This article was co-authored by our friend James Philip; thanks, James!

Introduction

Understanding beneficial ownership structures is a critical aspect of preventing money laundering and terrorist financing. Gaining insight into who ultimately owns or controls a significant interest in a legal entity helps distinguish normal connections from unexpected ones in a network. The Financial Action Task Force (FATF) has highlighted its importance since 1996 with two recommendations dedicated to it (#24 and #25). To more closely align with FATF’s recommendation, the US Treasury’s Financial Crimes Enforcement Network will launch a registry on January 1, 2024, the beneficial ownership secure system (BOSS), as part of the Corporate Transparency Act (CTA). This registry will enable the establishment of links between businesses and their majority owners, thereby enhancing the protection of the US financial system by bringing more transparency to traditionally opaque structures. While the registry is a welcome addition for compliance professionals, it poses some problems, like identifying all beneficial owners, ensuring the information is correct, and improving the collection process.

KYB vs KYC

The collection of information on businesses is more complicated than collecting personal information for individuals. Information about the ownership percentage of the business has to be collected first to understand which individuals will need information collected on them. Fortunately, the CTA will also require institutions to collect information on owners who have substantial control over the company, own 25% or more of the business, or receives substantial economic benefit from the assets of the company. The ownership links will also be present in the BOSS registry to enable the public sector to understand relationships between individuals and their significant business interests. Once the information on the business has been collected and verified by a financial institution, they can focus on collecting and verifying information on the individual owners. Reusing existing workflows and practices at this stage is important to reduce duplicative internal policies and training: this also ensures consistency of operations.

Getting KYB Right

Gathering the right types and amount of information is crucial to overcoming KYB challenges. The CTA will require businesses to report changes in their information, which will make it easier to maintain the integrity of the KYB database. Opaque corporate structures in some US states make it challenging to identify ultimate beneficial owners as the type of corporate structure introduces specific considerations for collection. For example, if the business is a trust, the individuals collecting the data will need to obtain a legal document showing who the trustees are. In these instances, the collector must understand when their efforts are sufficient. The requirements imposed by States in the US vary, and the context of each needs to be understood. States will have different names for business documents and varying transparency requirements. Fortunately, there are companies that are reducing these operational headaches. New companies are specializing in the collection of KYB information and reusable digital identities to help gather and reuse information on the business.

Keeping KYB Current

It can be challenging to obtain and update a business’ information. Corporate structures are often complex, and care must be taken by the financial institution when recording updated business information. During a business’s lifetime, changes in ownership, signatory authority, and addresses are frequent, requiring an efficient way to handle such changes. If you are charged with setting the policies or the actual collecting of KYB and UBO information, there are some essential factors to consider. Covered institutions need policies and procedures that keep in mind the lags between information change, collection, and verification. It is important that institutions allow their clients to continue doing business while updates are being made — significant friction will cause clients to churn. Obtaining the correct information is crucial, but taking a practical approach to keep clients happy with fewer interruptions is the better option.

Conclusion

The establishment of a beneficial ownership registry in the US is a massive step forward in protecting the financial system. While the registry will help identify businesses and their owners, it presents several challenges that need to be addressed, such as identifying beneficial owners, ensuring the accuracy of the collected information, and optimizing the collection and verification process. The most effective way to address these challenges is to set up your compliance program in the short term to have flexibility in the collection and verification of business information. With the right policies, procedures, and tools, a compliance team will be ready to handle this next set of regulations.