Uncertainty about client identity: dangerous for reputation

One glance at the Chamber of Commerce’s trade register tells us who the owners of a company are. Really, this should have been possible across all EU/EEA member states since January 10th this year. And yet, to the European Commission’s vexation, the Netherlands still hasn’t got its affairs in order. According to the Dutch minister, there is not a single member state where, in the opinion of the European Commission, the implementation has been completed successfully. For the time being, companies will continue to be faced with extensive searches to find out who owns and benefits from a company. With fines and reputation damage as potential consequences.

This is about the UBO register. An acronym that stands for Ultimate Beneficial Owner. In this new register, organisations will soon be required to state who the owner is and whether there are other people with a controlling stake in a business. A UBO, as such, can never be a legal entity, it can only be a natural person with a beneficial interest in a company, foundation, or association. It pertains specifically to people who control more than 25 per cent of the shares or voting rights. By publicly identifying the UBO, it becomes clearer who really controls a company. Customers and suppliers are then better able to identify who they are doing business with.

Ever more companies subjected to anti-money laundering law

Of course, there are underlying reasons for creating the UBO register. The European Commission hopes that it will help combat money laundering and other financial crime. For certain services and for transactions of large sums, companies are required to investigate the owners and stakeholders of the party they are doing business with. If, for example, it emerges that those names are included in a sanctions list or a list of (suspected) terrorists, the deal must be scrapped. There is even a duty to report any transaction where something seems questionable.

Contrary to popular belief, these strict rules not only apply to banks and other parties in the financial sector. More and more companies in other sectors are also bound by these rules. These include accountants, real-estate agents, art dealers, office landlords and car dealers. All of them are required to perform UBO checks.

From ING to the car dealer down the road

In practice, however, this is not always done with the same diligence. A well-known example of this is the large settlement that ING agreed with the Dutch Prosecutor’s Office (Openbaar Ministerie) in the autumn of 2018, to the sum of 775 million euros. The bank had not screened all of its customers equally well, resulting in ING accounts unintentionally being used for the laundering of many millions of euros. The Dutch company Heesen Yachts also received negative media exposure in connection with suspicious transactions. They sold two expensive yachts to a Russian senator, a transaction that was linked to money laundering. But there are also many smaller examples, even closer to home. Like a car dealer who was paid tens of thousands of euros in cash. According to the Dutch courts, he should have tried harder to find out the true identity of the buyer. This earned him a fine of 35,000 euros.

Risks to reputation damage are lurking in the shadows

A monetary fine is not the only thing companies should be wary of. The risk of reputational damage is also a factor to keep in mind. Various Dutch newspapers published extensive articles about the suspicious transactions at Heesen Yachts. That is the kind of publicity companies really do not want. Organisations that are suspected of involvement with or facilitating money laundering also run the risk of losing clients and suppliers. In practice, the suspicion alone is enough to see contracts ended and collaborations postponed. Companies that come under suspicion may also be forced to find a new bank because their existing accounts get closed.

European Commission puts the Netherlands on notice of default

But let’s return to the new UBO register. The EU wants to use this register to make it easier for companies and other organisations to find out who they are really doing business with. A couple of clicks of the mouse and you can see what customers you’re dealing with. The British have had a register like this in place for some time now, and Belgium is also on board. In other European countries things are not going as smoothly. The Netherlands, for example, has been holding off the implementation of the UBO register for quite some time. The European Commission is now at a point where they’ve had enough and put the Netherlands and several other European countries formally on notice of default earlier this year. If they wait much longer, the Commission may initiate an infringement procedure at the European Court of Justice which, theoretically, could result in a fine being imposed. It probably won’t come to that but, all the same, it does not show these countries in the best light. If we think about it, is this not the same government that insisted that companies should diligently comply with the law?

Do not wait for the UBO register, get your own affairs in order

Even if the UBO register is finally implemented in the Netherlands, it is likely to take a few years more before it truly becomes a valuable source of information for companies. Not only is the Dutch Chamber of Commerce yet to implement the functionality at a technical level in its own platform, companies will also need to be approached, over a period of three years after the register is implemented, with the request to register their UBOs. According to Andries Doets, lawyer specialising in anti-money laundering legislation, it is only when in practice that we will see to what extent companies will comply with the request in a timely manner. If companies refuse, there are enforcement options, but they come at a cost in both time and capacity. It is also not unthinkable that the supplied information will contain errors or inaccuracies or becomes outdated if changes are not being reported. So, for the foreseeable future, companies are left to figure out for themselves who the people behind a customer or supplier really are. And even after implementation of the register, an organisation that is required to comply with the law, will need to take responsibility for its own customer due diligence. Andries Doets informs us that the Dutch watchdog has been pushing for organisations to take responsibility for this themselves. Organisations will, where needed, have to do independent investigations to check whether the information in the UBO register is in fact accurate.

Background checks required

And even once that is finally done, it still isn’t time to celebrate just yet. The due diligence requirements on organisations don’t stop at identifying a UBO, they then also need to do a background check on that UBO. Is this a politically exposed person? Are there any suspicions of corruption? Is this man or women on a sanctions list? Is this a potential terror suspect? That is information you do need to check, but that won’t be included in the UBO register. Simply identifying an owner or other stakeholder is not where your duties as a company stop.

A good compliance policy

So, ensure that you get your due diligence processes in order now, especially while the UBO register is still some time away and is not going to offer a solution just yet. It will require investment, but it will avoid potentially sizeable fines in the future, with all the risks to reputation that could entail. As such, it is prudent that you do not affiliate yourself with organisations that do not know the rules or that deliberately ignore them. Instead, ensure that your company is able to identify UBOs, investigate them, and to take swift action if any suspicious transactions come to light. That is what a good compliance policy can do to help your company successfully do business.

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