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The Evolution of UBO: How AI Is Powering the Next Leap Forward
In 2024, we’re in the midst of a major transformation in the way we identify and regulate Ultimate Beneficial Owners (UBOs). Legislative changes in the EU and US are set to revolutionize how businesses disclose and manage ownership information.
Adding to this is the impact of artificial intelligence (AI), which has the potential to supercharge the identification process—making it faster as well as more accurate and efficient. By automating data collection and analysis, AI can help businesses stay compliant with the new regulations, reduce the risk of errors, and significantly cut down on the time and costs associated with manual processes.
In this article, we’ll explore these significant developments, their impact on compliance, and how AI is shaping the future of corporate transparency worldwide.
The Definition of UBO
Let’s begin with a quick definition. A UBO is essentially the person who truly owns or controls a company, even if their name doesn’t appear on official documents. The concept of the UBO is crucial in reinforcing anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations by ensuring transparency and preventing illegal activities.
Understanding the UBO is crucial because it helps authorities track down who is really behind a company, ensuring that the right people are held accountable and that business practices are clean and legal. Here’s what you need to know:
- Real ownership: The UBO is the individual who holds a significant chunk of the company’s shares or voting rights. Typically this means owning 25% or more, but it varies depending on the country’s laws.
- Hidden control: Sometimes control isn’t just about owning shares. It can also mean having a significant influence over how the company is run, even if it’s through other people or companies.
- Legal requirements: There are strict rules in place globally to identify and verify UBOs. For instance, the EU has the Anti-Money Laundering Directives, and there’s the Financial Action Task Force (FATF) guidelines internationally.
- Keeping records: Companies often need to report their UBOs to regulatory bodies, and they must keep this information up to date.
UBO: Where We Are in 2024
On January 18, 2024, the European Council and Parliament reached a significant agreement on AML/CFT regulation, marking a new era in the harmonization of UBO identification and access to UBO registers across the EU. This agreement aims to streamline and standardize how UBOs are identified, ensuring much greater transparency and easier access to vital ownership information.
In the US, the Corporate Transparency Act (CTA) came into force on January 1, 2024, transforming the landscape of corporate transparency. This pivotal law mandates that all companies disclose their beneficial owners to the authorities, setting clear standards for how this information must be recorded and reported.
Implications and Benefits
These changes in UBO regulations on both sides of the Atlantic are designed to enhance transparency and combat financial crimes more effectively. By harmonizing rules in Europe and enforcing stringent reporting requirements in the US, authorities aim to close loopholes that have previously allowed illicit activities to go undetected. For businesses, this means they need to adapt to new compliance requirements while offering an opportunity to foster greater trust and credibility with customers.
Challenges in Traditional UBO Identification
Ensuring the correct identification of UBOs is crucial for companies to remain compliant and avoid significant penalties. However, many compliance departments still rely heavily on time-consuming due diligence processes, manually sifting through documents and databases to identify UBOs.
It’s difficult to identify the UBO, because of the weight of documentation (in various languages) that needs to be gone through. It’s resource-intensive for the back office, in terms of people, time, and money. Skimping on this runs the risk of heavy regulator fines.
Traditional methods of identifying UBOs involve extensive, costly manual work, including:
- Document analysis: Scrutinizing various legal and financial documents to trace ownership structures.
- Manual searches: Conducting searches across the internet and numerous databases to piece together ownership information.
- Data quality issues: Dealing with mixed and often unreliable results from disparate sources.
How Generative AI Can Revolutionize UBO Identification
Generative AI holds the promise to transform the traditional approach, making UBO identification faster, more accurate, and cost-effective in the following ways:
- Efficient data collection: AI can dramatically speed up the process of identifying beneficial owners by efficiently exploiting external data sources. Advanced AI algorithms can continuously scan and extract up-to-date data from public and private websites, ensuring that the information is current and accurate. This eliminates the need for tedious manual searches and significantly reduces the time required for due diligence.
- Automated document analysis: One of the most promising applications of AI in UBO identification is its ability to read and analyze complex documents. Generative AI and language models can be trained to understand legal and financial documents, such as articles of association, shareholder agreements, and corporate records. By automating the document analysis, AI can identify retention chains and uncover hidden ownership structures with much greater precision and speed.
- Enhanced accuracy and reliability: AI systems can cross-reference data from multiple sources, reducing the risk of inaccuracies and ensuring a more reliable identification process. Machine learning models can also learn from previous cases, continuously improving their accuracy and ability to detect complex ownership patterns. This level of reliability is difficult to achieve with manual processes.
- Real-time monitoring and updates: AI-powered tools can provide real-time monitoring and updates on UBO information. As changes occur, such as new shareholders or changes in ownership structures, AI systems can promptly detect and report these changes, ensuring compliance departments always have the most current information. This proactive approach helps companies stay ahead of regulatory requirements and avoid potential sanctions.
- Cost-effective compliance: By automating many of the labor-intensive aspects of UBO identification, AI can significantly reduce the costs associated with compliance. Companies can allocate their employees more efficiently, focusing on higher-value strategic initiatives rather than manual data collection and analysis.
The Next Stage of Evolution?
Generative AI is set to revolutionize the identification of UBOs by tackling the inherent challenges of traditional methods. To dive deeper, download our whitepaper.
Vincent Bertrand
Project Director and Knowledge Manager, Financial Crime & Compliance
