What is an Ultimate Beneficial Owner (UBO)?

There is one question a bank will definitely ask when reviewing the application made by your company for a business bank account: Who are the ultimate beneficial owners of your company?

An Ultimate Beneficial Owner is a natural person, who is not necessarily recorded as a shareholder of the company, but who has actual power and authority to direct the company and reap its profits.

Why is ultimate beneficial ownership important?

Banks require beneficial ownership information because ever since the turn of the century, money laundering and terrorist financing crimes have been on a constant increase. The estimated amount of money laundered globally in one year is 2 - 5% of global GDP, or $800 billion - $2 trillion in current US dollars.

In practice, financial crimes often use complicated networks of companies to mask their illegal financial activities. To tackle this, governments and international organizations have enforced much firmer regulations to enforce financial transparency surrounding company structure and ownership.

As a direct consequence, the identification of all ultimate beneficial owners of a legal entity is part of the AML compliance duties imposed on financial institutions.

To understand this issue more, we have created an article, in which we explore what the UBO legislation is, the reasons for its existence, as well as how it applies in the practical context of a bank account opening.

1. What is Beneficial Ownership?

The concept of “Beneficial Ownership” was first developed in the 1933 U.S. Securities Act in relation to the ownership of securities (such as shares in a company).

This concept was then adopted by several national and international laws and is now applied not only to the ownership of securities but to the ownership of all sorts of other goods whose ownership is subject to registration in legal records (for instance real properties and vessels).

Understanding beneficial ownership requires first explaining what legal ownership is.

The legal owners of goods are the natural or legal persons whose name is entered on the relevant legal record, or a central registry maintained to keep track of the ownership of that good.

Think of the ownership of a house. In most countries, to be the legal owner of a house, your name needs to be entered in the appropriate legal ownership records. This is the way to prove you have ownership of the house.

Now think of the situation, in which your name would be duly registered in the legal ownership record of the house, but another person would enjoy the benefit of owning the house. In this case, you would be the legal owner, while the other person would be the beneficial owner.

So, beneficial ownership refers to an individual who enjoys the benefit of the ownership and can exercise ultimate effective control of real-estate property, security, or some other good without being registered as the proprietor on the relevant records.

2. What is an Ultimate Beneficial Owner (UBO)?

In the context of fighting money laundering and terrorist financing, the Ultimate Beneficial Owner of a company, also known as “UBO”, is the natural person, who ultimately enjoys the benefit of owning the company.

To put it simply, the ultimate beneficial owner is the individual, who is not recorded as a shareholder of the company, but who has actual power and authority to direct the company and reap its profits.

Ultimate Beneficial Ownership has emerged as a crucial notion for financial institutions to perform their compliance duties after the creation of the Financial Action Task Force (or FATF) in 1989.

Founded by thirty nations, FATF is an organization tasked with outlining advice and regularly assessing the processes that countries should adopt to counter money laundering and terrorist financing.

Today, most legal definitions of UBO in national regulations are established on the guidelines set by the FATF, and so the UBO of a legal entity is internationally recognized as an individual who:

According to the Money Laundering Act (GwG), a beneficial owner is a person who:

• Owns more than 25% of the company's equity (shares),
• Has more than 25% of the voting rights and can exercise, directly or indirectly, such voting rights at the general meeting of shareholders of the legal entity,
• Or who can similarly exercise significant control over the company.

On this particular point, it is worth mentioning that banking practice goes beyond legal requirements. When identifying UBOs, banks will indeed retain a 10% threshold as opposed to the 25% one provided by the regulations.

UBOs according to the FATF definition can also be persons with power of attorney, guardians of minors, corporate directors or nominee directors that are appointed to conceal the true owners of a given firm, and shareholders, including the holders of bearer shares that may be transferred anonymously.

In the European Union, the Fourth Anti-Money Laundering Directive (4AMLD) defined ultimate beneficial ownership as the following:

• Under 4AMLD, ownership or control of more than 25% of the shares or voting rights in a legal entity confers ultimate beneficial ownership status.
• 4AMLD allows for senior management officials to be treated as beneficial owners in cases where the above criteria cannot be determined. 

3. Reasons for the UBO legislation

The following practices and situations have led to the rise of the Ultimate Beneficiary Owner legislation:

3.1. To respond to problems surrounding money laundering

Money laundering is the illegal process of making money that was generated by criminal activity that appears to have come from a legitimate source.

This money is made through unlawful activities such as the sale of drugs or weaponry, human trafficking, tax evasion, and prostitution, to name a few.

The aim for individuals who launder money is to hide these sums of cash and their provenance by covering up how they inject them back into the economy.

Money laundering consists of three main measures:

1. Depositing: the first stage involves the launderer bringing illegal sums of money into the financial system. To do so, the amount is divided into smaller sums and then deposited into various accounts.
2. Concealing: from those accounts, different amounts of money are moved into new accounts. Most commonly, these accounts will be abroad, in countries different from the one where the money was made. This is done in an attempt to conceal any trace of the sums of money and usually involves multiple overseas company structures.
3. Integrating: in this final stage, the illegally made money reenters the legal economic system through a series of investments. This involves investments in property, or high-end luxury goods, to name a few.

3.2. To respond to issues surrounding the financing of terrorist groups

Terrorists need money and other assets to run their organizations (travel, accommodation, weapons, training…) and set their attacks into motion.

Disrupting financial transactions that are terrorism-related will directly prevent future attacks by cutting their finances. Countering terrorist financing is therefore an essential part of the fight against terrorism crimes worldwide.

Terrorism financing is different from money laundering in three ways:

• Its purpose is to hide the final use of the sums of money, as opposed to where they come from and how they were made.
• It does not always revolve around large sums of money as opposed to money laundering. It can actually comprise relatively small amounts of money but that can still have a substantial impact in terms of destruction and disruption on civilians and society.
• Although terrorist groups support their activities through crime, lawful money can be found to be stolen and misused to financially provide for terrorist acts.

3.3. To prevent and fight fraud

Fighting fraud, especially commercial scams and tax evasion is a significant problem in today’s global economic system.

Large-scale fraud is often assimilated with the unlawful use of businesses and commercial systems.

Organized fraud is usually concealed by international company structures, which are created in order to prevent the identification of the criminals involved and their network inside the firm.

4. Which organizations have the obligation to identify the UBO?

Anti-Money Laundering and Anti-Terrorist Financing regulations state which organizations have the obligation to identify Ultimate Beneficial Owners and their business relationships. 

This obligation is part of a more general “Know Your Customer” or "KYC" compliance process whereby certain organizations must find out information on their clients.

All financial organizations are obligated to check UBO, including:

• Commercial and investment banks;
• Insurance firms;
• Brokerages and investment firms; and
• All companies that handle money, such as credit unions, money transfer businesses, and payment gateways.

Such organizations must identify the UBOs of their customers as soon as they start a business relationship with them.

Also, as long as the business relationship remains active, financial institutions must verify from time to time that the UBOs of their clients have not changed.

That explains why a bank will require to know who are the UBOs of your company when you apply for a business account, and then ask you to confirm their identity on a regular basis.

Once provided with the UBO information, banks will check if this is consistent with public information available at companies’ registries.

In case such public information is not available, they will require a confirmation from you in the form of a certificate of incumbency issued by a qualified third party.

In cases when UBO information is not collected, financial organizations may face significant sanctions, ranging from financial penalties to time to jail, or both.

Aside from penalties, it is clear that they also put their reputation at risk when doing business with unchecked UBOs, should they turn out to be associated with money laundering, terrorism, or fraudulent activities.

To go further

Opening a business account in Hong Kong requires more than just informing the bank about who your UBOs are.

To learn about the whole process, check out our full guide. We've included all the steps you need to know when opening a business bank account in Hong Kong.