Know the ultimate beneficial owner, protect your business from hidden risks

The disclosure of ultimate beneficial ownership (UBO) has come under the spotlight following the recent revelation of a tin corruption case in Indonesia, which has captured public attention over the past few months. In this case, which caused state losses amounting to 300 trillion rupiahs (equivalent to approximately 18.58 billion USD), the identification of UBO uncovered hidden flows of illicit funds concealed behind corporate structures.

This underscores the critical importance of transparency in business management to prevent crimes such as corruption and money laundering.

According to the Financial Action Task Force (FATF), the lack of transparency in beneficial ownership information enables the flow of approximately $1.6 trillion in illicit funds through the global financial system annually. This staggering figure highlights the necessity of BO screening to ensure compliance, mitigate risks, and promote ethical business practices.

Understanding the Concept of Beneficial Ownership

What is Beneficial Ownership?

The Organisation for Economic Co-operation and Development (OECD) categorizes beneficial owners into three distinct types:

1. In a Company: The beneficial owner (BO) is typically a shareholder or member.
2. In a Partnership: The BO is a partner, which can include both limited and general partners.
3. In a Trust or Foundation: The BO is identified as the founder.

In Indonesia, the definition of a beneficial owner can refer to Presidential Regulation No. 13/2018. A Beneficial Owner is an individual who has control over the funds or shares of a corporation through three main authorities: (i) appointing or dismissing corporate management, (ii) controlling the corporation, and (iii) receiving benefits from the corporation, either directly or indirectly.

What is Ultimate Beneficial Ownership (UBO)?

The definition of UBO can differ depending on the jurisdiction. For example, in the European Union (EU), beneficial ownership generally refers to individuals owning at least 15 percent plus one share in a company, voting rights, or other direct or indirect ownership. 

However, this rule is different for certain sectors. In extractive industries or companies that pose a higher risk of money laundering or terrorism financing, the ownership requirement to be considered a UBO is five percent plus one.

Meanwhile, in the USA Individuals who own or control at least 50% of the organization are deemed UBO and are required to disclose.

Basically, ultimate beneficial ownership (UBO) refers to individuals who ultimately benefit from or control the organizations. Identifying UBOs is a key component in understanding the complete ownership structure of an organization.

For example, Budi owns 60% of the shares in Company A. Then, Company A purchases 50% of the shares in Company B. As a result of this acquisition, Budi automatically has an indirect ownership of 30% in Company B, making him the UBO of Company B

In another example, Dewi owns only 10% of the shares in a company but has majority voting rights under the shareholders’ agreement. Since she can control the strategic decisions of the company, Dewi is considered a UBO.

The Difference Between Ultimate Beneficial Owner (UBO) and Beneficial Owner

While both terms involve identifying individuals behind entities, the key distinction lies in depth. Beneficial ownership can include layers of ownership, such as trusts or subsidiaries. UBO focuses on uncovering the very last layer—the ultimate owner.

What is UBO Screening?

UBO screening is the process of verifying and identifying the ultimate beneficial owners of a company. It involves gathering and analyzing data from various sources to ensure compliance with laws and regulations, detect potential risks, and establish transparency in business relationships.

Why do we need to identify UBO?

• To identify hidden risks

Identifying and verifying the UBO will help your organization determine who truly controls the entity and what risks are associated with them. For example, before partnering with a mining company, your organization conducts UBO identification. The results reveal that the beneficial owner, who is not listed in the company structure, is a politician and a member of parliament.

This insight uncovers hidden risks, such as conflicts of interest and reputational concerns, allowing your organization to reassess the partnership. Additionally, identifying beneficial owners facilitates the due diligence process for a more in-depth evaluation.

• Compliance with Anti-Money Laundering (AML) Regulations

Regulators in various countries have established the obligation to conduct UBO checks as part of enhanced due diligence to prevent money laundering and other financial crimes. 

In Indonesia, this is regulated by Presidential Regulation No. 13 of 2018, which governs the Implementation of the Principles of Identifying Beneficial Owners of Companies to prevent and combat money laundering and the financing of terrorism. Meanwhile, Malaysia has the Anti-Money Laundering Act of 2001, and Thailand regulates similar matters through the Anti-Money Laundering Act B.E. 2542. Organizations that fail to comply may face sanctions.

• Transparency and reputation

Transparency regarding UBO contributes to a better investment climate, as investors tend to feel more secure when they know who actually controls the company.

UBO Screening in Different Industries

Financial services industry.

Heavily regulated, requiring stringent AML and Know Your Customer (KYC) measures. UBO screening is critical for risk assessment and compliance, helping identify potential red flags with high-risk clients or transactions.

Real estate sector.

Complex ownership structures often obscure true ownership, increasing risks of money laundering and tax evasion. Robust UBO screening ensures compliance and protects against reputational damage.

Manufacturing and retail

Though less regulated, these industries face risks related to supply chain transparency and ethical sourcing. UBO screening helps verify suppliers’ adherence to ethical standards and prevent fraud.

Benefits of Effective UBO Screening

Implementing effective UBO screening processes offers a multitude of benefits for organizations, extending beyond compliance with legal requirements. 

• Enhanced risk management. 

By accurately identifying and verifying the ultimate beneficial owners of a business, organizations can assess potential risks associated with those individuals. This proactive approach enables companies to mitigate risks before they materialize, ultimately safeguarding their assets and reputation.

• Promotion of transparency and trust. 

In today’s interconnected world, stakeholders, including customers, investors, and regulators, are increasingly demanding transparency from organizations. By engaging in thorough UBO screening practices, companies demonstrate their commitment to ethical business conduct and corporate governance. This transparency not only fosters trust with stakeholders but also attracts responsible investors who prioritize ethical practices and sustainability.

• Improved decision-making processes within organizations. 

With a clear understanding of who owns and controls an entity, companies can make informed decisions about partnerships, investments, and other critical business activities. 

As part of the enhanced due diligence services offered by Integrity Indonesia, the process of Ultimate Beneficial Ownership (UBO) search plays a crucial role in ensuring transparency, reducing risks, and detecting potential issues hidden within a company’s ownership structure. With accurate identification, companies can maintain their business integrity, avoid involvement in illegal practices, and ensure compliance with applicable regulations.