Unregulated entities are a key concern in respect of economic and financial crimes and many criminal enterprises utilize commercial institutions to commit such crime. It is for this reason that many governments are seeking to strengthen and enhance their existing Anti-money laundering and counter fraud legislation.
To this end, the UAE government issued Cabinet Resolution No. 58 of 2020 on Regulating Beneficial Owner Procedures (the Resolution) in August 2020, which requires all companies which are licensed to do business in the UAE, unless exempted by the Resolution, to maintain both a detailed register of Partners/Shareholders and a register of Real Beneficiaries.
However, this is not news to anyone and companies are obliged to know their clients in order to root out connections with criminal or unsanctioned parties.
But what is a UBO (Ultimate Beneficial Owner) and why is transparency necessary when dealing with such people or entities? And how do you protect yourself and your company from falling foul of this complicated legislation?
What is a UBO?
A UBO is an individual who ultimately owns or controls 25% or more of an entity (whether directly as a shareholder or indirectly via control of companies) or other entities or structures that control the entity. In short, it is the ultimate beneficiary regardless of the chain of control.
The following is a non-exhaustive list of examples of UBO relationships which can be identified in practice:
- Legal Person – Ownership, i.e., this is where the UBO is identified as the ultimate owner of the entity in question.
- Legal Person – Senior Managing Official i.e., this is where the UBO is identified as a Senior Managing Official of the entity.
- Legal Arrangement – Trust – Settlor i.e., this is where the UBO is identified as the Settlor, Grantor or Donor of a trust which owns or controls the entity.
- Legal Arrangement – Trust – Trustee i.e., this is where the UBO is identified as the Trustee of a trust which owns or controls the entity.
- Legal Arrangement – Trust – Protector i.e., this is where the UBO is identified as the Protector of a trust which owns or controls the entity. Note – The main difference between the Protector of trust and a Trustee is that assets of the trust vest in the Trustee, whereas this is not the case with a Protector.
- Legal Arrangement – Trust – Beneficiary i.e., this is where the UBO is identified as the beneficiary of a trust which owns or controls the entity.
You may want to know: Regulations on Ultimate Beneficial Ownership (UBO) in UAE Enforced
Steps used to check for a UBO
First step: Obtain the entity’s details and credentials
To verify their legitimacy and the accuracy of their records, entities must provide full and up-to-date information regarding their registration/ license number, name, address, legal status, and executive management. The details and information required may differ depending on the country or jurisdiction.
Second step: Research and clarify the chain of ownership
Identify natural or legal persons who hold in shares or any other interest in the entity and determine whether it is a direct or indirect relationship.
Third step: Identify the UBO
Determine and identify the total percentage of shares, management control, and ownership stake of every individual. Utilize this information to calculate whether any such person meets the definition of a UBO as per the relevant legislation.
Fourth step: Perform an AML/KYC check
All those identified UBOs should then undergo a comprehensive AML (Anti-Money Laundering)/ KYC (Know Your Client) assessment.
Risk Categories of UBOs
A UBO’s risk category will determine the correct approach:
Low risk
In respect of Low-Risk UBOs, it will mostly be sufficient to simply request the relevant individual to provide evidence of their identity and to sign a statement confirming such details. The standard visual check (by comparing the presented ID document’s photograph with the actual facial features of the individual in question) and authentication check (by verifying the presented ID document’s authenticity) will generally be adequate in low-risk cases.
Medium to High risk
If the individual in question if a Politically Exposed Person (PEP) or there are concerns of terrorism or money laundering, then further investigation will be the most appropriate action.
In this regard, the Financial Action Task Force recommendations include the following:
- Conducting of additional in-depth searches to collect information and data from a wider variety of sources to assess the individual’s risk profile. Factors such as political exposure, negative reports in the media and being the subject of legal or regulatory enforcement may contribute adversely to the risk;
- Investigating the source of funds involved in the transaction to ensure that that they are not the proceeds of a crime and to document whether there are discrepancies between the income, the source of wealth, and the overall net worth of the individual in question;
- Obtaining additional information and detail from the customer regarding the nature of the business relationship or transaction;
- Requesting existing clients to annually provide updated information about significant amendments in respect of ownership.
The aforementioned list relative and not finite since every company must determine the appropriate safety measures on a case-by-case basis and based on the specific risks.
