Multiple ownership layers, incomplete Ultimate Beneficial Owner (UBO) information, or suspicious offshore jurisdictions are only a few risk examples that are linked to complex corporate structures. Sometimes, identifying who truly owns and controls another company is a difficult task, complicating Know Your Business (KYB) verification.
For example, more sophisticated techniques, like obscuring the true decision makers through layers and layers of shell companies or trusts, help money launderers successfully move illicit funds. More importantly, they do this while staying under the radar. For other companies that want to stay compliant and far away from financial crime, determining and assessing the true ownership structure can result in higher due diligence costs and extra time spent on manual risk assessments.
In this blog post, we share the three most popular ways complex structures are used to obscure true ownership and review different challenges linked to KYB compliance using concrete examples.
How a Company’s Ownership Structure Works
Ownership structure is the details about a legal entity and the people behind it, explaining who owns, controls, or benefits from that business. This includes beneficial owners, shareholders, parent companies, ultimate beneficial owners (UBOs), and other individuals with significant control over the entity. Finding out the true ownership structure helps identify natural persons or entities with significant influence or control over the company.
This process is often part of Anti-Money Laundering (AML) and KYB regulations, with specific rules like UBO verification very important in some jurisdictions. During a KYB check, a financial institution needs to analyze the ownership structure of a client company to detect complex ownership structures, such as indirect ownership layers, and identify UBOs, aka any individuals holding more than 25% of shares or voting rights.
An Example of a Company’s Ownership Structure
The ownership structure of a bank typically includes:
- Founders
- Shareholders
- Equity investors
- A parent company (if applicable)
- Government ownership (if applicable)
This helps prevent financial crime and ensure transparency, sometimes helping determine if the other entity is worth partnering with or isn’t linked to sanctions or other risks that can’t be tolerated. In general, identifying and verifying these individuals is important because they hold prominent positions and have stronger chances of being tied to financial fraud, similar to how Politically Exposed Persons (PEPs) carry higher risks of activity like corruption.
So, it’s safe to say that when businesses use overly complex structures like hidden shareholders or nominee directors, it can signal an attempt to conceal true ownership. Some businesses and their compliance teams might assess this factor and either reject such a company’s onboarding or move on with stricter additional checks to ensure the company is legitimate.
What are Some Common Ownership Frameworks?
Ownership frameworks are the legal and structural setups that show how a company works based on its business structure. They are influenced by factors like taxation or liability. That’s why some entities are considered more complex and require extra work for establishment or ongoing due diligence.
Some common frameworks are:
Limited Liability Company (LLC)
This is a very popular, hybrid business structure that separates personal and business liabilities, or, in other words, separates the business’s finances from the owners’ personal assets, protecting personal belongings from business debts.
Sole Proprietorship
This is a type of business that’s controlled and owned by a single person who is responsible for all liabilities, debts, and obligations since there is no distinction between the business and its owner. The person receives and manages all profits. From a KYB verification perspective, sole proprietorships require a different workflow due to a simpler framework.
Corporation
This is an entity legally owned by shareholders who are separate from its owners. This allows them to conduct business and pay taxes, as well as hold assets and enter new contracts. In corporations, shareholders have limited liability and profit through stock value appreciation or dividends. With KYB checks, defining the ownership structure in a corporation can be difficult, especially in layered or multinational corporate setups.
Partnership
This is a structure that has two or more individuals or entities managing and sharing the business’s profits. There are general, limited and limited liability partnerships, and that’s why the structure defines how partners share liabilities and responsibilities together. For example, a partnership is a very common choice among accountants or lawyers due to tax advantages (compared to corporations). In KYB verification, it’s important to verify both active and silent partners to prevent hidden ownership structures.
How Can You Define a Complex Corporate Structure?
A complex ownership structure refers to an opaque company setup that typically isn’t transparent, often making it hard to verify who truly owns or controls a company. This can happen when the company has multiple corporate layers, different shareholding agreements, or links to offshore entities. The issue with complex ownership is that it carries increased compliance risks and can present further challenges, like difficulties when trying to assess and verify company UBOs.
When dealing with such structures, you need to:
- Uncover and trace hidden ownership by detecting key AML red flags, like secrecy jurisdictions or offshore entities.
- Use Enhanced Due Diligence (EDD) checks to assess risks, such as money laundering or tax evasion, using more thorough measures.
For example, if OceanGate Holdings BVI owns OceanGate Cyprus Ltd, which in turn owns OceanGate Germany GmbH, you might struggle to identify who ultimately controls the German company because the British Virgin Islands and Cyprus do not provide full public access to records through official company ownership registers.
Some registers are either gated or provide incomplete information, which makes it hard to deal with complex corporate structures in KYB compliance. In contrast, for example, limited companies and LLPs in the UK are required to maintain and publish complete ownership information with the Companies House, since they have limited liability protection. This requirement adds a sense of accountability, making the entity more trustworthy, not to mention making the verification of beneficial ownership much easier.
Top Ways Complex Ownership Structures Hide the True Owners
There are certain techniques that are widely popular among different companies and corporate structures, and they are used to conceal the true people behind the entity. Often, this is done to avoid the public eye, or worse, due to financial gain and the benefits the owners get by committing fraud.
For this reason, it’s important to assess companies and conduct proper KYB checks. Part of that, it’s extremely important to know the main ways in which complex corporate structures are used to conceal ownership.
For example, some entities:
1. Use Trusts to Separate True UBOs from Legal Owners
Trusts are used for legitimate purposes. For example, for asset protection or estate planning. However, they can be used to hide ownership and conceal a company’s financial control. For example, entities use trusts and special nominee arrangements and appoint a trustee/nominee to legally hold assets on behalf of another person. This separates the legal owner and the true UBO, making it mandatory to dig deeper in order to assess the true beneficial ownership.
For example, if a trustee holds shares in a company on behalf of an undisclosed beneficiary, paired with offshore entities or nominee directors, the risk of misuse in the entity increases.
That’s why your KYB verification consists of several steps, such as:
- Assessing the purpose of the trust
- Identifying all parties involved
- Examine links to high-risk jurisdictions
- Monitoring changes in trustees
2. Use Cross-Border Structures to Complicate Transparency
Another technique is multi-jurisdictional layering, which involves using several tiers of corporate, trust, or nominee entities across different countries. Since each layer is established in a different legal system, it’s hard to determine who owns the business. That’s because access to ownership records is limited, creating the extra hassle for those trying to trace the real owners behind the entity.
Extra triggers can serve as red flags or simply highlight the challenges of managing cross-border structures. For example:
- Jurisdictions with weak disclosure requirements amplify the opacity risk.
- Manual labor is required for EDD tasks, such as document collection, database cross-matching, UBO verification, etc, which adds up to a lot of time spent on a business that doesn’t fit the risk appetite.
In practice, a company’s compliance officers need to collect documents from multiple jurisdictions, look for common directors or addresses, and analyze transaction flows to identify UBOs, which then need to be verified through a proper KYC check. That’s why each country or jurisdictional layer raises the time, cost, and overall technical difficulty of the KYB onboarding.
3. Use Shell Companies Without Real Operations
This is one of the most common methods for concealing ownership. While the concept of a shell company isn’t a bad thing itself, as it can be used for acquisitions or mergers as well as for holding assets, shell companies are often considered a risk due to their potential use for money laundering. A shell company, in this context, means that it can exist only on paper as a front without real employees and financial transactions, and proper business operations.
That makes shell companies one of the most common tools for:
- Hiding ultimate beneficial ownership, making it difficult to identify who truly benefits from the entity and its transactions.
- Concealing the source and movement of funds, concealing the fact that sometimes a shell company doesn’t even have legitimate economic activity.
For example, a shell company in Country A might be owned by another shell in Country B, which is then controlled by a trust in Country C. This way, each jurisdiction adds a new layer of secrecy that doesn’t help compliance teams when they need to assess ownership structures. So, if no valid business purpose is found, this sort of structure can signal potential risks of tax evasion or money laundering.
How Can You Solve Challenges Linked to Complex Corporate Structures?
Like with many due diligence processes, there’s no secret hack. Assessing complex corporate structures in practice means that automated KYB software, like iDenfy, is required, along with other vital practices, such as EDD measures for high-risk entities and ongoing monitoring after the initial onboarding stage. This helps detect risks and ensure ownership transparency even across multi-jurisdictional or layered entities, helping you determine whether the company is legitimate and fits your internal risk appetite.
There are practical steps you can take to achieve this goal and have a compliant KYB verification workflow. For example:
- Verify UBOs and identify all individuals with significant control in the company (use shareholder records, trust deeds and corporate filings)
- Review regulatory filings, such as incorporation documents or annual reports and check global registries (works well for finding links to indirect ownership)
- Use an automated KYB system to save time and identify shareholders across several jurisdictions faster (this also helps track changes in client profiles in real-time once the software, like iDenfy’s KYB solution, flags risks and inconsistencies)
Within this framework, other AML processes, like screening entities and individuals against sanctions lists, are vital. Applying a risk-based approach helps prioritize dealing with edge cases and entities that require extra manual reviews based on risk factors like ownership opacity, suspicious transaction frequency, or jurisdictional exposure. In practice, to uncover who truly owns and controls a business means deconstructing even the most complex corporate structures.
The Bottom Line
For large companies that juggle multiple applications and need to onboard a high volume of corporate clients, digging through corporate structures for KYB isn’t a new thing. However, it doesn’t necessarily mean that it needs to be a long process, causing the team to wake up with headaches. The solution is using automation for KYB onboarding. Automated solutions are designed to deconstruct complex ownership structures, helping companies stay compliant with evolving UBO, sanctions, and cross-border regulations.
Rather than wasting hours scrolling through registries and managing long email threads, automated tools leverage AI to spot inconsistencies, produce insightful reports, and guide the next steps in EDD. For example, red flags like unrelated shareholders in several high-risk entities across multiple countries can be easily identified by iDenfy’s system, not allowing compliance officers to miss important points.
This is only a fraction of the KYB package that you get, among features like pre-made onboarding templates based on different industries and clients, built-in KYC verification for directors and UBOs, automated business document collection, bank account verification, streamlined access to Secretary of State (SOS) portals, and much more.
Want to learn how you can get passed ownership loops and hidden corporate structures? Book a free KYB demo right away.
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