Understanding ownership structures for AML compliance

There have been several high-profile anti-money laundering failures in the UK and across the world. The cost of organised crime can be measured in dollars, of course, but is also impacts people's lives. Understanding the ownership structures of a business isn't as straightforward as it seems, but it is extremely important.

In order for banks and other financial services companies to protect themselves, their clients and their reputations, they must take appropriate steps to assess the risk of money laundering and other types of financial crime across their institution. This means understanding how their institution could be used to launder funds and also the risk that new and existing customers pose. 

Assessing and monitoring risk associated with corporate customers; understanding whether they are legitimate or whether they pose a risk, is widely referred to as Know Your Business or KYB.

In this blog, we'll take a look at Know Your Business verification processes and the ownership structures associated with corporate customers that help institutions understand their exposure to money laundering.

The scale of organised financial crime‍

To gather a full understanding of the importance of KYB verification, it's important to take a look at the scale of global financial crime. The magnitude of money laundering worldwide is difficult to pinpoint, as it is multi-faceted and, by very careful design, largely invisible. 

However, according to PwC’s2020 Global Economic Crime and Fraud Survey, money laundering, tax fraud, insider trading, antitrust and bribery and corruption were the top 5 most costly types of fraud committed globally in terms of direct losses. Costs to institutions can also compounded by hefty after-the-fact fines and remediation activity.

Due to the nature of money laundering, it is difficult to estimate the total amount of funds involved or at stake globally, but according to the United Nations, it is thought to be approximately 2.5% of global GDP.

AML compliance

Global regulatory bodies, such as the FATF, mandate Anti-Money Laundering (AML) regulation to ensure criminal organisations are stopped or impeded in as many instances as possible. To remain compliant with these AML regs, banks and other financial institutions complete due diligence and screening on corporate clients against criminal watch lists, global sanction lists and media sources to identify and manage high-risk clients – possibly off-boarding those deemed a threat. And they put monitoring in place to control ongoing risk.

Institutions around the world work hard each day to identify suspicious activity, reporting that to the relevant authorities when it is uncovered. But there are clearly instances where criminals slip through the net. The cost of money laundering can be measured in dollars and pounds, but if can also be measured on the impact it has on human lives. There was a groundbreaking high court ruling in October 2021, for example, which impacts hundreds of victims of human trafficking and their right to remain in the country.

What is Know Your Business (KYB)?‍

So we know KYB is important, but what in fact is it and what does it involve?

Well, in essence, KYB is a due diligence process whereby a financial institution tries to establish trust with a corporate client by understanding its ownership structure to build a picture of legitimacy. The due diligence process that regulated businesses go through verifies who the owners or stakeholders are to help them understand the level of risk they might pose. This is part of managing and delivering legal requirement to meet AML regs, but it's also protecting the institution from becoming complicit.

Before onboarding a new corporate client or business customer, the financial institution needs to perform a series of checks to verify the legitimacy of the company.  That means identifying major shareholders and ultimate business owners (UBO) to ascertain whether there may be (or are) any connections to organised crime. If there is a connection to financial crime through a UBO or board member, then this could be an account set up for the purpose of money laundering - important information needless to say!

KYB compliance processes seek to verify business owners, attributes and other identifiable information through documentation, business registers and other online data checks. Then ongoing monitoring will take place over time to ensure the risk profile of a corporate client hasn’t changed, after all ownership structures can be very fluid with new shareholders and UBOs added at any given moment. 

This KYB activity is often carried out through a series of automated data checks that pull on different sources of AML information and public archives. Checks can include:

+ Looking for politically exposed people (PEPs)

+ Sanctions 

+ Adverse media screening

Banks also need to demonstrate to auditors or regulators – if called on to do so - that they have gone through a robust AML process and that adequate mechanisms are in place for ongoing monitoring and reporting.

How to understand company structures

The first step to completing Know Your Business verification is confirming which individuals in the business or organisation hold the most senior positions and therefore have the most control or influence over business operations. These individuals may be referred to as ultimate business owners (UBOs), Senior Managers/Partners, Executive Directors or another term, depending on the legal form of the business. 

The job titles of these individuals may include:

- Chairman
- Trustee
- Partner
- Chief Executive Officer (CEO)
- Chief Financial Officer (CFO)
- Chief Operations Officer (COO)

The personal information of these individuals must then be gathered and a chart or document outlining the structure of the business created to establish the ownership structure (anyone who owns a stake of 10% or more in the firm).

This document must contain the following information:

- Their full names
- Their country of registration and registered number (for non-UK citizens)
- A complete breakdown of their share capital
- The details of any bearer certificate/instrument that forms part of their share capital
- The details of voting control where this doesn't align to the equity stake

Building trust online

To develop a lasting Business2Business (B2B) relationship, mutual understanding, transparency and trust are all essential. To establish trusted relationships, checking that a business or organisation's board members, business owners, providers and clients are not engaged in corruption or criminal activity is step one and a seriously important part of the journey. KYB verification helps establish this trust while identifying potential risks and threats.

Compliance procedures, like KYB, help banks protect their reputations and their clients, but they also help protect society more broadly, as the proceeds of money laundering are derived from activities like human trafficking.

Corporate customers will expect to go through a KYB process, but if delivered efficiently, using automated solutions to keep the process as smooth as possible, it can support loyalty and advocacy. Robust compliance checks can actually give clients peace of mind that their bank puts accountability and transparency first.

KYB verification can actually make an institution stand out in a competitive landscape.

Get in touch

There are lots of reasons why it's a good idea to get a KYB process running smoothly and efficiently. It's a legal requirement, of course, but also clients prefer it, it supports compliance professionals with a difficult task, and it protects people from crime. 

PassFort offers SaaS RegTech solutions that can speed up automated PEPs, Sanctions, and Adverse Media checks, while bringing compliance professionals into the process when they need to make risk-based decisions. We support financial institutions around the world with execution of their KYB processes, and we have partnerships with 25+ leading data providers to get access to the data needed to complete checks and confirm ownership structures. 

If you would like talk to us about automating your KYB process and staying compliant with AML regulations, please get in touch any time - we would love to hear from you.