People engaging in financial crimes are now more agile than ever before. The use of sophisticated and complex ownership structures is now a very popular way for sanctioned entities to hide so that they can undertake prohibited financial transactions. However, during beneficial ownership checks for sanctions due diligence and while monitoring transactions, financial institutions should be able to identify these sanctioned entities. Know your customer (KYC) software is expected to enable firms to weed out these bad actors so that they can meet both their regulatory obligations and their ethical responsibilities to the society.  

Boosting Beneficial Ownership Data 

Establishing the beneficial ownership of an organisation, as well as the beneficial ownership of related entities is now essential for a thorough KYC process. New regulatory standards issued by the Financial Action Task Force (FATF) are being implemented in countries around the world, including the United States and the United Kingdom. These regulations aim to provide enhanced beneficial ownership data, which is essential for financial institutions to conduct their checks effectively. For example, the US Treasury Beneficial Ownership Registry began accepting reports since January 2024. In the UK, the Economic Crime and Corporate Transparency Act 2023 tightened up the UK’s existing beneficial ownership information programme, so that more entities and data are captured. 

In addition, new industry collaboration is making the use of beneficial ownership data less complex. For example, a new beneficial ownership data standard has been developed to make it easier to create and share beneficial ownership data using a single format. Additionally, in September 2023, the Global Legal Entity Identifier Foundation (GLEIF) announced that its Legal Entity Identifier (LEI) – a 20-character, alpha-numeric code based on the ISO 17442 standard developed by the International Organisation for Standardisation (ISO), which is heavily used in financial services technology systems and transaction processing – is now being linked directly to the beneficial ownership data standard. 

With these changes, theoretically, sanctioned entities should no longer be able to hide behind complex corporate ownership structures or relationships with the enhanced beneficial ownership data available to sanctions screening software; however, having access to the data is just the first step.  

Translating Data into Action 

Global financial services regulators such as the UK’s Financial Conduct Authority (FCA) are now insisting that firms have beneficial ownership baked into their sanctions screening processes. For example, in its recent consultation paper on its Financial Crime Guide updates, the FCA identifies as best practice financial institutions using software that can “identify customers who make use of corporate vehicles to obscure ownership or source of funds” (in both onboarding and transaction monitoring processes). Software should be able to screen all relevant parties, identify connected entities and corporate structures that may be subject to sanctions, articulate the full ownership structures of entities, and demonstrate that it is screening all relevant parties.  

The sanctions screening software should also automate as much of the process of identifying beneficial ownerships as possible. For example, the real-time ownership hierarchy should be automatically extracted from the company’s filings. In addition, this ought to be completely customisable according to the firm’s requirements in terms of ownership thresholds, share types to consider, and other relevant regulatory practices.  

Having the right approach to beneficial ownership data and processes within sanctions screening software is essential. Firms should consider whether their existing tool is able to effectively use these new sources of data in their KYC process, to meet the growing demands of regulators around the identification of sanctioned entities who are beneficial owners within complex ownership structures. And in an era in which acting ethically is more important than ever before, ensuring firms meet their obligations can help enhance their reputation with customers, investors, and other stakeholders.