Client’s Profile and Source of Funds/Wealth

While looking into a customer/client’s profile it is important to understand the relationship between the client and the source of funds or their source of wealth. Ensuring that you have got verifiable information to demonstrate an understanding of the true ownership and control structures of your client or the corporate entity and, conducting a proper screening against sanctioned lists for Politically Exposed Persons (PEPs) and adverse media is a requirement.

It is worth mentioning that the Financial Action Task Force (FATF) and other global regulators recognize a risk-based approach. For low and medium-risk customers, Customer Due Diligence (CDD) coverage may be basic. However, for high-risk clients, there is an expectation that you go deep into these core CDD areas discussed below.

Who can be the real Beneficial Owners?

The concept of beneficial ownership focuses on identifying a ‘natural person’, we want to look for a living, breathing, human being(s) someone who ultimately owns or controls an entity, it could be someone that ultimately exercise effective control over a legal person or arrangement. A legal person can be a corporate entity, while an arrangement may include structures such as companies, trusts or foundations etc.

Beneficial ownership can be through direct or indirect means:

1. Direct Ownership
   • Owning shares in a company.
   • Holding ownership of voting rights.
2. Indirect Ownership
   • Nominee arrangements: Nominees often act on behalf of the true beneficial owner. Sometimes a beneficial owner may select a director or shareholder as a nominee. Often, Corporate Service Providers (CSP(s)) have been seen providing services as a nominee.
   • Management control: Somone who has the ability and control to remove the majority of directors or other contractual associations.
   • Veto rights that give away significant ability to influence decisions or control profit rights.
   • Beneficiary of loans or other benefits: Conditions in contracts granting control rights to a property.

Most jurisdictions require the identification of anyone owning 25% or more of a shareholding as a UBO. For higher-risk clients, firms often reduce this threshold to 10% to better understand their place in the control structure. The type of entity (trust or corporate) also influences the identification process.

In the UAE, the concept of Ultimate Beneficial Ownership (UBO) is governed by Cabinet Decision No. 109/2023 Concerning the Regulation of Beneficial Ownership Procedures Cabinet Decision No. (58) of 2020 Regulating Beneficial Owner Procedures. The provisions of this decision shall apply to the authority having competence to supervise the trade names register for the various types of establishments registered in the UAE, and licensed legal persons in the UAE including the free commercial zones. However, (a) companies wholly owned by the Federal or Local Governments in the UAE or any other companies wholly owned by these companies, (b) Financial Free Zones; and (c) a federal or local government that contributes or owns shares in the company are exempted from the provisions of this decision.

Likewise, the provisions of Cabinet Decision No. 132/2023 on the Administrative Penalties to be Imposed on the Violators of Cabinet Decision No. 109/2023 Concerning the Regulation of Beneficial Ownership Procedures shall apply to the juristic persons that are licensed and registered in the UAE including the non-financial free zones violating the provisions of aforementioned Cabinet Decision No. 109/2023.

According to the UAE regulations, a UBO is anyone who owns or controls 25% or more of the shares, voting rights, or other ownership interest of the company, either directly or indirectly. If no natural person meets this criterion, then any person who controls the company by other means; and if no such person can be identified, then the person who holds the position of senior management.

It requires all entities registered in the UAE to maintain accurate and up-to-date records of their UBOs; and disclose UBO information to the relevant regulatory authority in the UAE within 15 days of any changes in the UBO information. Failure to comply with these disclosure requirements can result in penalties, including fines and potential administrative sanctions.

Risk-Based Approach and How to Assess Controllers in Complex Structures

A risk-based approach allows for unconstrained navigation while investigating complex structures. What is a good strategy for dealing with these nominees and CSPs? When nominees or CSPs are involved in a corporate structure, ask questions – Ask what is their role in the structure? What is the nature of this corporate service provider? Where do they operate from? What activities do they provide, is it just for company formation and management or is it for tax advice? This does not imply there is criminality but brings about a thorough risk assessment.

In most legal systems around the world people under the age of 18 can own/hold assets however, they are usually under the control of their parents/legal guardians and therefore those guardians and the parents will be considered to be the true beneficial owners.

Unwrapping full ownership tree may not be practical, however judging each case on its merits is crucial, considering both direct and indirect ownership, including family members and minors. Thus, it is important to unwrap the whole structure and look across the different lines of a corporate structure. Below are a few vulnerabilities and risks around corporate structures that may raise a red flag during diligence process:

• Complex structures shareholdings – Complex structures can hide the true ownership and control of a company. Multiple layers of ownership, cross-shareholdings, and inter-company loans can make it challenging to identify the ultimate beneficial owners.
• Involving nominees – Nominee directors and shareholders are individuals or entities that act on behalf of the true beneficial owners.
• Trading companies. Investigate – who is the company trading with, what are they trading?
• Holding and investment companies – holding companies just exists to owns other assets and don’t do operations.
• Shell/tax – not to be confused with Holding companies, shell companies just exist on paper no actual business operations
• Entities with similar names attempted to confuse regulators.

To identify individuals with effective control, consider:

• Aggravated Ownership: Aggregate ownership across different strands in the structure, make a chart of the corporate tree, look at what names repeat, also keep an eye out on the shareholding percentages of each individual/entity.
• Ownership Below Thresholds: If someone was a historical founder of a company and is the CEO of the company and they sit on the board but they own only 10% shares of the company, it is may be likely that they are the UBO of that company if their effective control element in that company can be established.
• Nominees and CSPs: Assessing the risk associated with their involvement.
• Family Members and Close Associates: Common technique in sanctions matters where assets are transferred to family members and close associates.
• Decision-Making Heads: Look out for the heads of the decision-making body in a parent company.

Trusts and Concealed Ownership

Trusts can disguise ownership and control. Trustees legally own the property on behalf of beneficiaries, but the true beneficiaries may remain concealed, especially in blind trusts. Understanding the true nature of a trust is essential to ensure it is not a sham.

When property is transferred into a trust, the beneficiaries cease to be the legal owners. The legal owners are the trustees, who hold the property on behalf of the beneficiaries. Trustees are not entirely free to act as they wish; they are guided by international concepts of trust law and the terms of the trust deed. However, trusts can be abused to conceal the true beneficiaries, sometimes involving blind trusts where the UBO is not disclosed.

There have been global efforts to improve transparency around beneficial ownership, these include:

• G8 Summit 2013: Commitment to increased transparency.
• FATF Report 2014: Highlighted misuse of companies and legal arrangements.
• EU 5th Anti-Money Laundering Directive 2018: Required member states to establish beneficial ownership registers.
• G7 Finance Ministers 2021: Committed to strengthening national registers of beneficial ownership.

Identifying UBOs are crucial. Criminals have huge amounts of wealth to dispose of whether that’s coming from the crimes of drug money, human trafficking, counterfeit goods, wildlife crime, terrorism etc., whatever it is, that money has to go somewhere. There are professional enablers, including CSPs that facilitate the transfer of assets to offshore or high-secrecy jurisdictions, helping in the purchase of properties, yachts, art, and luxury cars. This global problem requires strong measures to tighten the use of hidden beneficial ownership.

Practical Steps for Compliance

To ensure compliance and mitigate risks, organizations should:

• Verify Customer Information: Ensure all provided information is accurate and verifiable.
• Screen Against Sanction Lists: Regularly check customers against PEPs and adverse media lists.
• Conduct In-Depth CDD: For high-risk customers, perform extensive/enhanced due diligence.
• Understand Ownership Structures: Fully unwrap ownership trees to identify all beneficial owners.
• Assess Nominee Arrangements: Investigate the role and reputation of nominees and CSPs.
• Monitor Trusts and Foundations: Scrutinize trusts to uncover true beneficiaries and ensure they are not sham structures.

By implementing these practices, organizations and lawyers in Dubai can better understand and control the risks associated with beneficial ownership and complex corporate structures, ensuring compliance with international regulations and protecting the integrity of the financial system.

Written by – Sanjeev Kandathil