Due diligence on corporate customers requires the financial services provider to determine who are the ultimate beneficial owners or UBOs of the enterprise so that due diligence can be carried out on these people. UBOs are the natural persons who own corporate and institutional customers.

If the due diligence reveals that an owner of a financial service provider's customer is not a natural person, the financial services firm must continue digging to find out who stands behind these legal entities. Failure to do so would allow the customer to conceal the identity of its beneficial owners, resulting in the risk that the financial services firm provides services indirectly to prohibited clients. Let's have a look at an example. Imagine a financial institution wished to onboard a company ACME Used Cars and Vans as a customer. The customer due diligence reveals that there are three natural persons who own shares in ACME Used Cars and Vans, but also two other entities, the Clifton Family Trust and TRG Production Limited who own shares in the company. It is the financial services firm's obligation to find out who are the beneficial owners of these entities. On further investigation, the firm identifies that three Clifton siblings are the beneficiaries of the family trust, which is based in the British Virgin Islands. The firm screens all three siblings for sanctions matches and negative news and no hits are found. It then discovers that TRG Production Limited is wholly owned by Sir Michael Mitchell, a member of the UK upper the house, the House of Lords. When it screens for sanctions against Sir Michael, there are no matches, but negative news screening yields numerous hits over the last five years. The latest being that 75 million pounds of his assets have been frozen by the National Crime Agency over fraud allegations. TRG Production stake in the firm's customer. ACME is 10%. So what should the firm do next? So Michael Mitchell is alleged to have used his influence on government ministers during the Covid Pandemic to win a 200 million pound contract for a company controlled by his wife for the supply of personal protective equipment to the National Health Service. The fraud allegation center on the fact that the equipment supplied was defective and unusable.

Negative news is a reason for the firm to conduct customer due diligence or CDD on Sir Michael himself. Another reason to conduct CDD on an ultimate beneficial owner is when ownership is 10% or more, and the client is a high risk of financial crime. In this example, both conditions have been met. There's a lot of negative news, and when a PEP owns a stake in an enterprise, the enterprise like the PEP himself is a high risk type of client. So what should the firm do next? Deny service to ACME or continue providing service with ACME rated high risk due to the PEP connection. Either course is possible, but continuing to provide service would demand some risk mitigation. This would have to include the firm satisfying itself that TRG production is only a passive investor and that ACME source of funds is untainted by the fraud allegations against Sir Michael. Finding the identity of UBOs can be difficult in certain circumstances, including the following situations. Listed companies, it would be time consuming and difficult for firms to screen all of the owners of public companies. There may be thousands of them scattered across numerous countries. Instead, firms may rely on an internally approved shortlist of stock exchanges. When a client is listed on an approved exchange, the firm relies on the due diligence disclosures and transparency checks that the exchange will have had to carry out in relation to that company.

Unduly complex corporate structures, a company may have several layers of corporate owners making it harder to find the natural persons who are the ultimate owners. Our financial services firm's risk owners must question corporate structures if they appear to be unduly complex.

For example, a customer has four layers of corporate owners and natural persons exist only at the fifth layer of ownership. The customer should be asked to explain the commercial purpose of the ownership structure to help the firm decide if it is legitimate. Otherwise, the purpose of an overly complex structure could be concealment.