In part one of our series, we had a look at what Ultimate Beneficial Owners (UBO’s) are and why they matter. This included discussing why The FIC Amendment Act requires Accountable Institutions to identify and verify all Ultimate Beneficial Owners (UBO’s) in order to truly know who you are doing business with. However, this is not always as straightforward as it might sound, and so in the second part of this UBO series, we will unpack the challenges Accountable Institutions face around identifying UBO’s.
What are the challenges around identifying UBO’s?
With thousands of companies being incorporated each year, sometimes with little information required and the increased presence of high-secrecy jurisdictions, shell corporations, offshore legal structures and nominee shareholders, the task of identifying an organisation's ultimate owner cannot be underestimated.
Whilst the vast majority of clients will be legitimate businesses, over recent times it has become clear that corruption, fraud, drug and human traffickers, as well as terrorists, are leveraging companies to provide a level of legitimacy to their illicit activities, transactions or funds. This, along with recent scandals, is leading regulators and governments to strengthen their controls around corporate transparency and reinforces the need to really understand your client as part of your customer due diligence (CDD) and who you are ultimately working with.
The requirements around establishing a UBO has created an interesting paradox by requiring more granular identification and verification in an environment that has very limited accessible public information around ownership. Around the world, many countries have either begun to create or have plans to create beneficial owner registers to counter the use of legal persons to disguise illicit activities or criminally obtained assets.
In South Africa however, a lack of company ownership information leads to a heavy reliance on client declaration and self-certification, which was a key finding in the 2021 Mutual Evaluation Review of the country carried out by the Financial Action Task Force (FATF).
The report noted that law enforcement faces challenges to readily obtain accurate and updated beneficial ownership information about companies and trusts, to enable effective investigation and that “significant money laundering risks remain largely unaddressed for beneficial owners of legal persons and trusts”.
It is hoped that South Africa will consider these serious concerns and seek to address the challenges sooner rather than later, especially considering recent tender corruption scandals that highlighted the use of entities attempting to disguise the flow and ownership of illicitly gained funds.
Publicly available access to ownership information will not only assist Accountable Institutions in being able to easily and quickly identify who they are ultimately working with but will also enable them to effectively assess the potential risk they possibly present.
To summarise, the challenges around identifying UBO’s include the lack of clarity around beneficial ownership definitions and thresholds across global regulations and guidance, inaccurate or non-existent ownership registers, reluctance to disclose potentially confidential information, and even client lethargy around endless disclosures all compound the task of complying.
However, with systems like DocFox, Accountable Institutions can seamlessly identify and verify UBO’s and be notified if there are any potential adverse media involving these UBO’s in order to accurately assess the potential risk they present.
Keep an eye out for our next article as we take a closer look at some best practices for identifying and assessing UBO’s. Click here to read part 3 of the series.