The Uniform Beneficial Ownership Rule has received a great deal of attention in the past few years. This was largely because under the Corporate Transparency Act, the scope of the UBO would have been greatly expanded. For now, the expansion of the rule has been put on hold. However, the basic requirements of the rule remain. There are still requirements to collect information when adding a new business customer. But now that you have the UBO information on your customers- so what?
The gathering of the information that is required is the first basic step- it is what you DO with that information that can make the rule game-changing. Incorporating UBO information into both risk-rating and monitoring plans for customers is a key best practice. It is in fact the overall point of the UBO rule.
The Reason for the Rule
One of the main tools that are being used to avoid detection of violations of things like sanctions is shell corporations. A shell corporation is a corporation without active business operations or significant assets. These types of corporations are not necessarily illegal, but they are sometimes used illegitimately, such as to disguise business ownership from law enforcement or the public.
For example, 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
Before the UBO rule was enacted, the ownership of established companies as well as shell corporations was an area that we missed in our overall information gathering used for risk assessment purposes. While we often did a background check on the company itself, we did not focus on the ownership of the company. The ownership of a business can and should make a huge difference in your risk profile of a customer.
Owners can present additional risks in many ways such as:
- Cash intensive related businesses
- Ownership that is potentially OFAC sanctioned or otherwise compromised.
- Ownership that is engaged in illicit activities such as trade-based money laundering that could be blended into the operations of the established business
Risk and Ownership
How can the ownership of a company impact risk? A small example may help illustrate. Suppose we have a local owned and operated flower shop that specializes in the Sky-blue Orchid that grows almost exclusively in Tasmania Australia
Our customer specializes in selling this rare plant to the many admirers in the local area and throughout the country. Our risk profile of this customer would include business flow expectations that would include:
- A combination of cash checks and credit/debit card payments as deposits.
- Wires to the suppliers primarily in Australia Payments to other suppliers, utility bills, rent or lease payments, insurance, etc. by debit card and /or ACHMinimal wires coming in
- Incremental growth
Now suppose our customer is joined by a 51% owner who is also a casino owner; does the risk profile of the company change? What else would you look for because of this change in ownership or control?
The risk profile of the company has not necessarily changed, but it would be a best practice to consider that any change in the cash flow or other activities of the flower shop might indicate that the new owner is changing the operation of the company. This is not to infer that a change in ownership itself is a problem; but the risk profile of the company must be reconsidered.
Risk Profiles and UBO
When risk rating customers and administrating the list of customers considered ‘high risk” it is important that the UBO information including who the controller people/persons are is part of the overall risk assessment and monitoring program that results.
The whole point of risk assessing customers should be to determine how your monitoring program will be used to mitigate risks. In the above example, the monitoring program would be altered to look for potential changes in the nature of the cash flow of the company including:
- Higher cash deposits
- Wire activity in countries is different from the pastIncoming wiresBulk sales of flowers
- Customers from regions outside the established base
UBO information collection should be dynamic -at least annually – and must be built into the overall risk assessment and subsequent monitoring program. Once the information is collected, it should be incorporated into the overall risk assessment of customers and the monitoring program designed to mitigate risk.
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