Home Finance Identifying Beneficial Ownership: A Regulatory Conundrum

Identifying Beneficial Ownership: A Regulatory Conundrum

by internationalbanker

By Jo Priestley, Head of Financial Crime Expertise, Efficient Frontiers International





Undertaking comprehensive customer due diligence (CDD) on corporate vehicles such as companies, trusts, foundations, and partnerships, has inevitable challenges especially where complex ownership structures are in place. Financial Institutions need to know both the legal owner and the beneficial owner, i.e., who owns the organisation and controls and benefits from the activities of the organisation. The risk is that where there is opacity of beneficial ownership then money laundering and / or terrorism financing could be facilitated by known or suspected criminals.

Efficient Frontiers International’s “KYC Report: The State of Compliance” survey respondents indicated that they find beneficial ownership challenging, no doubt because of the use of shell companies, complex ownership and control structures involving layers of shares registered in the name of other legal persons and other methods of layering the true ownership.

FATF (Financial Action Task Force) note that “Enhancing the transparency of legal persons makes them less attractive for criminals in hiding their real identities”. They note that “it could be challenging to ensure that the beneficial owner information is adequate, accurate and up-to-date, particularly when the ownership chain involves legal persons and legal arrangements spread across multiple jurisdictions.”

First line financial crime risk teams understand the importance of identifying ultimate beneficial ownership, however, it is a complex task to ensure that the information is adequate, accurate and up to date, for the reasons given by FATF. Financial Institutions often find this exercise challenging and need support to undertake and update CDD as this is a regulated requirement and breaches may result in the regulator using enforcement action against the firm.

FATF guidance

FATF’s Recommendation 24 guidance which is currently in a consultation phase states the following:

The misuse of corporate vehicles could be significantly reduced if information regarding both the legal owner and the beneficial owner, the source of the corporate vehicle’s assets, and its activities were available to the authorities in a timely manner”. The FATF further clarify that the availability of beneficial ownership information in some locations is a bigger challenge, but equally should be addressed to significantly reduce money laundering opportunities.

So, what is the UK doing about it?

The UK Home Office introduced the new Economic Crime and Corporate Transparency Bill to the House of Commons on 22nd September. The objective of which is to make provision about economic crime and corporate transparency, to make further provision about companies, limited partnerships and other kinds of corporate entity, and the registration of overseas entities”. So, what does The Bill mean for UK companies registered on Companies House? And how does it help firms identify beneficial ownership?

What is included?

The Bill presents new reforms which include:

  • New, stronger powers for Companies House to further check and challenge potentially incorrect or fraudulent information – enabling the registry to cross reference information with data vendors
  • Updates to the registration and transparency requirements of limited partnerships to help prevent abuse of such legal entities
  • A requirement for companies to submit sufficient evidence for current information to remain on the register
  • Simplified filing and data submission requirements

What does this mean for UK businesses?

Currently, there are few obstacles to submitting company information – with little in the way of verification. Companies that therefore wish to remain on Companies House must prepare for the requirements by collating verifiable information for submission.

EFI’s 2022: ‘The State of Compliance’ Survey revealed that 62% of respondents found that identifying beneficial ownership was the biggest challenge when performing KYC checks.

This data confirms this aspect of KYC as one of the industry’s biggest challenges. More specifically, why is this a challenge in practice? Why is it proving such an issue for compliance teams? And what are regulators doing to combat it?

Identifying beneficial ownership is a constant focus in the UK with steps being taken towards greater transparency in relation to foreign companies seeking to buy land who must now present verified beneficial information to Companies House before any application to the Land Registry can be made. Understanding the authenticity of documents can be a challenge, especially when onboarding clients from across the globe.

Documents vary between those that can be authenticated via public sources and private documents that must be verified by a notary or similar. Therefore, it is not much of a surprise to see beneficial ownership struggles as a cause for concern for these respondents – considering the occasional requirement for documents to be translated between languages for review, it isunderstandable why this aspect of KYC is causing headaches.

“The data within this survey highlights the long-standing issue that obtaining and unwrapping of complex ownership information and identifying beneficial owners are constant struggles. These remain the biggest obstacles to compliance, and it is logical that these factors are the respondents’ biggest challenges. These are common issues facing clients conducting KYC onboarding and remediation when requesting updated documentation and information. From our experience, clients value a partner that can minimise the time and resource required by sourcing the relevant public source information in the first instance.” – Tanya Gallon, EFI KYC Delivery Lead

How to approach identification issues in KYC

As mentioned above, identifying, and understanding risk is key and using information sources via automated screening tools can support the understanding of the customer. For instance, automated screening tools identify Politically Exposed Persons, sanctioned individuals and entities, and adverse media hits on corporate vehicles and individuals who own and control the entity. Assessing the output of any screening hits requires skilled operational analysts who can assess the alert in context of the CDD. Robust policies and procedures are important, so too are operational analysts who are more than box tickers but understand the risk in context of the customer, their stated business purpose, and their activities. Using up to date and trusted registries is vital to obtaining accurate verifiable information regarding ownership. This may seem obvious, but with the upcoming changes to Companies House in the new Bill aiming to help prevent the use of companies registered in the UK as money laundering vehicles by requiring complete transparency of ownership, this is a more important consideration than ever. These upcoming changes will no doubt support increased transparency, but this does raise a crucial point on the transparency and reliability of overseas registries. Addressing the multi-jurisdictional risks of customers is a key part of a Financial Institutions business unit risk assessment and risk appetite.

The FCA’s business strategy

The FCA’s 2022-2025 business plan outlines some important objectives to tackle the problem of identifying beneficial ownership. This includes their proactive approach to identifying technology, that may be of benefit to AML (Anti Money Laundering) efforts. This is a concerted effort which includes a £50m package to develop IT systems and infrastructure, with a focus on the use of advanced analytical techniques like AI (Artificial Intelligence) and machine learning. Our clients have identified this and as a result we continue to invest in our fight against financial crime with our award-winning technology platform, Propel.

The provisioned improved verification and reporting powers of Companies House helps significantly with the prevention and detection of financial crime through the financial system. The ability to reinforce measures that ensure transparency within company ownership and control throughout the UK financial landscape serves the intention of AML and terrorist financing detection effectively. The strengthening of infrastructure to prevent and detect financial crime in the UK is a welcome addition as part of The Economic Crime and Corporate Transparency Bill.


The full KYC Survey report can be downloaded HERE


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