Demystifying UBO compliance: transparency vs privacy

• Growing pressure on financial institutions to meet UBO compliance objectives
• Launch of public registries may hinder, not help, the compliance process
• Privately held third-party databases will continue to play an important role

The regulatory pressure on Ultimate Beneficial Ownership compliance continues to intensify, and it’s not hard to understand why.

Continuous leaks of sensitive information do not only embarrass those listed in the document dump but also embarrass the authorities that actively advocate against corruption.

Policy-makers have been vigorously pursuing an anti-corruption agenda in recent years, seeking to disrupt the flow of illicit funding. It has created a fast-moving regulatory environment, challenging the compliance function to source scarce skills and invest substantial amounts in relevant software. Transparency is a critical component of the anti-corruption battle, with over two-thirds (70%) of anti-corruption cases pointing to a lack of corporate transparency as a factor. However, the ongoing leaks of sensitive information reveal a stunning lack of financial transparency despite the regulatory expansion. 

Ensuring that all UBO details are properly captured for scrutiny has become an essential part of curbing illicit financial flows.

We should expect further expansion of UBO-centred regulation, creating even more pressure and complexity to the compliance function. Searching for UBO details can be incredibly challenging and time-consuming, especially for organisations and individuals who actively invest in hiding their true identity.

In the EU, the 4th and 5th Anti-Money Laundering Directives required Member States to establish a central UBO registry for corporate and other legal entities incorporated within their territory. In theory, these registries should simplify the UBO compliance process and facilitate the growth of financial transparency, reducing the opportunity for individual or corporate misconduct. A growing number of governments have complied and have instituted public registries to reveal the true owners behind legal entities.

However, access to these registries is now contested.

According to the EU Court of Justice Ruling, public registries conflict with privacy rights.

The court recently ruled that provisions requiring EU Member States to make UBO information accessible to the public in all cases are invalid. Public access to UBO data significantly interferes with fundamental privacy and personal data protection rights guaranteed by the EU Charter of Fundamental Rights.

EU Member States were, therefore, instructed to implement appropriate safeguards when making UBO information publicly available.

Despite this, the obligation to register UBOs remains in place. There is some leeway as the Anti-Money Laundering Directive allows Member States to shield UBO information on a case-by-case basis. 

There is a similar tussle in the US, where a proposed FinCEN rule seeks to prevent banks from distributing registry information anywhere, internally or to affiliates and foreign divisions.

Finding the appropriate balance between transparency and privacy has delayed the roll-out of the registers and is sure to be an ongoing challenge.

Without verification, any details held on the registers will be useless, and at the moment, there is a lack of clarity and consistency in verification norms and standards. Recent testimony by the American Bankers Association (ABA) to the US Subcommittee on National Security, Illicit Finance and International Financial Institutions Of the House Financial Services Committee highlighted their concerns about the number of inaccuracies and inconsistencies. The ABA explained that the conflict between register data and internal data would substantially slow down the compliance process unless the errors were resolved.

The policy-making process is long and arduous; tweaking an existing policy can take just as long. Changing the rules to improve the output of registers may take a considerable time. While software innovation, evolving data privacy regulation, and the growth of open banking may help increase the usefulness of registries in the future, in the short term, their use may hinder compliance due to the access application process and the need to verify data in some cases.

Compliance functions would be better served by third-party proprietary databases designed explicitly for UBO compliance, tailored to meet regulators’ standards.