The importance of UBO due diligence in global M&As

Verifying UBO details as part of a KYC check has historically been conducted by compliance teams at financial institutions. But now, especially as more countries adopt UBO reporting regulations, obligations are expanding to other business sectors. 

It is a compliance task that extends beyond just reporting the required UBO details and updating records with local government regulators as corporate structures change, and it has important implications during corporate transactions, like M&As. A failure to provide and verify UBO information could derail a deal and may present a liability for both parties.

In this article, we explore what defines a UBO, why UBO reporting is important, and why conducting UBO due diligence is critical to mitigating risk in global corporate transactions.

What is a UBO?

Typically, a UBO is defined as an individual that directly or indirectly controls, has ownership of, or has voting rights over a certain percentage of a company. As such, this person has significant control and influence over the business. The Financial Action Task Force adds to this definition by describing an ultimate beneficial owner as “…the natural person on whose behalf a transaction is being conducted.”

The standard threshold followed by many countries to be considered a UBO is that the individual must hold at least a 25% ownership stake in a company or have significant influence over the business. There are a few exceptions. For example, in Mexico, the threshold for a UBO or “Controlling Beneficiaries” is 50%, while in India, the “Significant Beneficial Owner” must hold at least a 10% stake.

A UBO is generally not a company or legal entity, but rather is a natural person who benefits from or for whom benefits are received on behalf of.

Why is UBO important?

Global regulatory trends are increasingly emphasizing corporate transparency. Much of this stems from key AML regulations enacted in Europe as well as the more recently passed Corporate Transparency Act in the U.S., which went into effect on January 1, 2021. The “Act” mandates a new UBO reporting requirement for reporting U.S. and non-U.S. businesses who are registered to do business with and within the country.

A failure to identify a UBO could result in the company processing transactions that violate domestic and international laws designed to combat money laundering, illegal financing, and criminal activity. Some of these include the U.S. Patriot Act, the UK Bribery Act, FCPA, UN Sanctions, and more. The company may also risk becoming isolated from the global financial community for overtly or inadvertently maintaining ties with such individuals.

In some countries, UBO details are only available for approved government officials to access under certain circumstances. Although the general trend is moving towards those registers becoming publicly available.

To mitigate any risks during a global deal, companies need a robust and auditable process for identifying who exercises ultimate control and who will benefit from any corporate transactions. The following data sources can help in-house legal and compliance teams, as well as law firms, verify a beneficial owner:

• Shareholder and subsidiary information
• Corporate ownership organization charts and structure
• Sanction lists
• Lists of Politically Exposed Persons (PEPs)
• Looking at sister companies with the same UBO
• Inspection lists
• Any news and media coverage about the company
• Information on beneficial ownership versus perceived ownership

Why is UBO due diligence critical during corporate deals?

To answer this question, consider how a failure to conduct UBO due diligence can impact a deal on both sides – for the buyer and the seller.

If a buyer has identified and is in discussions with a target, they will research and review their finances, products, corporate structure, partnerships, and sales information, among other things. If the deal moves forward without conducting further due diligence into the target's UBOs, then at a later stage they discover that an individual deemed a beneficial owner appears on a sanctions list or is politically compromised. This deal may not gain approval from local regulators and fall through.

In addition to the time, money, and effort expended to get far into a deal, it is also risky. If entered into a joint venture or partnership with a company that has a UBO that poses compliance risks, there may be serious financial, and in some cases, criminal implications for the business. A recent ruling by France's Court of Cassation determined that criminal liability is transferable to the acquiring company in an M&A. Liability does not disappear.

A failure to uncover UBOs can risk infringement of local laws and international standards and result in hefty fines in some countries. The company’s reputation is also at risk and may impact its ability to generate revenue in the future. There are also costs associated with remediation and corrective actions to be considered.

From the seller’s perspective, a failure to conduct UBO due diligence of the acquiring company or interested party can also be risky. The main reason for identifying the UBO is that it enhances a business' regulatory compliance position. Conducting thorough due diligence will also help identify any individuals who have been previously flagged. Knowing the ultimate beneficiaries behind a business and their investment status can help provide insight into whether the deal at hand presents any risks and ultimately if it is worth investing in.

Due diligence is critical on both sides as international legislators are increasingly paying attention to non-compliance and holding companies undertaking mergers and acquisitions accountable.

Post-deal UBO maintenance

Even after a global M&A deal is transacted, UBO information must be updated to reflect any changes to the ownership structure resulting from the transaction. Most countries require that any updates be reported within 30 days of the change occurring.

Ongoing maintenance of beneficiary information as required by the local jurisdiction can be a significant burden for large companies with multiple subsidiaries and assets around the world, but it should not be overlooked. UBO maintenance should form part of ongoing annual compliance work. The stakes are simply too high.

When establishing an entity in a new country or multiple countries resulting from an M&A deal, reporting accurate beneficial ownership information is critical to establishing good standing, complying with local regulations, and safeguarding your business from potential penalties and charges for non-compliance and reputational damage that hinder growth. More importantly, it demonstrates your organization’s commitment to transparency in business.

No matter where your next global deal takes you, CT Corporation’s experts have the local know-how to help support you every step of the way - from due diligence work to deal closure and post-deal integration. To learn more about how CT Corporation’s Global Transactional Services can help address your needs across the world through one central point of contact in the U.S., contact a CT Corporation specialist today.