Updated: Aug 16
During 1990s in the wake of the Abacha Affair, a money-laundering scandal broke in Nigeria. It paved path for global efforts to prevent abuse of the financial system by political figures. Many countries in the world follow guideline provided by FATF (Financial Action Task Force). Around 49 countries are member of this Task force and India is one of them.
As part of credit assessment process, you might have come across entities called PEP - (politically exposed person) an assessment criteria to decide credit worthiness and compute risk associated to counter party. The person may not be actively associated to some political parties but it can be a party official or someone serving as senior executive on government owned entities. It also can be a family member..
These people represent higher risk for financial institutions because they are prone to getting involved in financial crimes, money laundering or financing terrorism as compared to a normal customer. Having said that it is imminent to evaluate each counter party for PEP check.
To prevent such financial crimes, compliance requirement is continuously evolving with more and more stringent clauses getting added to present AML/CFT (anti-money laundering / combating the financing of terrorism) guideline. Therefore, the term Ultimate Beneficial owner is getting increased importance not only from credit risk point of view but also for compliance as well. Onus is on financial institutions to adopt the changing regulatory landscape.
When any person is opening a bank account, it is the duty of financial institutions (banks) to do KYC (Know Your Customer) to ensure that the person opening an account is the one who is using it. Regulators have gone one step ahead and they also want institutions to do KYB (Know your business) because banks should know with whom they are dealing with. In this article we will examine what this is about and how a bank can fulfil this demand.
Who all have to do UBO screening?
As per Money Laundering and Terrorist Financing Act, if you are a bank, estate agent, investment institution, casino, solicitor, notary, accountant, currency exchange office, auditor, lease company and insurer, it is applicable to you.
The process is simple and rules are easy to monitor.
UBO Screening process
Step 1. Find the identity
Bank should be able to identify the eligible counterparty to undergo UBO compliance. The below criteria will list the number of counterparties who are eligible for UBO check:
One who holds 25% or more share capital
One who exercises 25% or more of the voting rights
A beneficiary of 25% or more of the legal entity’s capital
A nominee director appointed on behalf of another person and used to conceal the identity of the true owner of the company or some illicit activity
A company or other legal entity who is a corporate director, who may be used to construct complex and opaque corporate structures across multiple jurisdictions to facilitate illicit activity
A holder of bearer shares which do not require registration of the owner, and can be transferred simply with changing hands of the share certificate. This anonymous ownership may be used for tax evasion, money laundering or illegal activities
It extends the above definition to one who exercises the right to appoint or remove the directors, or one who has the right to exercise control over the company’s operations
Large or irregular cash transaction in an account like heavy cash deposit/withdrawal
Heavy investment in cash intensive sector like bullion/ real estate
Use of offshore tax heavens and shell firms
Country of risk where there is high level of corruption like Somalia, Sudan, Syria, etc.
Use of fictitious addresses and fake identity
Non-submission of annual financial statement
In case of not falling under the above criteria, the management is treated as beneficial owner and no UBO scrutiny is applied on them, however those who fail in above criteria are subject to undergo UBO scrutiny.
Step 2. Perform a UBO Scrutiny
The promoter/director/counterparty who has to undergo UBO scrutiny has to be validated against following check
If any of the director/promoter/counterparty is a PEP
If any director/promoter/counterparty is appearing on blacklist/ EU freeze list/ OFAC list/ inspection list/ sanction list
If any director/promoter/counterparty is ever involved in money laundering
If there is any negative news about director/promoter/counterparty on web platform
Step 3. Identify Risk Level
Identify the level of risk based on severity level. The associated risk could be high, medium or low and accordingly measure has to be taken.
Step 4. Take appropriate measure
Institutions may proceed to report such person to the local authority concerned and shall proceed to initiate corrective action plan (CAP).
ConstaCheck (an EWS platform by CARE Risk Solutions) helps to identify, tag and allows to take appropriate measures by multiple corrective action plan.