Companies are increasingly expected to understand who they are doing business with. This serves to prevent doing business with mala fide parties. Any institutions that fall within the scope of the Anti-Money Laundering and Anti-Terrorist Financing Act (Wwft) must retrieve the identity of the UBO (the ultimate beneficial owner) of their business relations on a mandatory basis. The legislation is complex, however, and the fines are high. This page provides answers to all your questions relating to UBO legislation. What exactly is a UBO? Is it mandatory for your company to disclose the UBO? How do you perform the client screening and how can you prevent fines from supervisory bodies?
Countering fraud, in particular social and tax fraud has been a focal point in the past few years. Large-scale fraud is usually associated with inappropriate use of companies and commercial structures.
Serious, organised fraud is often hidden in an international business, designed to avoid identification of criminals and their network of shady firms. Fraudulent parties like making use of off-shore islands and tax havens. Investigators frequently find ‘ghost firms’ when delving into bankruptcy fraud, VAT fraud and other mala fide practices. Fictive addresses, PO boxes or registered seats in private homes of people, who have no idea, are frequent finds. Companies with a vague purpose or companies not depositing their annual financial statements are generally not a good sign either.
This sort of practices gave rise to the UBO legislation.
The abbreviation means Ultimate Beneficial Owner, i.e. the person or entity that is the ultimate beneficiary of the company. Certain financial and other organisations, including banks, currency exchange offices and insurers, are subject to mandatory disclosure of the UBO if doing business with any party. The underlying reason of this provision is preventing natural persons with malintent, such as money-laundering or financing terrorism, from being able to hide behind a company, foundation or other legal entity.
The ultimate beneficial owner of a legal entity is the natural person who:
This is not always straightforward. It is hard to establish the UBO of a company with its registered office in Liechtenstein or on the island of Vanuatu.
Money-laundering means that large sums of money illegally gained (for example from selling drugs or weapons, human trafficking, prostitution, tax fraud, etc.) are pumped into the legal economy. Money-launderers try to hide the illegal provenance of the money.
The money-laundering process generally consists of three steps:
Financing terrorism means that money is raised or donated for terrorist purposes. In contrast to money laundering, where the aim is to hide the illegal origin of the funds, financing terrorism is all about hiding the illegal destination of the funds.
The procedure for financing terrorism is therefore slightly different. It generally concerns small amounts of money, which makes it difficult to trace in the first place. Only for larger amounts, the deposit phase will initiate the process as in money laundering. Terrorist networks also complete the veiling phase to escape the government’s radar and to hide the identity of the clients and beneficiaries. The integration phase is also skipped, as the amounts no longer surface in the legal money circuit, but are used for terrorist activities.
To transfer the money, terrorist organisations use smuggle routes or informal systems such as ‘hawala’ in addition to the regular banking circuit.
Hawala banks are ‘underground’ banks, which is a widely spread practice in the Middle East, Asia and Africa. This concerns an informal circuit that operates outside the traditional banking system. In the closed world of hawala, trust plays an essential role. A customer hands money to a banker and trusts that the money will be paid out to a beneficiary somewhere else in the world via a different banker. The customer does not receive any notification of handing over money. It is purely based on trust. The bankers settle mutual debts between them.
Initially, migrants used the system to transfer money to relatives in their country of origin in a cheap and quick way. The anti-money laundering measures, increasing supervision of financial transactions and the lack of any paper trail in hawala have made this alternative payment circuit also popular with criminals and terrorists. They see this as an ideal system to transfer funds from criminal origin or for tax evasion reasons to countries with less strict supervision.
To counter money laundering and terrorism financing, thirty countries, including Belgium, founded the Financial Action Task Force in 1989. This international organisation defines recommendations for the member states, frequently evaluating the measures that member states have in place. In Belgium, the Cell for Financial Information Processing (‘CFI’) was founded in 1993. This government department is responsible for processing suspect financial transactions that are associated with money laundering and terrorism financing.
If money laundering or terrorism financing is suspected, you need to report this to CFI accordingly. The CFI receives both subjective and objective reports. Subjective reports are based on people’s suspicions of money laundering or terrorism financing.
The objective reports are based on statutory indications. Even in cases where no irregularities are suspected. This may include:
Please do not inform the client of your report. CFI will further investigate and analyse this information. If there are serious indications of non-compliance, then the details will be submitted to the district attorney.
The reporting organisation has immunity and anonymity to prevent threats and aggression.
The Fourth Anti-Money Laundering Directive is currently the subject of European negotiations. This is the sequel to the Third Anti-Money Laundering Directive based on which the Wwft was introduced in 2008. The Fourth Anti-Money Laundering Directive is expected to be introduced in 2015.
Money laundering and terrorism financing transactions amount to between 400 and 1,000 billion euros according to IMF (International Monetary Fund). This is between 2.5 and 5 percent of the worldwide GDP.
In the past few years, the number of reports in Belgium saw a dramatic increase. In 2013, CFI received a total of 22,966 notifications (compared with 21,000 in 2012). All notifications were bundled in 5,063 new case files (compared with 4,002 in 2012). A total of 1,168 case files were transferred to the district attorney at an amount of almost 800 million euros. In almost all these case files, CFI found serious indications of money laundering or terrorism financing. According to the judicial authorities, this amount could be estimated at about 1.18 billion euros.
25% of these case files related to inappropriate use of company goods or bankruptcy offences. This was estimated to amount to 156 million euros.
In the period between 2009 - 2013, 140 of such cases were actually subject to a court sentence. This involved a total of 168 million euros in penalties and confiscations.
UBO screening is mandatory for organisation as set out in the Money Laundering and Terrorist Financing (Prevention) Act. This includes banks, lease companies and insurers, solicitors, civil-law notaries, estate agents, currency exchange offices, investment institutions, accountants, company auditors, diamond traders, security companies, casinos and others. For a detailed list of all professional categories within the scope of the law, please refer to Section 1 of the Act.
These are the general steps to take for UBO screening:
Determining and checking the UBO identity are key elements of the screening. This check - also referred to as client screening - may be risk based. This means you may make a personal estimate of the risk of a business relation or transaction being part of money laundering or terrorism financing systems. The identity verification is generally based on the identity card, passport or Articles of Association if it concerns a company.
Once you have detected the identity, you should screen the UBO to estimate the risk. For example, is the UBO in PEP lists, inspection lists or sanction lists, or does it have negative publicity? This could include the EU Freeze list, OFAC and the AFM Alert list.
If you fall within the scope of the Wwft, you must use objective indicators to class your clients into various risk categories, ranging from low to high. The nature and scale of the client screening may be adjusted to this risk assessment. The lower the risk, the less effort you need to make to reduce this risk.
For a low-risk client, a simplified client screening suffices. For example, asking the identity of the UBO and having the client sign a so-called UBO statement, on which your client notes the UBO details.
If a client is not physically present for identification or is a PEP (Politically Exposed Person), or if there are any indications of a higher risk of terrorism financing or money laundering, stricter client screening is required.
Additionally, it is important for you to assess your relations in a uniform and efficient way and file the ensuing information consistently. The identification data must be filed and updated for at least 5 years.
It is important for you to accurately and structurally document your efforts. Ensure that you can demonstrate compliance with the Money Laundering and Terrorist Financing (Prevention) Act in the event of announced or unannounced inspections. Due to the complexity and strict rules, an increasing number of organisations chose to automate the process.
Penalties up to EUR 1,350,000 may be imposed for non-compliance.
These sanctions are separate from a range of other administrative or disciplinary sanctions that may be imposed.
In addition to the Ultimate Beneficial Owner or UBO, there is something referred to as the Ultimate Parent Company (UPC). That is the company on the very top of the organisation structure.