 20% of KYB PTY LTD (providing an indirect .6 x .2 = 12% ownership of KYB PTY LTD).

Adding these together, Individual B has a 15% + 12% = 27% interest in KYB PTY LTD.

The example above is one of many company structures. To the untrained eye, complex company structures can be really difficult to navigate when determining beneficial ownership.

Individual D = 28% ownership

Individual D is a beneficial owner because they hold 80% of the units in Z TRUST (a unit trust) which in turn owns 70% of X PTY LTD, which owns 50% of KYB PTY LTD (meaning Individual D has an indirect .7 x .8 x .5 = 28% ownership of KYB PTY LTD).

You may be asking, in what situations is verifying beneficial ownership **not** required?

When using a Simplified Verification Procedure for certain types of companies and trusts, verifying the beneficiaries is not required. For more information on simplified verification procedure see Know Your Customer

5 Step Process for Meeting your Beneficial Owner Obligations

1. Assess

Perform a Beneficial Ownership Risk Assessment:

Business customers have different risks attached than doing business with individuals. Entities may have opaque and complex ownership structures. This can make it difficult to determine their beneficial owner(s) and therefore achieve AML/CTF Compliance.

It is essential to assess the ML/TF risk posed by the beneficial owners of your customers in accordance with your AML/CTF program customer risk assessment methodology.

Keep your information up to date.

The beneficial owner(s) of your non-individual customers may change over time, so you need to regularly update beneficial owner information throughout the life of relationships with your non-individual customers.

2. Determine

Determine the individual beneficial owners of your business customers.

25% of ownership is the threshold for beneficial ownership. This can be opaque due to company structures, and entity ownership. Finding individual beneficial owners can require digging down multiple layers of company ownership.

Keep in mind there is only ever a maximum of four individual beneficial owners.

Some specific ownership structures can be used as an indicator for identifying money laundering and terrorist financing typologies. Typologies are recorded methods criminals use to laundering money or finance terrorist. Typologies are useful as historical reference points for compliance professionals to help identify money laundering.

3. Collect

Collect and take reasonable measures to verify information on each beneficial owner.

In accordance with your Know Your Customer procedures, collect and verify

Full name, date of birth and/or address of the beneficial owner and perform a KYC check.

  • To verify a beneficial owner you must use reliable and independent electronic data that demonstrates the identity information you collected about the beneficial owner is correct.
  • What counts as reasonable measures for verification purposes will depend on the ML/TF risks you have identified in relation to providing the designated service to the relevant customer.

What constitutes reasonable measures?

If unable to determine the identity of any beneficial owners of a business customer your definition of ‘reasonable measures’ becomes relevant. In accordance with the 4.12.9 of the AML/CTF Rules you should look to verify the identity of another individual instead.

For a company or partnership, any individual who:

  • Is entitled to (either directly or indirectly) exercise more than 25% of the voting rights, including a power of veto, or
  • Holds the position of senior managing official. (or equivalent)

For a trust any individual who holds the power to appoint or remove the trustees of the trust.

For an association or registered co-operative, any individual who:

  • Is entitled to (either directly or indirectly) exercise more than 25% of the voting rights, including the power of veto, or
  • Would be entitled on dissolution to more than 25% of the property of the association, or
  • Holds the position of a senior managing official (or equivalent).

Disclosure certificates are only to be used if the above does not complete the processes outlined in your AML/CTF program for identifying beneficial owners. Please refer to Chapter 30 of the AML/CTF Act for more information on using disclosure certificates.

4. Keep Records

You must keep records of the identification processes you performed on the beneficial owners of your business customers.

Be sure to keep your information up to date.

It is important that your records can be used to demonstrate that you have investigated each link in a non-individual customer’s chain of ownership to identify all of the individual ultimate beneficial owners.

The bronID portal can be used to navigate down each level of non-individual know your customer verification until the individual beneficial owners are identified.

A record of your verifications is displayed within the bronID Portal

5. Document

By establishing an AML/CTF program you are required to document how you will fulfil your obligations to verify beneficial ownership in your AML/CTF program. Keep this in mind when you Design your AML/CTF Program

Including

  • How do you determine who the beneficial owner(s) of your non-individual customers are?
  • What information you will collect about each UBO?
  • What information you will verify about each UBO?
  • What reliable and independent electronic data you will use to verify the identity documentation of beneficial owners?
  • If, and when, you will use disclosure certificates?
  • If, and when, you will resort to identifying an individual instead of being able to identify an actual beneficial owner?
  • How your business defines ‘reasonable measures’ for verifying?
  • What are beneficial owners?

Processes set out in your AML/CTF program must not be generic. They must be specific to your business and instruct staff on how to collect and/or verify beneficial owner information.

Once included in your AML/CTF program, it is a legal requirement that processes are followed by all staff.

For more information on these steps check out the AUSTRAC UBO Factsheet


Complying with your AML obligations can be a complex process, and yet a crucial piece for proving a legitimate service.

bronID is constantly adding to our AML/CTF toolkit to help you execute on your each of your compliance obligations.

By following our knowledge centre guides we aim to help you automated your AML/CTF compliance obligations and make achieving industry best practices the bronID standard.

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Mitchell
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Mitchell

A catalyst for transforming legislation and governance into easy to use software. The personified pen of bronID.

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