Today, financial institutions face several challenges, such as identifying and verifying the actual owners of businesses to prevent fraud and money laundering. With rising pressure to comply with CDD rules and Enhanced Due Diligence (EDD) practices, institutions must follow the rules for beneficial ownership identification. This process is compulsory, complex, and costly.

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In this blog, we'll explore the importance of beneficial ownership for AML compliance and the role of EDD in managing risk. We'll also examine effective verification methods, monitoring requirements, and laws. By the end, you will get the strategies to ensure your business stays compliant while minimizing risks and costs.

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What Is Beneficial Ownership?

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Beneficial ownership means individuals who ultimately own or control a business. Although this may not be visible on official documents, they have the power to influence decisions or claim profits from a company. In financial regulations, identifying the beneficial owner is essential for transparency and to prevent illicit activities such as money laundering or fraud.

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This individual is a person who owns legal entities with at least 25% ownership or those with significant control over the company's decisions. Specific thresholds might vary depending on jurisdictional regulations. Finding this person is challenging, especially for companies with complex ownership structures. 

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Beneficial ownership is crucial in anti-money laundering (AML) compliance. By identifying the true owners, financial institutions can assess risks, prevent criminal activities, help them meet CDD rule requirements, and avoid regulatory penalties.

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How To Identify Beneficial Owners?

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Identifying the beneficial owner is critical in ensuring compliance locally and internationally. These individuals ultimately control or benefit from a business, even if they are not listed as formal owners. Here's how financial institutions and companies can identify beneficial owners:

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1. Establish Ownership Criteria: The first step is to establish ownership criteria based on regulatory guidelines. A person who controls a business owns 25% or more of a company's equity or has significant control over its operations. This individual, directly or indirectly, holds substantial voting rights or influences that organization's decision.
2. Examine Corporate Structures: A detailed review is necessary for entities with complex ownership structures, such as holding companies, trusts, or joint ventures. If you want to find this person, you need to look beyond the immediate shareholder register. This includes tracing the ownership back through intermediate entities or individuals and identifying all potential beneficial owners.
3. Documentation And Data Sources: Use a combination of documentary and non-documentary verification methods. Official company documents, such as shareholder registers, tax filings, and articles of incorporation, should be reviewed to get this information. A bank or financial institution can also use third-party databases like those provided by AiPrise, especially for foreign or multinational entities.
4. Conduct Interviews Or Inquiries: In some cases, direct customer engagement may reveal beneficial ownership details. You may request additional documentation or conduct interviews to understand a company's control structure better. This step can help clarify any ambiguities in ownership, especially for those with multiple layers of control.
5. Implement Ongoing Monitoring: Finding the beneficial ownership is not a one-time verification process. Institutions must regularly monitor for changes in ownership or control. This is particularly important when a customer undergoes structural changes, such as mergers, acquisitions, or shifts in shareholder composition. Updating beneficial ownership records ensures compliance with regulations and mitigates emerging risks.

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Now that you're familiar with beneficial ownership, it's time to explore another critical aspect: Customer Due Diligence (CDD) and its various forms.

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Understanding CDD Rule And Its Types

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Customer Due Diligence (CDD) verifies customers' identities and assesses their financial transaction risk. It helps organizations understand their customers and ensure they are not indirectly involved in illegal activities such as money laundering or terrorism financing. CDD is an important part of AML and CFT compliance, and it mitigates financial crime risks. Let's look at the three main types of CDD.

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• Standard Due Diligence (SDD): It is designed for low-risk customers and involves minimal activities like identification checks and documentation. It is a common approach to business transactions and relationships that ensures compliance with basic regulatory requirements.
• Enhanced Due Diligence (EDD): It is essential for high-risk customers who need a deeper background check. This process also includes continuous monitoring to assess potential risks more thoroughly. EDD is fit for politically exposed persons (PEPs) or customers from high-risk jurisdictions. 

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Employing tools from AiPrise can facilitate the continuous monitoring and enhanced scrutiny required in EDD, ensuring comprehensive compliance.

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Do you feel like an expert on CDD now? Let's take it up a notch with Enhanced Due Diligence practices.

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Learning More About Enhanced Due Diligence (EDD) Practices

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Enhanced Due Diligence (EDD) is vital only when a customer presents a higher risk. It involves a detailed investigation to understand risks better and ensure compliance with AML and CFT regulations.

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Risk-Based Approach

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• EDD starts with a risk assessment to learn the level of risk associated with a client.
• A deeper review of the individual's background, business activities, and connections are part of it.
• Through this process, you can verify the source of funds and the nature of their transactions.
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Steps For Implementing EDD Practices
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• Gather Additional Documentation: Request records such as proof of income, business activities, and ownership structure.
• Continuous Monitoring: Monitor transactions continuously and detect suspicious activity or significant customer profile changes.
• Enhanced Scrutiny: Investigate any red flags or inconsistencies, such as unusual transaction patterns or connections to high-risk jurisdictions.
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Comparison Of EDD With Existing Procedures
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• EDD is more thorough than Standard Due Diligence (SDD) because it requires deep customer identification and verification.
• SDD needs minimal checks for low-risk customers, but EDD demands a deeper investigation and continuous monitoring.
• EDD is different from the standard method as it helps financial institutions identify and mitigate potential risks before they become serious issues.

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AiPrise provides solutions that align with the in-depth requirements of EDD, making your due diligence efforts more robust.

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Ready to become a pro at spotting true ownership? Let's walk through how to make this a reality.

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Understanding And Implementing Beneficial Ownership Requirements

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Understanding and implementing beneficial ownership is vital for financial institutions. By identifying the actual owners of legal entities, you can better assess risks and follow AML regulations. Below are the essential points for effective implementation:

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Goals Of Identifying And Verifying Beneficial Owners

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Identifying and verifying beneficial owners is central to maintaining transparency and mitigating financial risks. Here are the key goals of this process:

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• Transparency: The primary goal is to uncover the individuals who ultimately own or control a business. This is vital for providing transparency into company ownership.
• Risk Management: Verifying beneficial owners helps assess money laundering or fraud risks and ensures compliance with regulatory requirements.
• Regulatory Compliance: Accurate identification supports compliance with the CDD rule and other AML regulations. It protects your business from legal and reputational risks.

Legal Entity Customers With Complex Ownership Structures

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It is challenging to identify beneficial owners of companies with ownership structures. As a business, you must conduct a deeper investigation to ensure compliance with AML regulations.

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• Ownership Layers: Identifying beneficial owners in entities, such as holding companies or trusts, can be complex. Look into the entire ownership chain to determine who controls the company.
• Nominee Directors/Shareholders: Some companies use nominee directors or shareholders to hide the true owners' identities. Thorough due diligence is needed to identify these hidden owners.
• Cross-Jurisdictional Challenges: Finding the owner of an international company can be a little harder as it is registered in different jurisdictions with varying transparency laws.
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How Can You Verify Beneficial Ownership Information?

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You can follow several methods. Some of them are:

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• Documentary Verification: Request official documents such as shareholder registers, business licenses, and tax filings to verify ownership details.
• Third-Party Data Sources: Use third-party databases, public records, and commercial registries to verify beneficial owners. This is necessary for complex or multinational entities.
• Direct Inquiries: Talk with customers directly through questionnaires or interviews to obtain detailed information. This may help you reveal the ownership and control structures, especially when other methods are insufficient.

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AiPrise uses over 100 data sources globally, making it an excellent choice for companies looking to verify ownership in multinational environments.

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Let's take a world tour of CDD laws and see how regions handle these essential regulations.

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CDD Laws Overview

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Several governments implement Customer Due Diligence (CDD) laws to prevent financial crimes like money laundering and terrorist financing. When you are operating in a particular region, you must comply with the particular law to avoid legal consequences. Let's explore some of them now.

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1. United States (USA)

The USA PATRIOT Act is one of the most famous in the world. It compels financial institutions to implement CDD procedures as part of broader AML compliance efforts. The Bank Secrecy Act (BSA) and the FinCEN CDD rules mandate CDD for new customers and ongoing monitoring. Under these laws, institutions must verify customers' identities and identify the beneficial owners with 25% or more ownership or significant control.

2. United Kingdom (UK)

The UK's Money Laundering Regulations (2017) are connected with the EU's 4th Anti-Money Laundering Directive, which requires businesses to conduct thorough CDD procedures. As per this law, financial institutions must identify and verify customers' identities, including beneficial ownership. The UK government also mandates Enhanced Due Diligence (EDD) for high-risk clients, including politically exposed persons (PEPs) and customers from high-risk jurisdictions.

3. European Union (EU)

The European Union's Anti-Money Laundering Directives (AMLD) provide a clear guide for member states. The 4th and 5th AMLD emphasize the need for businesses to identify and verify individual and corporate beneficial owners. The 5AMLD strengthened requirements for transparency in corporate ownership, requiring public registers of beneficial owners for companies within the EU.

4. Australia

The Anti-Money Laundering and Counter-Terrorism Financing Act (AML/CTF Act) clearly defines CDD procedures in Australia. According to this law, financial institutions and businesses must verify the identity of their customers, including the beneficial owners of legal entities. Like the UK and EU, Australian CDD rules have provisions for Enhanced Due Diligence when dealing with higher-risk customers.

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It's not just about identifying ownership; keeping those records fresh and accurate is another game—let's explore how.

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Monitoring And Review Of Beneficial Ownership Information

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Ongoing monitoring and review of beneficial ownership is essential as part of CDD rule or law. Monitoring helps an organization detect any suspicious activity by its customers and helps it report the suspicious activity to the authorities. Some of the key processes of monitoring are:

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1. Risk-Based Monitoring

• Financial institutions can follow a risk-based approach when monitoring existing accounts. Accounts with higher risk profiles, such as those linked to complex ownership structures or high-risk jurisdictions, require more frequent review.
• Regular reviews ensure that information remains accurate and up to date, especially if there are significant changes in ownership or control.

2. Updating Records

• Institutions have a legal obligation to update beneficial ownership records regularly. If an ownership structure changes, the institution must add the new beneficial owners.
• As a financial institution, you must establish procedures to update records during periodic reviews or if new information comes to light to ensure CDD and AML requirements.

3. Triggers For Updates

• Some specific events or triggers may prompt the need to update beneficial ownership information. These reasons can include a change in corporate structure, mergers, acquisitions, or a significant shift in the ownership stake.
• Institutions should be vigilant in monitoring for such changes and collect or verify updated beneficial ownership to stay compliant and reduce risks.
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Conclusion

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The CDD rule and beneficial ownership regulations improve transparency and reduce the risks of money laundering (ML) and other financial crimes. These rules help businesses better understand their true owners and ensure compliance with AML laws.

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Finding ownership is difficult, as complex ownership structures work in multiple jurisdictions. Maintaining up-to-date records requires effective resources and is a time-consuming process. However, this is necessary to mitigate financial crime risks as part of the law.  

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‍If you want to stay compliant with the CDD rule, partner with AiPrise, where you can help streamline your compliance processes. Our platform offers comprehensive solutions to verify beneficial ownership and ensure regulatory compliance. Try our services now and see how you can confidently streamline your business.