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Do you know who you’re doing business with?

by Jackson B

By Chris Laws, Head of Strategy and Product, Dun & Bradstreet

If you were asked who the Ultimate Beneficial Owner (UBO) of one of your suppliers or customers was, would you be able to answer?

The Fifth Money Laundering Directive (MLD), now stipulates that you don’t just have to know this, you also have to monitor for any changes of ownership as part of ongoing due diligence.

This fifth MLD came into effect at the start of 2020 and is the latest in a series of policy developments calling for firms to take a risk-based approach to Anti-Money Laundering (AML), Customer Due Diligence (CDD) and Know Your Customer (KYC) efforts.

This means businesses are responsible for keeping track of who ultimately benefits from, owns or controls the companies they do business with, and monitor for any changes in ownership. Essentially this requires firms to work through their business’ network of any and all providers engaged in an exchange services to ensure they have a clear view of any direct shareholders or equity holders of companies they work with, to flag any potential risks and illegal connections.

It’s not just about complying with regulations. It’s also important for businesses to understand who the beneficiaries are within their supply chain and customer base in order to protect their own reputation and financial health due to regulatory penalties or loss in customer favour.  Screening for any connection to adverse behaviour can be key to avoiding serious repercussions.

For example, a brand could face irrevocable damage if it comes to light a business has been unknowingly funding the illegal actions of a Politically Exposed Person (PEP) that they didn’t realise was a beneficial owner of one of their suppliers.

The EU Commission has increased requirements for transparency in recent months and by March 2021 there should be a consistent and accessible pool of information on UBOs across all regions.

Challenges and red herrings

It’s not easy to decipher beneficial ownership, and in recent years the approach has evolved to include multiple metrics. This is a more thorough process, but also presents more challenges.

One of the most common obstacles is overseas ownership. Not every country has the same regulatory standards as countries like the UK, which is something the EU Commission is trying to resolve by introducing consistent regulatory requirements across Europe.

For now, identifying overseas beneficial owners can be difficult. Data may be hard to obtain, and it may be unavailable or vague.

New research from openDemocracy reveals nearly 400,000 UK companies either don’t know or won’t say who their beneficiaries are. And it’s a problem which is only magnified when we look at it from a global scale.

Chris Laws

Chris Laws

Even when businesses obtain information for UBOs who are based overseas or in the UK, the problem of vague statistics can remain.

The Persons of Significant Control (PSC) register only provides range percentage categories (25-50%, 50%-75%) rather than a specific percentage of ownership. The diluted percentages makes it tough if you’re trying to work out the figures from a large list of potential UBOs.

And the challenges don’t stop, even when you do obtain the actual figure. There are many cases within global ownership structures where conflicting information exists. Due to differing jurisdictions in different parts of the world, if someone is so far removed in the business chain, there might be no obligation in some countries to declare their interests in a business operating the UK.

Companies will have to look far beyond the businesses they are dealing with directly to pinpoint and monitor UBOs. But despite the challenges this entails, clarity is possible using third party data and analytics.

Filtering the muddy water

The list of legal entities that come into contact with a business is long and often complex.

A good way to work out who the UBO may be is to visualise your business relationships and their extended network in a spider-diagram. This doesn’t mean sitting down with a pen and paper. Instead, technology can be used to pull together a graph quickly by working with a comprehensive data set.

Similarly, some organisations use a flexible suite of algorithms to work out the worst-case scenario in order to focus their attentions on the most prominent risks. If you’re unable to collate all the information necessary, the algorithm will use proxies.

Even if you are able to locate the UBOs for your customers using these methods, it doesn’t mean your work is done.

Ongoing monitoring

Data changes, and so do UBOs. Changes can impact the risk-profile of your organisation and ownership needs to be continually monitored as part of compliance activities.

Some businesses choose to do this through an annual customer review, which can be a pain-staking task – one which can miss important changes if they happen throughout the year, yet also can be a wasted effort if there has been no change between reviews.

By moving to systematic monitoring, risks can be flagged and reacted to quickly, which can help to protect, and even grow, revenue.

It also means businesses can be aware of any changes in ownership and take any required actions as soon as they happen.

Emerging technology is also giving businesses foresight in terms of risk management of UBOs. For example, much of the systematic approach can be handled through automation. It’s now possible to receive alerts on changes in firmographic data and UBO information through third-party technology platforms and APIs that integrate directly into your workflows.

It may feel like a challenging task but identifying and monitoring UBOs is an important part of managing your business’ current risk and looking after its long-term future.

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