Unravelling complex company structures to identify ultimate beneficial owners can be difficult, owing to complex and sometimes opaque business structures. But it is an important step in protecting a firm from risk and complying with regulations.
Customer due diligence is critical for managing an organization’s risks and protecting it against financial crimes. The process includes understanding who you are doing business with, and your partners’ business structures – which you must also understand to comply with financial crime regulation.
An especially important part of your partners’ business structure is the ultimate beneficial owner. This person ultimately owns the company or exercises de facto control. A beneficial owner owns more than 25% of the company’s shares, or controls more than 25% of the voting rights.
Regulators recognize the importance of screening ultimate beneficial owners, and require companies to comply with stringent regulations as part of business partner checks. The US Financial Action Task Force (FATF) mandates companies to identify the beneficial owners of all their customers, partners, suppliers, and third parties. The European Union’s anti-money laundering directive requires verification of customer data through a “trusted and independent” source.
Regulations vary by jurisdiction on the type of information that should be collected on ultimate beneficial owners, and on how they should be identified and verified. In Singapore, for example, companies are required to hold a register of their own beneficial owners, to be made available when required for checks. The variation in regulations puts the onus on each company to adopt its own risk-based approach.
In October 2021, the International Consortium of Investigative Journalists leaked 11.9 million files containing names of politicians, businessmen and celebrities suspected of being involved in money laundering. The ICIJ highlighted how offshore companies and shell companies can be misused. The anonymity provided by offshore centers makes it much easier to hide illegal activity, and can help to conceal illicit funds. Eliminating anonymity makes it harder for bad actors to conceal their wrongdoings, and so transparency is crucial in the fight against money laundering and terrorism financing.
Due diligence checks can help to achieve transparency. Such checks show a firm who it is doing business with, and the associated risks. The complex structures and legal forms that a company can take can make it hard to identify all the relevant parties, and unravelling these structures depends on information that varies by jurisdiction. Furthermore, the beneficial owner may want to make the structure complex to avoid detection. As a result, many compliance teams struggle to screen comprehensively.
Complete, verifiable, and up-to-date data shows all the links and relationship structure of an organization – parent, subsidiary, and connected parties, as well as the ultimate beneficial owner. Figure 1 shows how a company can be linked to its owners.
Figure 1: An example of a complex company structure
An accurate depiction of shareholding structures can also help with monitoring. A firm can see changes, even small ones, such as a change in ownership percentage, or the addition of a shareholding company. This perpetual monitoring helps a firm to assess the impact of changes in its entire client network in near-real time. Perpetual monitoring also allows alerts to be pushed out when required, rather than periodically refreshing all information on every client.
Moody’s Analytics tools enable perpetual monitoring of all relevant stakeholders in near-real time. Through monitoring ownership calculations from an entity to its ultimate beneficial owner, as well as adverse media related to all relevant parties (shareholders, directors, and owners), our suite of KYC solutions helps organizations to monitor and assess the impact of changes.
For more information about Moody’s Analytics KYC solutions, please contact us to schedule a demo.