Exposing UBOs: A comprehensive guide to AML compliance for complex entities

Picture this. You’ve just had a request land on your desk to onboard a family office based in the British Virgin Islands, a known tax haven. Where do you begin? How do you ensure you’re covering all your bases for AML procedures? 

It’s complex; it’s in the name.

AML for complex entities is complicated - it’s in the name. But the defence of it being ‘too complicated’ doesn’t cut it when it comes to the law. Due to geopolitical instability, the rise of anonymous funding types (crypto and NFTs) and a ground swell for ESG / doing the right thing, regulations have become increasingly stringent. And previously weak repercussions are being replaced with more persistent and vigilant prosecutions and fines for non compliance.

Across the globe, we see the same pitfalls and errors noted by auditors. In this blog, we explore all you need to know (and didn't know you needed to know) about AML for complex entities. Helping you minimise the risk of fines, reputational damage, and legal action.

Challenge 1: Tax-haven-based complex entities

Tax havens are jurisdictions that offer low taxes and other financial incentives to attract businesses and individuals. While not all tax havens are associated with money laundering and other financial crimes, some have been used to hide illicit funds. 

Conducting AML on a complex entity based in a tax haven is particularly challenging. This is due to the inherent lack of transparency and information sharing favoured by such jurisdictions and is a key reason why they attract money launderers and tax dodgers alike.

Conducting AML on a tax-haven-based complex entity is particularly challenging due to the inherent lack of transparency and information sharing.

AML regulations require reporting entities/relevant persons that work with clients based in tax havens to implement additional due diligence measures to mitigate the risk of money laundering. This may include: 

• enhanced customer due diligence
• monitoring transactions more closely
• and reporting suspicious activity to relevant authorities. 

Enhanced due diligence consists of conducting additional checks on the beneficial owners and the sources of funds and wealth, and determining if they have any connection to politically exposed persons (PEPs).

Challenge 2: High and Ultra High Net Worth Individuals (U/HNWIs)

U/HNWIs usually have complex financial structures, including multiple bank accounts, investment portfolios, and various property holdings. And often they are spread across multiple countries and reporting jurisdictions. AML regulations require reporting entities to perform enhanced due diligence on U/HNWIs to identify and mitigate the risks of money laundering and other financial crimes. This may include verifying the source of their wealth and funds, monitoring transactions more closely, and conducting ongoing reviews of their accounts.

Criminals often use complex structures, such as shell companies, trusts or other legal entities, to obscure the true ownership of assets in order to discreetly transfer funds across borders.

Challenge 3: Source of Wealth and Source of Funds

The source of wealth (SOW) and source of funds (SOF) are two important concepts in AML. The SOW refers to the origin of an individual's wealth, while the SOF refers to the origin of the funds being used for a specific transaction. Reporting entities are required to verify the SOW and SOF of their clients to ensure they are not facilitating money laundering or other financial crimes. This may include conducting background checks, reviewing financial statements, and verifying the legitimacy of transactions.

Check out our guide to the 8 common struggles of Source of Wealth and Source of Funds and how to solve them. 

Challenge 4: Ultimate Beneficial Owner (UBO) Exposure

UBOs

‘UBO’ refers to the individual or individuals who own or control a company, trust or asset. Knowing who the UBO is can help to identify potential risks for money laundering or other financial crimes. UBOs are often hidden behind layers of complex corporate structures, making it difficult to determine who is actually in control of the entity. Test your knowledge on identifying UBOs with our online game.

UBO exposure

‘UBO exposure’ refers to the risk that a firm may be unwittingly facilitating money laundering or other illicit activities through their business dealings with a client, whose true beneficial owner is unknown or concealed. This is because criminals often use complex structures to conceal their illicit activities. They may use shell companies, trusts or other legal entities to obscure the true ownership of assets in order to transfer funds across borders undetected.

AML regulations require firms to identify and verify the UBO of their clients, including family offices and high net worth individuals. This involves: 

• collecting and verifying the identity of the directors and shareholders of the entity,
• reviewing corporate records, 
• and conducting PEP and sanctions checks on the beneficial owners.

These steps are vital for ensuring you are not inadvertently facilitating illegal activities by working with a client who is attempting to hide their true identity.

Challenge 5: New wealth types

New wealth types, such as NFTs or cryptocurrency favour anonymity. This is a problem for compliance officers trying to verify a source of wealth, or even a simple identity.

These wealth types are so new, most compliance officers don't have the exposure or training to understand them. 

It’s advisable to develop specific procedures for dealing with cryptocurrency transactions, including establishing controls for ongoing monitoring, transaction monitoring and reporting suspicious activity, as well as conducting enhanced due diligence for high-risk customers. If suspicious activity is detected, it must be reported to the relevant authorities, such as the Financial Intelligence Unit (FIU) or law enforcement.

But that’s not always enough. You also need to be confident that the exchange they used is reputable. There are hundreds of exchanges globally and even some of the most famous ones (e.g. Binance) have actually been stung for poor AML practices. Unless you live and breathe crypto you’d never hear about this. Most compliance officers want to focus on conducting focused investigations, or quality assurance audits. Not staying up to date with a fringe, but influential, wealth type ecosystem.

It’s complex, but achievable

AML regulations are an essential part of the financial industry, and understanding these regulations is critical for complex entities such as when dealing with family offices, tax haven based complex entities, and high net worth individuals. By implementing robust AML policies and procedures, conducting proper due diligence, engaging specialists or undertaking deep learning on alternative funding ecosystems such as crypto, and verifying the SOW and SOF of clients, you can help prevent money laundering and other financial crimes while protecting your reputation and bottom line.