How companies hide UBO’s - Legal Counsel Guides 12
Eduard Grigoryan
International Legal Counsel (PQE 7) | Ph.D. in Law Candidate | LL.M. in International Private Law | SQE Candidate
What is an Ultimate Beneficial Owner (UBO)?
An Ultimate Beneficial Owner (UBO) is the individual or individuals who ultimately own or control a company or other legal entity. The concept of UBO is fundamental in corporate transparency and anti-money laundering (AML) regulations because it identifies the true owner behind a corporate structure, often hidden behind layers of legal entities, nominees, or other intermediaries.
Key Characteristics of a UBO:
Ownership or Control: A UBO typically holds a significant percentage of shares or voting rights in a company, often defined as 25% or more, depending on the jurisdiction.
Indirect Ownership: The UBO might not be the direct shareholder. Instead, they may control the company through various layers of ownership, such as trusts, foundations, or holding companies.
Legal and Economic Interest: A UBO benefits from the assets or profits of the company, even if they do not hold a formal title or appear in the company’s public records.
Why Do Companies Conceal the UBO?
Companies or individuals may seek to conceal the identity of the UBO for several reasons, some of which can be legitimate, while others may raise legal and ethical concerns:
1. Privacy and Confidentiality:
Personal Security: High-profile individuals may wish to keep their business interests private to protect themselves from unwanted attention, harassment, or potential threats.
Commercial Sensitivity: Companies might conceal the UBO to protect sensitive commercial strategies or negotiations. For example, if a competitor knew who the UBO was, they might gain strategic advantages.
2. Tax Optimization:
Tax Planning: In some cases, UBOs may structure their ownership through multiple jurisdictions to take advantage of lower tax rates or tax incentives offered in different countries. While this can be legal, it often involves complex arrangements that obscure the UBO’s identity.
Avoidance of Double Taxation: By concealing the UBO, it might be possible to structure business activities in a way that avoids or reduces the burden of double taxation.
3. Asset Protection:
Protection from Legal Claims: UBOs might hide their identity to protect their assets from creditors, litigation, or divorce proceedings. By distancing themselves from the assets through legal entities, they can make it more difficult for claimants to pursue them.
Mitigation of Political or Economic Risk: In countries with unstable political or economic conditions, UBOs might conceal their ownership to protect their assets from expropriation or other government actions.
4. Regulatory Avoidance:
Circumventing AML Regulations: Some UBOs may attempt to hide their identity to avoid anti-money laundering (AML) checks, which are designed to prevent illicit activities like money laundering, terrorism financing, and corruption.
Evasion of Sanctions: Individuals or entities under international sanctions may use complex structures to conceal their ownership of assets, thereby continuing to do business in violation of sanctions.
5. Illicit Activities:
Money Laundering: Concealing the UBO is a common tactic in money laundering schemes, where the goal is to obscure the origin of illegal funds by passing them through various entities.
Tax Evasion: In some cases, the primary motive for hiding the UBO is to evade taxes by concealing income or assets from tax authorities.
Legal and Ethical Considerations
While there are legitimate reasons for privacy, the concealment of UBOs is increasingly viewed with suspicion, especially in the context of global efforts to combat financial crimes. International standards, such as those set by the Financial Action Task Force (FATF), require countries to implement measures that ensure transparency and allow authorities to identify UBOs, even in complex corporate structures.
How companies hide UBO’s?
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1. Nominee Shareholders and Directors
Nominee Shareholders: A nominee shareholder is an individual or legal entity registered as the legal owner of shares on behalf of the actual owner (the UBO). This arrangement is formalized through a nominee agreement or declaration of trust, which specifies that the nominee holds the shares in trust for the UBO. The nominee's name appears in the company's official records, while the UBO retains all economic benefits. This practice is legal in many jurisdictions, provided it is not used to evade tax or engage in illegal activities.
Nominee Directors: Similarly, a nominee director is appointed to the board of a company in place of the UBO. The nominee director acts under the instruction of the UBO, often formalized through a service agreement. This allows the UBO to exert control over the company without being listed as a director, thus maintaining anonymity.
2. Trusts and Foundations
Offshore Trusts: A trust is a legal arrangement where a trustee holds assets for the benefit of beneficiaries, as per the trust deed. Offshore trusts are set up in jurisdictions with strong privacy laws. The UBO may create a discretionary trust, where the trustee has full discretion over the distribution of assets, and the UBO is not necessarily listed as a beneficiary, thus shielding their identity. The legal separation of ownership (by the trustee) and benefit (to the beneficiaries) is a key feature of trusts that obscures the UBO’s direct connection to the assets.
Foundations: Unlike trusts, foundations are legal entities with their own legal personality, typically used for charitable purposes or private wealth management. In some jurisdictions, they offer privacy advantages similar to trusts. The UBO may establish a foundation, which in turn holds shares or assets. The foundation is governed by a board, but the UBO can influence its operations indirectly, often through confidential letters of wishes or similar instruments.
3. Layered Corporate Structures
Multiple Jurisdictions: UBOs often create complex corporate structures by establishing multiple companies across various jurisdictions, each with different ownership and disclosure requirements. These companies may own shares in each other, creating a chain of ownership that obscures the UBO's identity. For example, a company in one jurisdiction might be owned by a holding company in another, which is in turn owned by a trust in a third jurisdiction. Each layer provides legal distance between the UBO and the assets.
Special Purpose Vehicles (SPVs): SPVs are created for specific transactions, often in structured finance or securitization. These entities are legally separate from the parent company and may be used to isolate financial risk. In UBO concealment, an SPV can be owned by another entity, such as a trust or a holding company, adding another layer of complexity. The SPV’s purpose might obscure its connection to the UBO, making it difficult for investigators to trace the ownership chain.
4. Bearer Shares and Instruments
Bearer Shares: Bearer shares are physical share certificates that confer ownership to whoever physically holds them. Unlike registered shares, bearer shares do not require the owner's name to be recorded in any registry, making them highly attractive for those wishing to remain anonymous. While many jurisdictions have outlawed or heavily restricted the use of bearer shares due to their potential for misuse, they are still legal in some places. These shares can be held in a trust or in a secure location, making it nearly impossible to trace the true owner without possession of the certificate.
5. Trusts Combined with Powers of Attorney (POA)
Trust + POA: In this arrangement, a trust is established to hold assets, and a Power of Attorney (POA) is granted to a third party to manage those assets. The POA holder, often a lawyer or trusted advisor, has the authority to act on behalf of the trust, making decisions and signing documents without disclosing the UBO’s identity. The trust deed may remain confidential, and the POA adds a layer of operational anonymity, particularly when the POA holder is in a different jurisdiction.
6. Proxy Voting and Nominee Arrangements
Proxy Voting Agreements: Proxy voting allows one person to vote on behalf of another, typically in shareholder meetings. In the context of UBO concealment, the UBO grants proxy voting rights to a nominee or another entity, which then votes in the UBO’s interest. This arrangement is formalized through a proxy agreement and can be used to influence company decisions without the UBO’s direct involvement being publicly recorded. Combined with nominee shareholders, this method ensures that the UBO remains out of public view.
7. Bearer Shares Held in Trust
Bearer Shares in Trust: This involves placing bearer shares into a trust managed by a trustee. The trustee holds the physical share certificates and manages the assets according to the trust deed. Since bearer shares are anonymous by nature, and the trust adds a layer of confidentiality, this method makes it extremely difficult to trace the UBO. The trustee’s role is governed by trust law, which often includes a duty of confidentiality, further protecting the UBO’s identity.
8. Anonymously Managed Offshore Accounts
Offshore Accounts: Offshore accounts are often used to manage assets held in trusts or corporate structures. These accounts are opened in jurisdictions known for banking secrecy, where the identity of the account holder (the trust or the company) is protected by law. A POA can be granted to a representative in the offshore jurisdiction, allowing them to manage the account without revealing the UBO’s identity. The combination of offshore banking secrecy and legal mechanisms like trusts ensures that the UBO’s connection to the assets remains hidden.
9. Confidentiality and Secrecy Laws
Bank Secrecy: In certain jurisdictions, banking laws are designed to protect the confidentiality of account holders, making it difficult for foreign authorities to access information about the UBO. These laws are often exploited to hide ownership of assets or companies by keeping the UBO’s identity out of public records.
Corporate Secrecy: Some jurisdictions do not require public disclosure of the beneficial owners of companies, or they have corporate registries that are not accessible to the public. This lack of transparency allows UBOs to operate companies or hold assets without their identities being revealed.
10. Legal Loopholes and Jurisdictional Gaps
Jurisdictional Arbitrage: UBOs may take advantage of differences in legal and regulatory frameworks between countries to create structures that are difficult to penetrate. By setting up trusts, companies, and SPVs in jurisdictions with weak disclosure requirements or strong privacy protections, UBOs can legally shield their identities. This practice, known as jurisdictional arbitrage, involves carefully selecting jurisdictions that provide the most favorable conditions for maintaining anonymity.
Each of these mechanisms exploits specific legal features or loopholes to create layers of separation between the UBO and their assets, making it difficult for authorities to trace the true ownership. While they can be legally set up, these structures are increasingly scrutinized under international efforts to enhance transparency and combat financial crimes.
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This is such a vital topic, and transparency in corporate ownership cannot be stressed enough. 👏 Eduard Grigoryan (LLM, Ph.D. Candidate)