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This article is part of our Opinions section, where we invite industry professionals to share their views on the most pressing technology questions of our time.
Anonymous owners, shell companies and complex corporate webs are prime tools for money laundering and financial crime on a global scale. A World Bank review of 213 major corruption cases from 1980 to 2010 revealed that over 70% involved companies obscuring beneficial ownership to move and disguise illicit funds.
When it comes to identifying the Ultimate Beneficial Owner (UBO) of a company, appearances can be deceiving, and fintechs can be left exposed to undue risk if they can’t trace exactly who’s in control of the companies they serve.
So it begs the question: Do you really know who you’re doing business with?
For fintechs, the answer isn’t always clear, and that’s exactly what financial criminals count on. Behind the layers of corporate structure, beneficial owners – the actual individuals pulling the strings and enjoying the benefits of ownership – can remain hidden, providing cover for money laundering, tax evasion, and other financial crimes.
Over the years, criminals have refined their strategies, using offshore accounts, shell companies, and complex ownership chains to get around even the most rigorous Anti-Money Laundering (AML) checks. As a result, fintechs without a thorough understanding of beneficial ownership can become unwitting enablers, risking serious regulatory action and damage to their reputation.
Under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, a UBO is the natural person who, whether directly or indirectly, owns or controls a business entity. In the UK, this generally means those holding more than 25% of shares or voting rights in a company.
Identifying UBOs is essential for compliance with AML regulations, but it’s also a key step in helping fintechs assess risk and protect themselves from unknowingly facilitating financial crime. Without a clear understanding of ownership, fintechs run the risk of inadvertently partnering with bad actors or organisations that are ultimately involved in criminal activity.
For fintechs, properly identifying UBOs isn’t just a regulatory box-ticking exercise; it’s a necessary step in knowing who they’re really dealing with.
Without clarity on UBOs, fintech firms can open themselves up to facilitating illegal activities, risking heavy fines, reputational harm, and potential legal proceedings. Identifying UBOs can help fintechs make informed decisions about the risks associated with each client and, in the long run, maintain both compliance and credibility.
Fintechs can be particularly susceptible to financial crime and are often specifically targeted by criminals, as their rapid growth and typically leaner compliance functions can make it challenging to dedicate enough resources to complex UBO identification, especially when firms rely on manual processes to research, vet and verify corporate clients.
When fintechs fail to identify UBOs, they expose themselves to various risks. Regulators like the Financial Conduct Authority (FCA) and Securities and Exchange Commission (SEC) impose severe penalties for failures, ranging from significant fines to operational restrictions or even criminal charges.
In 2019, Huawei faced criminal charges for failing to reveal its link to Skycom, an Iranian-based company. Huawei’s CFO, Wanzhou Meng, admitted to misleading a global financial institution about the company’s ties to Skycom. Meng claimed Skycom was an independent partner when in reality, Huawei controlled it. This misrepresentation led a major bank to process transactions that violated US sanctions against Iran. Criminal charges have since been filed by the US Department of Justice against Huawei and Meng for “two dozen alleged crimes” including bank fraud, wire fraud, sanctions violations and money laundering.
This case highlights just how damaging hidden ownership can be – not just for regulators and authorities, but for the businesses and individuals caught in the crossfire, with non-compliance costing companies millions.
Criminals are constantly evolving their methods to stay hidden, looking for and exploiting weak spots in global financial systems and regulatory frameworks. Complex ownership structures, gaps in regulations, and flexible jurisdictions create ideal conditions for hiding UBOs.
Money launderers will often hide their true ownership by setting up complex, multi-layered structures across different countries. By using a web of shell companies in places with more relaxed regulatory supervision, they make it incredibly hard to track down the real owners. This creates a maze of companies in tax havens or regions with minimal regulation, effectively burying the beneficial ownership and keeping it hidden from authorities.
Offshore jurisdictions with lax rules around UBO disclosure are a haven for criminals looking to stay under the radar. By registering companies in these areas, they can stay anonymous and often use intermediaries, like law firms, to mask their identity even further. These jurisdictions also let criminals take advantage of inconsistent global standards, choosing regions with more lenient reporting requirements to stay out of sight.
Trusts are another common tactic for hiding UBOs. Instead of directly owning assets, criminals put them in trusts, with trustees holding the legal title. This lets the criminal maintain control without ever appearing as the official owner, keeping their identity hidden from regulators.
To tackle the growing risk of financial crime, fintechs need to get serious about identifying UBOs. It’s no longer enough to rely on basic, manual checks when onboarding corporate clients.
Fintechs should be using advanced tools and automated systems that go beyond the basics of Know Your Business (KYB) checks. These tools can dig deeper into complex ownership structures and help spot risks before they become a problem. With the help of technology, fintechs can track ownership patterns and detect any suspicious activity or red flags, making it harder for bad actors to hide behind layers of shell companies.
What’s more, having real-time access to up-to-date corporate registries and UBO databases is a must. Fintechs need to be able to act quickly whenever ownership details change. By keeping data fresh, you can stay ahead of any shifts in control and make sure that criminals aren’t using outdated info to slip through the cracks.
