The importance of Ultimate Beneficial Owner screening in trade

Denied party screening is a critical process for any business involved in international trade. Failing to ascertain whether the people or organizations you're doing business with are on sanctions lists can lead to serious consequences, from fines or the loss of export licenses through to criminal convictions.

There are a range of challenges associated with this, and among them is establishing who is ultimately benefiting from your business relationship. In many cases, the actual individuals or entities behind companies may be obscured and difficult to determine. However, failing to conduct thorough due diligence to get to the bottom of this can leave your firm exposed.

In order to deal with these issues, it's vital that Ultimate Beneficial Owner (UBO) screening is incorporated into your compliance and Know Your Customer (KYC) processes. So what does this involve and how can you ensure you are doing this effectively?

The term Ultimate Beneficial Owner refers to the individuals who have final control over a legal entity and benefit from its operations or assets. It's important to understand that the UBO may not necessarily be the same as the legal or registered owner, and they may not even be officially listed as a shareholder or director. However, they will still have a significant controlling interest or take a major economic benefit from the organization's activities.

Because UBOs are often unlisted, standard KYC procedures may fail to pick them up, which could leave trade partners unknowingly breaching sanctions or embargoes. Therefore, deeper screening to uncover the identities of these individuals and ensure they are checked against denied party lists is required.

Many major jurisdictions around the world have specific legislation covering UBOs, how these are defined and what steps businesses are expected to take in order to detect them.

In the EU, for example, beneficial ownership generally means an individual with at least 15 percent plus one shares in a company, voting rights, or any other direct or indirect ownership interest. However, these rules differ for certain sectors. In extractive industries or companies that are exposed to a higher risk of money laundering or terrorist financing, the share requirement to be considered a UBO is five percent plus one.

Meanwhile, US rules on UBOs are managed by bodies including the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC). Among the regulations enacted by OFAC is the 50 Percent Rule, which requires companies to disclose the names of any beneficial owners who own or control at least half of the company.

Failure to comply with US UBO reporting requirements can lead to civil or criminal sanctions, including civil fines of up to $500 per day of violation, criminal fines of up to $10,000 and/or up to two years' imprisonment.

While the importance of UBO screening should be clear, there are a range of challenges associated with this that businesses will have to contend with if they are to make certain they are complying with sanctions, embargoes and anti-money laundering legislation. Among these are the following:

• Poor-quality data. One of the biggest barriers to successful UBO screening is incomplete, outdated, or unreliable beneficial ownership information. According to Orbis, millions of companies around the world undergo a change of ownership every month, many of which will have implications for UBO.
• Complexity. UBO screening is a time-consuming process. Because much beneficial ownership information is not publicly-available, this means firms often have to rely on a multitude of sources and partnerships with other entities to gather the necessary information.
• Lack of collaboration. Effective screening requires cooperation between countries, but this is often hard to achieve, especially when dealing with jurisdictions that are reluctant to share data.
• Cost. Implementing comprehensive UBO screening processes may be prohibitively expensive for companies with limited resources.

In order to tackle these challenges, it pays to have access to advanced technology solutions that can automate the UBO screening process and gather data from a wide range of sources around the world into a single dashboard.

MIC's export control management software, for example, includes UBO screening tools that offer details of over 200 million companies worldwide. Automated interfaces that connect with the Orbis database of Bureau van Dijk (BvD) and Dun & Bradstreet's (D&B) Bisnode database ensure that users have access to accurate, regularly updated information on who is really behind any potential business partners.

This combines with daily-updated sanctions lists for all major jurisdictions - including the US, EU, UK, China and Japan, as well as UN Sanctions Lists - to ensure that once identified, the status of UBOs can be automatically checked for compliance.