Identifying and Verifying Beneficial Owners: Getting the Full Picture, Fast
Across Asia-Pacific and globally, the identification and verification of beneficial owners is becoming an increasing compliance burden for companies. Gathering and analyzing the information needed to understand complex corporate ownership structures in order to discover beneficial owners takes anything from several hours to days.
As a highly manual process, it is also prone to human error, leaving firms exposed to unknown risks and criminal activity, such as money laundering and corporate corruption.
What Are Ultimate Beneficial Owners?
The Organisation for Economic Co-operation and Development’s 2017 report Beneficial Ownership Disclosure in Asian Publicly Listed Companies describes a beneficial owner as “the natural person who has power to exercise controlling influence over the voting rights attached to shares.”
The Financial Action Task Force’s definition of a beneficial owner is an individual who owns or controls more than 25 percent of the shares or voting rights in a legal entity; holds the right to appoint or remove the majority of the board of directors; or has the right to exercise significant influence or control over the company.
Global regulations and guidance—including Hong Kong’s Anti-Money Laundering and Counter-Terrorist Financing Ordinance and the Monetary Authority of Singapore’s Prevention of Money Laundering and Countering the Financing of Terrorism – Finance Companies—dictate that these individuals must be identified and reasonable measures taken to verify their identities.
Why Is It So Important?
A strong corporate governance structure is critical in gaining and maintaining investor confidence. However, criminals have long used complex corporate structures to hide their real identities and conceal where their funds have come from—or what they are being used for. In recent years, the fight against money laundering has stepped up, with stricter regulations put in place around financial transparency.
Regulated firms have to carry out exhaustive checks when onboarding new customers to ascertain whether they present a compliance risk to anti-money laundering and anti-bribery and corruption regulations. The inability to identify the beneficial owner of a company could lead to an unintended breach of these rules, resulting in heavy fines and severe reputational damage—so it’s crucial that regulated firms are able to do this comprehensively and consistently across their customer base.
Many firms struggle to comprehensively and accurately discover beneficial owners.
Why Is It So Difficult?
Corporate structure and ownership aren’t always tidy. Complex structures may span multiple countries and can be many layers deep. In addition, different jurisdictions have different levels of transparency and disclosure requirements regarding company registrations and disclosure of ownership. Regional differences also come into play—in China, for example, many companies are owned or controlled by the state, adding another dimension of complexity.
The sheer number of sources needed to comprehensively understand ownership structure, identify ultimate beneficial owners and screen all relevant individuals and entities for regulatory and reputational risk presents a tremendous challenge. Data sources range from publicly available sources, such as many corporate registries, to premium providers of company data, regulatory data and adverse media, so companies have to access multiple websites and subscribe to multiple vendors—as well as find a way to integrate these into existing KYC or onboarding platforms.
The difficulties of mapping out the full picture of an organization’s ownership structure mean that many firms struggle to comprehensively and accurately discover beneficial owners.
And the challenge doesn’t end once the initial identification and verification is complete: Identified beneficial owners must continue to be monitored, and, as regulations are updated, processes have to be refined to ensure ongoing compliance.
Where Do I Find Information?
Data aggregators are typically used to extract beneficial ownership data from public sources to create full company hierarchy structures or to hold traceability references back to the original source. This data is relied upon as a secondary source, which still requires confirmation with a primary source—an approved registry or regulatory source, such as the Integrated Companies Registry Information System in Hong Kong or the Singapore Stock Exchange, or with the client, which is a very manually intensive process.
Intelligent process automation, such as that built within the encompass platform, can play a key role here, driving the retrieval of relevant information from trusted sources and the analysis of that data, in line with a firm’s KYC policies and in real time. This saves companies significant time and cost, while at the same time eradicating the potential risks of human error.
How Can I Balance Customer Experience with Regulatory Compliance?
There are a couple of key developments underway in the industry, which are leading the way for a more automated, and therefore faster, process.
Digitization. Algorithms are being developed to iterate through an ownership structure between available data from aggregators and a primary source, against which the data can be confirmed.
Ownership Registers. Following enhanced regulation, many jurisdictions across Asia and the world are creating ownership registers to support the global fight against financial crime. As an example, earlier this year, Hong Kong’s legislative council passed the Companies (Amendment) Bill 2017, which requires the creation and maintenance of a Significant Controllers Register. In Singapore, the Accounting and Corporate Regulatory Authority maintains an electronic register of shareholders and directors of private companies, which is available to the public. The aim of these registers is to increase transparency over who owns and controls companies; help inform investors when they are considering investing in a company; and support law enforcement in money laundering investigations.
The challenges around identifying and verifying beneficial owners may be substantial, but the risks that come with noncompliance are even greater. With less deeply embedded legacy technology than their Western counterparts, Asian financial institutions are well-placed to embrace disruptive technologies that dramatically simplify these challenges. Innovations including intelligent process automation and artificial intelligence allow firms to manage costs while satisfying regulatory expectations and reducing risk to the highest standards.