In the business world, terms like “shareholder” and “ultimate beneficial owner” often pop up. But what do they mean? And more importantly, how do they differ from one another? Here’s a comprehensive look at the difference between the two, and why being able to identify them is so important.
Defining shareholders and ultimate beneficial owners
Shareholders are individuals or entities that legally own shares of stock in a company. However, this doesn’t always mean they are the ultimate owners of those shares. Sometimes, a shareholder might hold them on behalf of another person or entity due to a contractual agreement. This concept is called ‘nominee shareholding’, where the nominee merely holds the shares but doesn’t take on the economic benefits or risks associated with them.
Ultimate Beneficial Owners (UBOs) refers to individuals or entities that ultimately benefit from the ownership of assets, whether it’s a business, securities, or even properties. According to Open Ownership, “a beneficial owner is a person who ultimately has the right to some share of a corporate entity’s income or assets, or the ability to control its activities.” This definition highlights the multifaceted nature of beneficial ownership. Unlike the nominal shareholders, UBOs have the actual economic interest in the company and bear the risks associated with it. They can be individuals or groups and can have either a direct or indirect stake in a business.
It’s important to note that individuals or entities can also be UBOs through control mechanisms, and not just through direct ownership. This includes those who exert significant influence or control over the entity, even if they don’t hold formal ownership.
Recently, the term ‘corporate vehicles’ has been used to include the wide array of entities through which UBOs operate, including companies, trusts, and foundations. This evolution in terminology reflects a growing need to understand the complex ways in which individuals own, control, or benefit from various types of entities.
Significance of ultimate beneficial ownership
The top 3 reasons why it’s crucial we have the transparency and open-access in place to recognise UBOs are outlined below.
- Combating financial crime: With money laundering becoming increasingly sophisticated, regulatory authorities are emphasizing transparency. This illicit practice involves masking funds acquired from illegal sources to make them seem legitimate. The process generally involves depositing, concealing, and integrating the funds by the business owners. UBO information helps banks and other institutions understand who they are doing business with, effectively curbing potential financial malpractices.
- Tackling terrorism financing: This involves diverting funds, either legally acquired or not, towards terror activities. Unlike money laundering, this may not always involve large sums but can still lead to significant societal impact.
- Fraud prevention: To curb large-scale frauds like commercial scams and tax evasion, understanding the actual ownership structures of companies becomes crucial. These frauds often involve intricate international company structures designed to shield the true perpetrators.
Responsibilities around UBO identification in the United States
In the USA, the Bank Secrecy Act (BSA) and the FinCEN Customer Due Diligence Final Rule (CDD Rule) regulate the identification of UBOs. Financial institutions are required to:
- Gather details on their customers’ ownership, including UBOs’ names, addresses, and ID numbers.
- Authenticate UBOs using credible, external sources like government IDs or public records.
- Continuously monitor customers and their UBOs for potential risks or illegal activities.
- Report any suspicious actions or dealings related to customers and their UBOs.
Under Anti-Money Laundering and Anti-Terrorist Financing regulations, certain organizations have a duty to identify UBOs. This includes a wide array of financial organizations like banks, insurance firms, brokerages, and even entities like credit unions and payment gateways.
For such institutions, identifying UBOs isn’t a one-time task. They need to ensure that the UBOs associated with their client companies remain the same throughout their business relationship. Any discrepancy found against public records can lead banks to seek additional certifications from the concerned business.
An important development in the USA worth mentioning is the Corporate Transparency Act, set to be enforced from January 1, 2024. This act mandates the creation of a central, non-public beneficial ownership register for US businesses, primarily accessible to law enforcement. It represents a significant step in enhancing transparency and curbing financial crimes.
The challenges with identifying UBOs
UBO identification is essential in the fight against financial crime, but financial entities encounter these common obstacles:
- Intricate ownership configurations, with legal entities often having multiple ownership tiers, further complicated by shell companies and bearer shares.
- No unified and dependable UBO data source, leading to reliance on varied and occasionally conflicting sources.
- Regularly changing UBO details due to business events like mergers or acquisitions, necessitating ongoing updates to maintain accuracy.
This is why it’s so important to strengthen regulation around UBO identification across the globe. The easier it is for businesses to hide their true ownership structure, the easier it is for financial crime to remain undetected and for the true culprits to remain unaccountable.
Conclusion
As the business world becomes more global and interconnected, transparency in company structures and ownership is paramount.
Understanding the difference between shareholders and UBOs, and abiding by the regulatory requirements related to UBO disclosure, is essential not just for compliance, but also for ensuring ethical business practices all over the world.
For a deeper understanding of beneficial ownership and its implications, Open Ownership provides a wealth of resources. Their high-quality, up-to-date beneficial ownership data, reconciled with OpenCorporates’ legal-entity database, offers a real-world example of effective transparency practices. More examples can be found in Open Ownership’s data sources.
