Best Practices: Sanctioned Ownership Screening
Ultimate Beneficial Ownership (UBO) refers to the framework used to identify the natural persons who ultimately own or control a legal entity, such as a company or trust. This framework promotes transparency and prevents financial crimes such as money laundering, terrorism financing, and tax evasion.
Meanwhile, Sanctioned Beneficial Ownership (SBO) refers to high-risk ownership of a company or other registered entity that is fully or partially owned by a sanctioned party. Screening corporate structures associated with sanctions, forced labor, export controls, and other high-risk activities is critical for AML compliance.
Companies providing financial services – whether traditional banks, fintechs or other financial services firms – as well as corporations with global supply chains and vendors, should screen their customers or counterparties to identify high-risk ownership and confirm declared ownership. With increasing regulatory requirements, it’s critical to implement effective UBO screening practices.
Which Information Must be Screened?
A beneficial ownership screen identifies an entity's ownership structure and flags any high-risk associations through ownership by examining Beneficial Ownership Information (BOI) at every level and determining the ultimate beneficial owners based on a specific ownership threshold.
Elements of Beneficial Ownership Information (BOI)
Ownership Stakes: Detailed data on the percentage of ownership held by individuals or entities in the company.
Control Mechanisms: Information on how individuals or entities exercise control over the company, including voting rights and decision-making power.
Chain of Ownership: A comprehensive view of the ownership hierarchy, tracking ownership through various intermediate entities to the ultimate beneficial owners.
BOI encompasses relevant data about individuals or entities that directly or indirectly own or control a company or organization. This information is critical in:
Identifying UBOs: Helps pinpoint ultimate beneficial owners among all beneficial owners.
Tracing Ownership and Control: Enables regulatory bodies and companies to map out and understand the ownership and control structures of entities.
Compliance and Risk Management: Assists in meeting regulatory requirements and assessing the risk associated with beneficial owners.
By gathering and analyzing this information, companies can ensure they have a clear and accurate understanding of the ownership structures, aiding in compliance with regulations and the prevention of financial crimes.
Foundational Regulatory Frameworks
Understanding the regulatory landscape is essential for effective sanctioned ownership screening. Major jurisdictions like the US, EU and UK have adopted regulations that determine whether an entity is sanctioned through its ownership structure. This expands the scope of sanctions and other restrictive measures beyond the entities, individuals, vessels, and other assets identified on sanctions lists.
Screening specialized lists that include global coverage of Ultimate Beneficial Ownership along with high-risk flags like sanctions is now the standard for effective compliance.
OFAC 50 Percent Rule: The U.S. Office of Foreign Assets Control (OFAC) 50 percent rule stipulates that any entity owned 50 percent or more, directly or indirectly, by one or more sanctioned individuals or entities is itself considered a sanctioned entity. This rule requires that U.S. persons and businesses refrain from engaging in transactions with such entities, even if the entities themselves are not explicitly listed on OFAC’s Specially Designated Nationals and Blocked Persons (SDN) List.
EU Sanctions 50 Percent Rule: The European Union’s 50 percent rule mandates that any entity owned 50 percent or more by a designated person or entity under EU sanctions is subject to the same sanctions as the designated party. This rule aims to prevent sanctioned individuals or entities from circumventing sanctions through subsidiaries or joint ventures, thus ensuring comprehensive enforcement of EU sanctions policies.
UK 50 Percent Rule: The United Kingdom's 50 percent rule under its sanctions regulations dictates that any entity that is more than 50 percent owned or controlled by sanctioned individuals or entities is itself subject to sanctions. The UK’s 50 percent rule expands its coverage to include controlling interests in an entity, irrespective of ownership.
How to Screen Beneficial Ownership
1. Collect Data
Gather detailed Beneficial Ownership Information (BOI) on business customers. This includes:
Ownership Structures: Identify the hierarchical structure of ownership, including parent and subsidiary relationships.
Identities of Registered Owners: Collect information on individuals or entities that own or control the business.
Best Practices:
Ensure thorough data collection to provide a clear understanding of ownership and control.
Use standardized forms to capture consistent and complete BOI.
2. Verification
Verify the collected BOI to ensure its accuracy and reliability. This involves:
Reliable Sources: Cross-check data against authoritative and reliable sources.
Examples: Government databases and corporate registries.
Compliance Databases: Utilize databases that include:
Sanctioned Beneficial Ownership: All companies subject to sanctions due to being majority-owned or controlled by a sanctioned individual or company.
Sanctions Lists: Identify entities or individuals subject to sanctions.
PEP Lists: Detect politically exposed persons (PEPs).
Adverse Media Checks: Look for negative news or information.
Best Practices:
Use multiple verification sources to enhance data accuracy.
Regularly update your verification methods to incorporate new data sources and technologies.
3. Risk Assessment
Evaluate the potential risks posed by beneficial owners through:
High-Risk Indicators: Focus on indicators such as:
Connections to sanctioned entities.
PEP status.
Jurisdictions with high levels of corruption.
Risk Models: Implement robust risk models to assess:
Ownership percentages
Control mechanisms
Historical compliance behavior
Best Practices:
Customize risk models to align with your organization’s risk appetite and regulatory requirements.
Continuously refine risk assessment criteria based on emerging threats and regulatory changes.
4. Ongoing Monitoring
Regularly monitor BOI to detect changes or red flags indicating increased risk. Key actions include:
Continuous Monitoring: Implement systems to continuously track beneficial ownership information.
Automated Alerts: Set up alerts for significant changes such as:
Changes in ownership percentages.
New associations with high-risk entities or individuals.
Best Practices:
Use automated monitoring tools to ensure timely detection of changes.
Conduct periodic reviews and audits to validate the effectiveness of monitoring systems.
Example: Implementing a real-time alert system that notifies compliance officers of any changes in beneficial ownership, allowing for swift action to mitigate risks.
Enhancing these steps with detailed actions and best practices can ensure a comprehensive and effective approach to screening beneficial ownership.
What to Look for in a UBO Screening Provider
Selecting the right beneficial ownership screening provider is crucial to ensure effective and efficient compliance processes. Consider the following factors:
Accurate Risk Flagging
Your coverage must extend to all relevant jurisdictions and risk data types to align with your organization’s unique risk profile, international operations, or exposure to foreign transactions and trade.
Keep in mind: Many vendors provide broad UBO data without providing actionable alerts against risks associated with an entity’s corporate structure For example: If your screen returns a result, but doesn’t specify that the beneficial owner is a sanctioned Russian oligarch vs. a low-risk PEP, you can’t accurately assess your risk relative to your organization’s parameters.
Ask your vendor: if the system returns relevant results for risk factors associated with your screen and test the system for accuracy.
This crucial SBO feature provides a clearer picture of the ownership structure and control of entities they do business with.
Real-Time Updates
Your system needs to be fast to reflect the latest changes in sanctions, watchlists and regulatory requirements as quickly as possible. For reference, at Castellum.AI, we update our database every five minutes.
Question for vendors:
How quickly is your data updated?
Does it update multiple times daily?
If not, is the delay greater than 24 hours for financial crime data?
Is your data update process fully automated, or does it rely on analysts to collect and standardize it?
Comprehensive Data Coverage
Your screening solution must cover broad data types for thorough compliance checks. This includes up-to-date information from global sanctions lists, politically exposed persons lists, export control watchlists, and other regulatory databases. It is essential that your system enables beneficial ownership screening alongside these financial crime risk data types, preferably within a single compliance screen.
Tuning and Filters
Many jurisdictions are expanding their UBO reporting requirements to cover a broader range of entities and ownership structures. Businesses may need to adjust their compliance processes to meet more stringent and comprehensive reporting obligations, covering trusts, partnerships, and other complex structures. Castellum.AI provides beneficial ownership screening parameters across 80+ risk ownership-related risk factors, geographic locations, and more to tune screening in line with your organizational risk profile.
Adjustable Scoring
Official regulatory thresholds set a minimum standard but your organization might adopt stricter thresholds to demonstrate a proactive approach to compliance to ensure a consistent and robust approach to identifying and managing risks. Your screening system should adjust seamlessly with any changes in your company’s screening thresholds to ensure alerts align with your specific risk profile and exceed regulators' expectations.
Data Enrichments
A screening system shouldn’t only collect risk data and present it to its users – standardization and enrichment are essential to improve screening system accuracy. For example, sanctions, PEPs, or export control information are issued globally in different languages, structures, and data formats. Unenriched data prohibits users from screening against relevant information accurately, increasing the rate of false positives and risk of false negatives, leading to violations.
Castellum.AI’s patented data process automatically collects, standardizes and enriches data from watchlist issuing authorities globally every five minutes. We extract information from unstructured text like dates of birth, IDs, locations and more, enabling users to screen financial crime risk accurately and eliminate false positives.
Integration
Your screening system should integrate seamlessly into your internal systems to streamline workflows and eliminate labor-intensive development. Your vendor should be able to provide clear documentation on their data structure and ontology, simple API documentation, and access to screening environments for your internal product and IT team to assess quickly.
Castellum.AI’s API enables users to access our entire risk database through a single API endpoint. We have public API documentation, integration instructions and a public API sandbox environment, which enables users to access our screening system immediately. The average time required to integrate our API and initiate screening is under one week.
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