The Importance of Identifying Beneficial Owners

The U.S. Justice Department indicted Chinese company Huawei in 2019 for concealing its ownership of Iranian company Skycom. Huawei’s employees allegedly hid the identity of Skycom’s ultimate beneficial owner (UBO), exposing their U.S. partners to significant legal risks. Understanding the difference between a beneficial owner and an ultimate beneficial owner could have protected them—as it will protect you. Keep reading to learn more!

Identifying both beneficial owners and UBOs is crucial to prevent funding illegal activities, comply with Anti-Money Laundering (AML) laws, and protect your business from fraud. Gratify offers a layer of security and compliance by continuously monitoring third-party data. Request a demo to learn more!

Who is a Beneficial Owner (BO)?

A Beneficial Owner (BO) is someone who benefits financially from a company's success. They have a vested interest in the organization, meaning they gain from its growth and profitability. Often, beneficial owners hold shares or voting rights, granting them influence over company decisions.

While in many cases the beneficial owner is the same as the legal owner, they can differ. For instance, a legal owner could be a trust or guardian acting on behalf of someone else, who is the actual beneficial owner. Corporate shareholders often serve as examples of beneficial owners. Unlike UBOs, there may be multiple beneficial owners of a company.

Who is an Ultimate Beneficial Owner (UBO)?

An Ultimate Beneficial Owner (UBO) is the individual who ultimately gains the most from a company’s success. The UBO is distinct from a regular beneficial owner because there is typically only one UBO—the person who reaps the greatest benefits and has the most control.

The UBO can be a shareholder, someone with Power of Attorney, a guardian for minors, or even a family member with direct or indirect control. For instance, in a trust, the UBO is the individual whom the trust represents. UBOs play a critical role in decision-making, especially in transactions involving financial institutions, as they are the ultimate recipients of the funds.

The ultimate beneficial ownership threshold varies by region:

• In the EU: Under the 4th Anti-Money Laundering Directive (4AMLD), anyone holding over 25% of shares qualifies as a UBO.
• In the U.S.: UBOs are defined as those who control over 50% of shares.

Due to differences in regulatory definitions, corporations may need to perform additional research to identify their true UBOs.

Why Identifying BOs and UBOs Matters

Protection from Third-Party Risks

Knowing the difference between a BO and a UBO—and identifying both—is essential to avoid third-party risks. Whether you're working with suppliers or partners, understanding who benefits from your business relationships helps you make more informed decisions.

Changes in ownership can directly impact your business. For example, a beneficial owner might purchase more shares and become the new UBO, which could change the dynamics of your partnership. By keeping an eye on BOs and UBOs, you can quickly respond to changes and mitigate risks.

Identifying BOs also allows you to ensure compliance with regulations, such as determining whether the beneficial owner is a Politically Exposed Person (PEP). Knowing this can alert you to potential bribery or corruption risks, helping you protect your company's reputation and comply with legal standards.

Maintain Compliance with AML Regulations

Understanding beneficial ownership is not just good practice; it's legally required under AML regulations to prevent money laundering, terrorist financing, and illegal activities. In the U.S., FinCEN (Financial Crimes Enforcement Network) oversees UBO regulations, covering all companies and organizations trading in the country.

Identifying UBOs is also part of the Know Your Customer (KYC) process, helping businesses avoid engaging with sanctioned individuals or entities. Staying compliant is crucial not just to avoid fines, but to ensure you’re operating with integrity.

Fighting Fraud

Identifying BOs and UBOs also protects your business from fraud. Fraud involving third parties, such as suppliers, can take various forms:

• Fake Vendor Fraud: Fraudsters pretend to be legitimate suppliers and get paid for goods or services that are never delivered.
• Invoice Fraud: Scammers impersonate legitimate vendors to receive payments meant for the real supplier.
• CEO Fraud: Criminals impersonate senior executives to convince employees to transfer funds for a supposed “urgent deal.”

Knowing your BOs and UBOs helps you verify the identity of third parties and prevent fraudulent transactions. Monitoring vendors and partners continually—not just during onboarding—is critical, as ownership changes could result in a BO or UBO ending up on a sanctions list.

How Gratify Can Help

Gratify helps protect you against fraud by continually verifying third-party credentials and checking vendor information against international databases. This ensures:

• They are who they claim to be.
• They are not listed on any sanctions lists.

Any suspicious activity is flagged, and transactions are halted until you provide approval. This protects you from fraud and helps you maintain compliance with AML regulations.

Key Takeaways

• The main difference between a BO and a UBO is that there is usually only one UBO, who benefits the most from the transaction.
• Identifying both BOs and UBOs is essential for AML compliance, fraud prevention, and a strong risk management strategy.
• Monitoring UBOs and BOs continuously, rather than only during onboarding, is key to staying compliant and avoiding third-party risks.