Cenbank moves to uncover hidden bank ownership structures

The Bangladesh Bank will now maintain a database of ultimate beneficial ownership (UBO) information of banks to enhance transparency in ownership structures – a move, prompted by past abuses, that aims to foster accountability and protect the financial system from similar risks in the future.

Banks will have to submit UBO information to the Bangladesh Bank within the next 10 days and then on a quarterly basis, according to a circular issued on 1 December, effective immediately.

For the first time, the central bank has issued guidelines on "Ultimate Beneficial Owners and Disclosure of Ownership Structure of Banks", detailing the reporting format and procedures for identifying ultimate beneficial owners.

The first dataset must be submitted to the Bangladesh Bank by 31 March 2025. Additionally, any changes in beneficial ownership must be reported to the central bank as soon as the entity, and thereby the bank, becomes aware of the change, according to the circular.

Previously, there was no mechanism for identifying ultimate beneficial owners. As a result, some business groups gained ownership in multiple banks by establishing shell companies.

For example, during the previous regime, Saiful Alam Masud, owner of the controversial business conglomerate S Alam Group, indirectly controlled eight banks through ownership held in the names of various shell companies, violating the Bank Company Act, which allows an individual to hold a directorship in only one bank.

He gained control of Islami Bank and Social Islami Bank through shell companies with no real business operations. While both banks were effectively under S Alam's control, his ownership could not be traced on paper.

Saiful held direct ownership in only one private commercial bank but placed his son, brother, and other company officials as representatives in other banks where he held ownership. As a result, the Bangladesh Bank was unable to monitor the single borrower exposure limit for loans taken indirectly by the S Alam Group.

The group took loans of at least Tk1 lakh crore from his banks, both directly and indirectly, abusing his ownership influence. This loan corruption ultimately led to the collapse of all banks controlled by S Alam.

In this context, the central bank introduced a guideline to identify the ultimate beneficial owners of bank ownership.

According to the circular, UBO information will be used widely to identify bank-related persons and entities, calculate single borrower exposure, large loan and significant shareholding, prior checking before issuing licence, appointment of director, etc. 

Furthermore, the Bangladesh Bank may use the information for prudential regulation and supervision purposes as well as for other cases if warranted.

Banks will have to ensure utmost accuracy and reliability in the identification of ownership structure through an appropriate review process, where applicable. 

Banks have to maintain a database of UBO information as well as preserve detailed records of all identification procedures and decisions.

The Bangladesh Bank may conduct regular and special or surprise inspections when warranted.

The managing director/chief executive officer, head of the Share Department, and company secretary of the banks will be held responsible for compliance with this circular and reporting all the required UBO information to the Bangladesh Bank. 

Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank (MTB), welcomed the central bank's initiative to ensure transparent ownership structures.

However, he told TBS, "Ensuring ultimate ownership in certain cases will be challenging for us. We will need to conduct extensive vetting before submitting the report to the central bank. Additionally, verifying all the information may not be feasible on our own, so the central bank's guidance and support will be essential. Otherwise, it will be difficult for the bank to handle the entire responsibility."

What happens when UBO regulations are violated?

Any violation of the instructions of this circular will result in punitive action under the Bank Company Act, 1991, said the circular.

If Bangladesh Bank has reason to believe that a bank's ownership structure is not sufficiently transparent or does not reflect reality, it has the right to deem the structure non-transparent. 

In such cases, the bank may be asked to modify its ownership structure to ensure transparency. Additionally, the Bangladesh Bank can require all direct and indirect shareholders to provide relevant documentation to verify their fitness and propriety. If necessary, enforcement measures may also be applied.

Banks have been asked to present this circular at the next board meeting for the information of the board members.

Why BB issued the guideline 

Explaining the purpose of the guideline, the Bangladesh Bank, in its circular, stated that non-transparency in a bank's ownership structure hinders the reliable identification of beneficial owners, the assessment of owners' suitability, the verification of the bank's capital quality, and the proper identification of all related parties.

Complex ownership chains and layers make it difficult for regulators and supervisors to trace the ultimate beneficial owners, especially when shares are held by legal entities. This opacity creates a significant barrier to both the soundness of individual banks and the overall stability of the banking sector.

Against this backdrop, financial sector regulators and supervisors in many jurisdictions are placing increasing emphasis on enhancing transparency in banks' ownership structures.

The circular also said an effective regulatory and supervisory framework should aim to ensure transparent ownership structures and prevent unsuitable persons from directly or indirectly acquiring control or exercising influence over banks, both at the bank licensing stage and continuously thereafter.

As part of implementing global best practices and enhancing transparency in banks' ownership structure, the Bangladesh Bank is issuing this guideline which has to be followed by banks meticulously and thereby assist the Bangladesh Bank in effective supervision and regulation of individual banks and the banking system as a whole.

Who qualifies as a UBO?

UBO refers to the natural person(s) who directly and/or indirectly owns or controls 2% or more shares of the bank or has influence over a legal person on whose behalf financial transactions are conducted. 

It also includes those persons who exercise ultimate control over the bank or any legal person in the bank's ownership structure if this legal person directly and/or indirectly owns or controls 2% or more shares of the bank, according to the guideline.

Non-transparent Ownership Structures include excessive layers of ownership (for example, chains of holding companies) often complicated by cross-holdings between legal entities, owners' residency in foreign jurisdictions that do not support effective crossborder cooperation on supervision, complex usage of available legal persons and arrangements (for example, special purpose vehicles, trusts) aiming to separate legal and beneficial ownership, and usage of formal and informal nominee shareholders and directors, shell companies and other instruments that do not give possibility to clearly identify ultimate beneficial owners of the bank. 

Although non-transparent shareholding structures typically use a chain of legal entities to create a corporate veil, this is not always the case. A bank may have multiple nominal shareholders with relatively small equity holdings each that act in concert to gain control in the interest of an undisclosed UBO.

Criteria for identifying non-transparent UBOs

According to the guideline, a bank's ownership structure should be considered non-transparent if it fails to allow the identification of all ultimate beneficial owners (UBOs) and any final legal entities in the ownership chain that do not have UBOs. 

Additionally, if the structure does not allow for the identification of all direct and indirect significant shareholders, or those with significant controlling influence in the bank, it would be considered non-transparent. 

The relationships between the individuals involved in the ownership chain mentioned above must also be clear; if these relationships are not, the structure would be deemed non-transparent.

The ownership documents should also be accurate; if they contain incorrect information, the structure may be regarded as non-transparent. 

If the Bangladesh Bank has reason to believe that the bank's ownership structure does not reflect reality, it has the right to request additional documents from the bank or any individual in the ownership structure.

Moreover, if the Bangladesh Bank believes that a person listed as a UBO is a nominal owner acting on behalf of another person, this would also render the structure non-transparent. 

Finally, if the Bangladesh Bank finds that at least two UBOs, who collectively own or control at least 5% of the bank's shares, have an unsatisfactory financial standing or if the legitimacy of their funds cannot be confirmed, the ownership structure will be considered non-transparent.