Fragmented ultimate beneficial ownership (UBO) rules across Asia-Pacific are complicating banks’ cross-border business activities and increasing the cost of their financial crime compliance measures.
Several jurisdictions have expanded the scope of their UBO frameworks in recent months, which look to uncover the ultimate beneficiary of a transaction as the region’s advanced economies keep aligned with global standards.
However, less-developed markets’ rulebooks and UBO registries are lagging, creating a fractured operating environment for lenders doing business in multiple countries.
It comes as regulators are taking a harder line against UBO-linked infractions.
In June, the Monetary Authority of Singapore hit three banks — including DBS, OCBC and Citibank — with financial penalties linked to breaches and failures around beneficial ownership investigations.
As such, the risks facing banks whose businesses straddle highly regulated home markets and countries with ill-defined rules and lower transparency standards are growing.
In these cases, questions about a counterparty’s customer due diligence programme can be challenging to answer, and market uncertainty around these relationships and the extent of responsibility for UBO obligations is growing.
“In countries where the regulation is more mature, banks take a more conservative approach and look at other beneficial owners and associated parties around their clientele when justifying their UBO obligations,” says Chua Choon Hong, senior director and head of the financial crime practice group for Asia-Pacific and the Middle East at Moody’s Analytics.
“[But] what if the counterparty a bank is dealing with is in a country that has a weak UBO registry and anti-money-laundering framework in place? Where does the responsibility lie? The issue then becomes how far a bank must take its know your customer’s customer (KYCC) requirements when working across borders,” he adds.
Regional lenders’ business units at the highest risk of UBO-related infringements, including correspondent banking and trade finance, face elevated costs as they grapple with these risks.
“There is a commercial implication here; you cannot simply end all relationships with high-risk countries or high-risk counterparties,” says Mr Chua.
The situation is contributing to Asia-Pacific banks’ spiraling compliance burden, which, according to data from LexisNexis Risk Solutions, exceeded $40bn for lenders across China, Japan, Malaysia, Malaysia and India in 2022.
There is little sign of the problem abating in the near term. According to the Asian Development Bank, around 83% of 31 Asia-Pacific countries evaluated by the global money-laundering watchdog the Financial Action Taskforce, between 2014 and 2022, were partially compliant or non-compliant with recommended UBO standards.
Nevertheless, the watchdog is taking steps to improve the situation. Last year, it agreed to more stringent global beneficial ownership standards under its evaluation process.
In March 2023, accompanying guidelines for implementation were also published to help countries adjust to these changes.
Yet, Asia-Pacific banks are not alone in dealing with this uncertain UBO landscape. A widening scope of sectors, from real estate to accountancy and law, across different jurisdictions in the region, are now subject to UBO requirements, according to research from Moody’s Analytics.
Until improved cross-border harmonisation is achieved on UBO standards, market uncertainty and compliance costs look set to grow across the region.
