Aligning ESR & UBO Across Structures

The New Regulatory Reality

Regulators worldwide are increasingly scrutinizing the relationship between beneficial ownership and economic substance. The days of maintaining separate compliance silos for ESR and UBO are over. Today, substance must align with ownership.

Why Alignment Matters

When beneficial owners are disclosed in one jurisdiction but substance is demonstrated in another, regulators raise red flags. This misalignment can trigger:

• Enhanced regulatory scrutiny
• Audit requests and information exchange
• Potential penalties for non-compliance
• Reputational risks

Practical Alignment Strategies

1. Ownership Structure Review

Begin by mapping your beneficial ownership structure. Identify all natural persons who exercise ultimate control, and ensure this aligns with who is directing and managing the entity for ESR purposes.

2. Substance Documentation

Document how beneficial owners contribute to the entity's substance. This may include their role in board meetings, strategic decision-making, and day-to-day operations.

3. Cross-Jurisdictional Consistency

For entities operating across multiple jurisdictions, ensure that ownership disclosures and substance claims are consistent. Avoid situations where ownership is disclosed in one jurisdiction but substance is claimed in another without proper justification.

Common Misalignment Scenarios

Scenario 1: Nominee Structures

Entities with nominee shareholders must ensure that the ultimate beneficial owners are properly disclosed and that substance aligns with the actual beneficial owners, not the nominees.

Scenario 2: Multi-Jurisdictional Operations

Entities operating in multiple jurisdictions must carefully structure their operations to ensure substance requirements are met in the jurisdiction where beneficial ownership is disclosed.

Scenario 3: Family Office Structures

Family office structures often involve complex ownership arrangements. Ensure that the family members who are beneficial owners are actively involved in the entity's substance.

Implementation Roadmap

1. Conduct a comprehensive review of current ownership and substance positions
2. Identify any misalignments or gaps
3. Develop a plan to align ownership and substance
4. Implement changes and document the alignment
5. Establish ongoing monitoring procedures

Looking Ahead

As regulatory enforcement intensifies, alignment between ESR and UBO will become increasingly important. Entities that proactively address this alignment will be better positioned to navigate regulatory scrutiny and maintain compliant structures.

Conclusion

The alignment of ESR and UBO is not just a compliance exercise - it's a strategic imperative. Entities that fail to align ownership and substance risk regulatory action, reputational damage, and operational disruption. Start the alignment process today.