Will the Real Beneficial Owners Please Stand Up!

Will the Real Beneficial Owners Please Stand Up!

What is a UBO (Ultimate Beneficial Owner) and why the confusion?

What is a Universal Beneficial Owner anyway?

We do thousands of beneficial owner's distillations. Distillation, "to extract the essential meaning or most important aspects of"  is our word for discovering and verifying the real or ultimate beneficial owners of a trading entity, no matter what its form, and to customers of our customers, it remains one of the most confusing aspects of AML law.

When you have a simple company, the concept of beneficial owners is simple, and well defined. Any natural person owning or controlling more than 25% of the shares of the company. Easy. But this nice simple concept almost never exists in reality. For instance, when we look at most developed countries in Europe, Australasia, and North America, there can be more than 20 types of "entities" that can trade in a name other than the natural person or persons who are the ultimate beneficial owners. Trusts, clubs, partnerships, sole traders, charities, government agencies, and the list goes on, varying from country to country, legislation to legislation. 

The concept of trading in another name from the natural individuals is the purpose of KYC, or Know Your Customer. Anti-Money Laundering strategies are designed to be able to "see" transactions, following the money trail from its source to its destination, and supply the providence of each step along the way. In almost all cases, this is a human to human transaction, regardless of the steps along the way. A consumer purchasing a product or service ultimately delivers a financial benefit to another natural person, whether in terms of profits, services, salaries, and so on.  Being able to follow the flow of money between people allows the governments of the world to work together to control crime, particularly organised crime. Think human trafficking, drug manufacture and supply, credit fraud, and much, much more. When we trade under a different name to the names of natural persons, the legitimate consequence is that we conceal the real people behind the transactions, and the real beneficiaries, which is why laundering illicit cash through trading entities is so widespread. The whole point is to hide where it came from, and who its going to.

Defining who is a UBO.

Back to our many forms of trading types. For the purpose of this article, we will call any one who trades a product or service a "business", and for simplicity we will say we only have the concept of small business, big business, and government. 

In the world of small business, most rely on the services of an accountant or legal adviser to determine the most effective structure to operate our business within. And, most accountants or legal services have very effective ideas on how to set up a business to protect the operator from legal liabilities, to minimise tax, and maximise benefits. However, the effect of this is not always clearly understood by the operator, particularly when it comes to the definition of beneficial ownership. A great example is in the use of trusts. A trust is a structure where a trustee carries out the business on behalf of the trust’s members (or beneficiaries), which can be fluid. A trust is set up through a trust deed and there are two main types: discretionary or unit trusts. In a discretionary trust, the trustee has discretion in the distribution of funds to each beneficiary. In a unit trust, the interest in the trust is divided into units with their distribution determined by the number of units held by each member.

Where the confusion enters is the our business owner considers himself just that, the owner, and generally speaking he or she is. But legally, from an AML perspective, this is not the case. For AML, the ultimate beneficial owner is the natural person who controls the flow of benefits derived from the business. And the control is defined by the description contained within the trust deed, usually seated with trustee, but not always. Settlors or appointers, can also be defined within a trust deed as being in control. hence the only way to formally verify the beneficial owner of a trust is to actually sight and read the trust deed. Something that is not usually received well, as most small business operators leave the trust deed in the hands of their lawyers and accountants, and providing a copy means fees and charges and time delays. But, it is an absolute requirement under law.

In a similar situation, we often see partnerships. Partnerships are similar to trusts, in that the terms of the partnership, decion making control, and share of proceeds to natural people is determined within a written document, the partnership agreement. And, just as in the trust example, the only way to verify the beneficial owners as defined by law is to sign and read the actual partnership agreement. In our experience, in small business, many businesses are registered a s a partnership, but the accompanying partnership agreement has never been signed off. Husband and wife teams are a great example, as are two buddies carrying on a business. The partnership is based on a handshake that profits will be split evenly, and the control mechanism is one of trust. And again we have a situation where distillation of the beneficial owner now requires expenditure of time, effort and money on the part of the business owner, some all of which are in short supply.

UBO's in big business.

Most large organisations don't have these challenges. Their corporate structure is well defined and documented, they may even have chief legal officer or chief compliance officer responsible for ensuring same. In larger businesses, the issue is one of complexity, particularly when the business operates internationally. A beneficial owner is not automatically a CEO, or a chairman, or director of the company. Every layer of the business and its holding companies needs to have shareholdings verified, and calculated for the child entity. This can be complex and time consuming, and in some cases, quite frustrating for the applicant. We saw a recent case where a small subsidiary needed a merchant account for a single retail operation. The business was owned by a larger entity, which in turn was owned by an overseas holding company, which in turned was jointly owned by three privately held private equity companies. The end result was that the three CEO's of the private equity forms were determine to be the ultimate beneficial owners, who needed to be formally identified. This caused the original applicant some consternation, in that he would have to ask three very senior executives in charge of billions of dollars of capital to undergo identity verification for a small merchant account. However, this is the law, and for compliance purposes, this is now a daily exercise for many senior executives.

Governments and everyone else

Who is the owner? The most common response we see is "We don't have an owner". And in the truest sense of the word, this is true. A government entity is technically speaking owned by the people. A club, association, NFP, is owned by its members, and hence everyone is an owner.

But in anti money laundering language, there is always an owner. Always. We have a concept in law called "deemed", to come to think of, or judge. In every country, AML law makes provision for the beneficial owners of an entity that can trade using a name other than a single natural person. The word owner hence causes significant confusion, because it is the legal term of reference, but does not have the definition in the vernacular of day to day language that we are used to. If you are considering your organisation, whether government agency, a club, a charity or an association, disregard your pre-existing concept of the word owner, and consider who is actually in control. And when we say control, we mean who controls the disbursements of the benefits your organisation procures. From an AML perspective, this person or persons will be deemed to be your beneficial owners under your respective AML laws.

Still have questions? Call us, and we'll be happy to help, even if you are not a client. It's what we do.

 

 

 

 

 

 


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