In the more regulated and interconnected global economy, it has become important to understand and verify the ownership structure of a company. Ownership structure verification is a key part of risk mitigation whether it is regulatory compliance, anti-money laundering (AML) efforts, or good due diligence practices. This paper examines the main points of checking the ownership structure of companies, beneficial ownership disclosure and the intersection of these procedures with business verification procedures like KYC and KYB.
What Is The Ownership Structure Of A Company?
The ownership structure of a company defines the ownership or control of a business. This may be as simple as a single structure, like a sole proprietorship or single-shareholder corporation, to a multi-layered structure with subsidiaries, trusts and holding companies in multiple jurisdictions.
Knowledge of business ownership structure is crucial in terms of transparency in cases where a company is involved in high-risk business, cross-border activities or financial service.
Risk Mitigation and Corporate Ownership Structure
A corporate ownership structure assists in the determination of not only legal owners, but also those who control the company. Although legal owners are usually provided on official documents, it does not necessarily represent the actual people behind the operations. It is therefore important to follow the ownership chain and know how the shareholders, board members, and other stakeholders relate.
The ownership structure of the corporation is especially crucial in the attempts to:
- Stop fraud and financial crime
- Regulatory compliance
- Evaluate reputational and legal risk
- Make proper due diligence on partnerships or acquisition
Beneficial Ownership: What Lies Beneath
An important aspect of comprehending the control of a company is to find the Ultimate Beneficial Owner (UBO). This is the person/people who are the end owners or controllers of a business whether directly or indirectly.
Reporting beneficial ownership is now a worldwide standard in the EU (AMLD), U.S. (FinCEN), and FATF frameworks. The major objective is to illuminate obscure structures which can be utilized in concealing illegal activities.
The most important data that are usually needed in beneficial ownership information are:
- UBO full legal name
- Birth date
- Residential address
- Controlling interest or percentage of ownership
The significance of Beneficial Ownership Information in Business Verification
With regard to business verification, gathering and examining the beneficial ownership data will help to make sure that organizations do not transact with high-risk or sanctioned entities. This applies particularly to banks, fintechs, law firms, and any other service provider that is under the AML regulation.
The identification of the UBO is useful in:
- Discover unseen connections to politically exposed persons (PEPs)
- Identify ownership in high-risk jurisdictions
- Avoid the use of shell companies to engage in illegal activities
KYC vs KYB Business Verification
Speaking of ownership structure verification, two terms are frequently mentioned: KYC (Know Your Customer) and KYB (Know Your Business). They are related though they have different functions.
KYC is mainly applied in verifying the identity of individuals. It involves gathering of documents, identity authentication and risk rating.
KYB applies this to businesses and it demands the verification of company registration, structure and business ownership structure.
Checking of corporate ownership structure and determination of Ultimate Beneficial Owner is a compulsory requirement in KYB processes. Regulatory agencies demand that financial institutions do not only verify the existence of a business entity but also evaluate the individuals behind it.
Regulatory Environment of Ownership Verification
The world is becoming more restrictive on beneficial ownership and corporate transparency. Regulatory authorities are currently demanding that firms have in place well-established systems of gathering and retaining beneficial ownership information.
There are some general rules:
- Compulsory beneficial ownership reporting to government registries
- Real-time updates in the event of change in ownership structures
- Keeping of records over a certain period of years
The provision of UBO data to the financial institutions and law enforcement when needed
Non-compliance can lead to huge fines, penalties, or reputational loss.
Ownership Structure Verification Problems
It is not always easy to check the ownership structure of a company. These include:
- Nominee shareholders or directors to hide true control
- Multijurisdictional structures that are complex in nature
- Disparate or missing public records
- Purposely misleading information or non-cooperation
The discovery and validation of ownership data is now aided by advanced tools and technology that enable automation of the process and makes it more reliable and scalable.
The importance of Ownership Transparency
The ownership structure of businesses is no longer a luxury to be transparent. Investors, regulators, customers and partners are all demanding a greater level of accountability and disclosure of risks.
Open ownership of corporations:
- Enhance trust and credibility
- Promote ethical business conducts
- Increase financial and reputational integrity
- Be prepared to be audited or reviewed by the regulator
Conclusion
In the current regulatory environment, companies need to do more than superficial due diligence and develop a profound understanding of the ownership and control of a company. Whether to determine the Ultimate Beneficial Owner (UBO), meet the beneficial ownership reporting requirements, or as part of their compliance and risk management or ethical business practices, corporate ownership structure verification is critical.
With regulations changing and the increased scrutiny, active and comprehensive business verification, which will involve both KYC and KYB approaches, is the best method of ensuring the protection of operations and establishing the basis of trust in international trade.
