Are UBO registers making a difference?
The EU’s 5th Anti-Money Laundering Directive (5MLD) became effective on 10 January 2020. Amongst various other guidelines, it stipulates that member states must open up access to registers of ultimate beneficial owners (UBOs) of companies, also referred to as UBO registers. This is a hot topic for many in our industry. The question is how far the registers are going to make a difference in helping to identify criminals, and will they help banks to make it easier to comply with their know your customer (KYC) obligations?
In a recent study, Arachnys found that 54% of respondents said that UBO registers will increase their confidence in EU company data and improve processes, with the remainder feeling that public UBO databases will only have a marginal impact at best.
The reason for this split presumably lies in the very nature of UBO registers, as it has been dictated that such registers are to be populated through self reporting. Legitimate bonafide companies can be expected to contribute to more transparent ownership information becoming available through self reporting their beneficial owners. However, those who have things to hide will continue to try and find ways to conceal the legitimate ownership of the vehicles being used to transfer money and launder the proceedings of their illicit activities.
For example, bad actors are expected to continue to use ever more opaque corporate structures. There is also the expectation that more companies will be using nominee directors including the appointment of relatives and other straw men to ensure that legitimate owners will fall below the 25% reporting threshold, and hence it becomes easier to conceal the identity of a company’s UBOs. Potentially even more problematic, however, is the fact that bodies overseeing UBO registers are typically not set up to support the task of properly validating and investigating self reported company ownership information. The results of this is that the UBOs listed within the register will not be correct, hence undermining the value of the UBO registers.
The use of UBO registers for KYC
As UBO registers are deemed viable official sources of KYC data, the expectation is that in the next year we will see significant adoption of the use of UBO registers for conducting KYC. We already see global banks starting to include the registers as a mandatory step in the KYC policies our customers ask us to setup on the Arachnys platform. For those companies who conduct business legitimately, this should lead to faster onboarding processes as the act of conducting KYC and validating customer provided data against official sources should become easier, and there’s less need for banks to have to go back to the customer to request additional proof of ownership.
However, this does not necessarily mean that the quality of the KYC will be improved. In fact, the result of the introduction of UBO registers might well be that we get a situation where banks will find it harder to keep the bad guys out of their books, as it almost becomes too easy for crooks to pass the KYC check by making sure that their customer provided data which is passed to the relationship manager matches with the data stored in the UBO registers. If that initial validation does not find any discrepancies, it is likely that fewer alarm bells will go off when the KYC is undertaken. There is already a going concern that CDD as it exists today makes it difficult to surface true risks within a customer population. The question is whether UBO registers might make it even easier to stay out of sight from the bank’s KYC and AML investigators.
It is clear from the above that the UBO registers are not going to be the holy grail for KYC. However, they do provide yet another data point which is going to be useful for streamlining KYC processes and allowing for the introduction of more automation. The resources which are no longer going to be required for conducting KYC can then be used for doing better quality investigations and actually getting the bad guys.