In­ter­na­tional Busi­ness Struc­tur­ing and Dis­clo­sure of Ul­ti­mate Ben­e­fi­cial Own­ers: cur­rent agenda

Kyiv Post Legal Quarterly - - News -

The mod­ern busi­ness en­vi­ron­ment is be­com­ing more and more af­fected by the AML reg­u­la­tory frame­work, which is be­ing widely im­ple­mented in the in­ter­na­tional fi­nan­cial sys­tem. One of the core sen­si­tive is­sues is dis­clo­sure of ul­ti­mate ben­e­fi­cial own­ers of cor­po­rate en­ti­ties, in par­tic­u­lar those based in ju­ris­dic­tions par­tic­i­pat­ing in an OECD ini­tia­tive to im­ple­ment the Au­to­matic Ex­change of In­for­ma­tion (AEOI) stan­dard. It is be­com­ing more chal­leng­ing for cor­po­rate struc­tures that have hid­den iden­ti­ties as their ul­ti­mate own­ers of as­sets to con­duct global busi­ness ac­tiv­i­ties with­out be­ing scru­ti­nized for com­pli­ance by banks and other fi­nan­cial in­sti­tu­tions. So how should a busi­ness be struc­tured in or­der to com­ply with UBO dis­clo­sure re­quire­ments, and at the same time pre­serve le­git­i­mate pri­vacy?

The in­ter­na­tional com­mu­nity’s pur­suit of trans­parency in the UBO is­sue was trig­gered by con­cerns that com­plex cor­po­rate struc­tures may be, and are be­ing used for money laun­der­ing and tax avoid­ance, caus­ing a drain on na­tional economies. Ac­cord­ing to the United Na­tions of­fice on Drugs and Crime, be­tween $800 bil­lion and $2 tril­lion is laun­dered each year. The World Bank states that 70 per­cent of large-scale cor­rup­tion cases in­volve the use of anony­mous shell com­pa­nies.

It was agreed that the best pos­si­ble op­tion to com­bat such vi­o­la­tions is to “de-anonymize” par­tic­i­pat­ing en­ti­ties by iden­ti­fy­ing UBOS, and thus re­solv­ing two key is­sues: to whom are prof­its at­trib­uted, and who can be held to ac­count for il­le­gal eco­nomic ac­tiv­i­ties.

The 2012 Fi­nan­cial Ac­tion Task Force (FATF) rec­om­men­da­tions and Guid­ance on trans­parency and ben­e­fi­cial own­er­ship re­quire that fi­nan­cial in­sti­tu­tions con­duct cus­tomer due dili­gence and record-keep­ing for the pur­poses of ben­e­fi­cial own­er­ship iden­ti­fi­ca­tion and doc­u­men­ta­tion. The United States For­eign Ac­count Tax Com­pli­ance Act (FATCA) of 2010 re­quires that for­eign fi­nan­cial or­ga­ni­za­tions and other non-fi­nan­cial for­eign en­ti­ties re­port to the IRS on the for­eign as­sets held by their U.S. ac­count hold­ers, or be sub­ject to with­hold­ing on with­hold­able pay­ments, thus dis­clos­ing the ben­e­fi­cial own­er­ship in­for­ma­tion.

FATF co­op­er­ated with Euro­pean Union pol­i­cy­mak­ers to en­sure trans­parency of the own­er­ship of cor­po­rate struc­tures. This re­sulted in the EU Fourth Anti-money Laun­der­ing Di­rec­tive 2015/849 of 20 May 2015 (4AMLD), which re­quires EU mem­ber states to keep cen­tral reg­is­ters of in­for­ma­tion on the UBOS of com­pa­nies and trusts. Data­bases of such UBO reg­is­ters shall be ac­ces­si­ble by the com­pe­tent au­thor­i­ties, en­ti­ties con­duct­ing cus­tomer due dili­gence and per­sons demon­strat­ing le­git­i­mate in­ter­est, such as jour­nal­ists in­ves­ti­gat­ing tax fraud and re­lated crimes, etc. It is an­tic­i­pated that both these na­tional UBO reg­is­ters and trust reg­is­ters will be linked at the EU level through a cen­tral Euro­pean plat­form.

Al­though June 26, 2017 was the dead­line for mem­ber states to im­ple­ment the 4AMLD into na­tional leg­is­la­tion, only Ger­many, the United King­dom and Den­mark met it. In other coun­tries, the leg­is­la­tion has al­ready en­tered into force, but spe­cific rules re­gard­ing the in­tro­duc­tion of a UBOS reg­is­ter has yet to be is­sued.

On March 9, 2017 the Euro­pean Par­lia­ment is­sued a re­port on the re­form of 4AMLD propos­ing to lower the thresh­old for an in­di­vid­ual to be con­sid­ered as a ben­e­fi­cial owner to 10 per­cent of the shares in the en­tity, as op­posed 25 per­cent as in the ex­ist­ing 4AMLD. The re­port calls for the cen­tral UBO reg­is­ters kept by mem­ber states to be made pub­licly ac­ces­si­ble ei­ther with­out charge or sub­ject to a lim­ited fee to cover ad­min­is­tra­tive costs. And a pro­posal for a Fifth Anti-money Laun­der­ing Di­rec­tive is al­ready be­ing drafted in Brus­sels.

Pop­u­lar low-tax ju­ris­dic­tions are adopt­ing leg­is­la­tion re­quir­ing that the com­pa­nies in­cor­po­rated therein main­tain UBO reg­is­ters. It was the UK who called for the cre­ation of UBO reg­is­ters for its Over­seas Ter­ri­to­ries and the Crown Depen­den­cies in early 2015. The ma­jor­ity thereof have im­ple­mented the rel­e­vant leg­is­la­tion (the Bri­tish Vir­gin Is­lands (BVI), the Cay­man Is­lands, Ber­muda, Guernsey, Jersey etc.) sup­ported by other pop­u­lar low-tax ju­ris­dic­tions in­clud­ing Belize, Mau­ri­tius and the Sey­chelles. These reg­is­ters are not pub­licly ac­ces­si­ble and are opened only for com­pe­tent au­thor­i­ties of the ju­ris­dic­tion of en­tity’s in­cor­po­ra­tion. How­ever, in some cases the UBO in­for­ma­tion may be ob­tained by for­eign state au­thor­i­ties where per­ti­nent ar­range­ments ex­ist, like the Ex­change of Notes and Tech­ni­cal Pro­to­cols agreed with the United King­dom (UK) Govern­ment by the BVI.

The UBO dis­clo­sure devel­op­ments are not lim­ited to the EU and low-tax ju­ris­dic­tions, and are greatly en­cour­aged by Panama Pa­pers scan­dal of April 2016. The leak­age of data­base of Panama-based in­ter­me­di­ary tax firm Mos­sack Fon­seca ex­posed hun­dreds of tax avoid­ance schemes in­volv­ing en­ti­ties from rep­utable ju­ris­dic­tions other than those no­to­ri­ous as off­shores. For in­stance, Canada clearly man­i­fests its in­ten­tion to set up a UBO reg­is­ter due to be­ing con­sid­ered as one of the states where it is eas­i­est to in­cor­po­rate a shell com­pany, as was re­vealed in the Panama Pa­pers.

The global trend of dis­clo­sure of ben­e­fi­cial own­ers is pro­moted not only due to the di­rect re­quire­ments for cre­at­ing UBO reg­is­ters and those re­lat­ing to fi­nan­cial due dili­gence. It is also dealt with in the OECD/G20 Base Ero­sion and Profit Shift­ing Ac­tion Plan (BEPS) – a frame­work of 15 Ac­tions ini­ti­ated in 2013 pro­vid­ing for world­wide im­ple­men­ta­tion of in­stru­ments to counter harm­ful tax prac­tices. Com­bat­ting base ero­sion and tax avoid­ance by ben­e­fi­cial own­er­ship reg­is­tra­tion is not di­rectly ad­dressed by BEPS, but it con­tains re­quire­ments im­plic­itly re­sult­ing in UBO dis­clo­sure.

Con­sid­er­ing the above, the UBO in­for­ma­tion seems to be not sub­ject even to the slight­est pri­vacy. The most cost-ef­fi­cient way to avoid pub­lic ac­cess is by go­ing off­shore, as the UBO reg­is­ters to be main­tained there are not pub­licly avail­able. How­ever, such UBO in­for­ma­tion may be ob­tained by for­eign state au­thor­i­ties by means of per­ti­nent Tax In­for­ma­tion Ex­change Agree­ments or in the course of the EOIR/AEOI frame­work.

An­other pos­si­ble op­tion is es­tab­lish­ing more com­plex cor­po­rate struc­tures in­volv­ing trusts, foun­da­tions and funds. The ju­ris­dic­tions re­quir­ing the UBO reg­is­ters nor­mally claim the UBOS of trusts, foun­da­tions and funds must also be listed therein, how­ever in prac­tice in­vest­ment man­agers may of­fer so­lu­tions where they show up in banks as UBOS for com­pli­ance pur­poses.

Some coun­tries im­pose an obli­ga­tion to doc­u­ment the steps taken to iden­tify the UBO of a trust, while the oth­ers ex­empt trusts from such doc­u­men­ta­tion, e.g. in Ger­many, thus cre­at­ing a reg­u­la­tory loop­hole. Usu­ally trusts are re­quired to keep a reg­is­ter of UBOS if they gen­er­ate tax con­se­quences or are res­i­dent in par­tic­u­lar ju­ris­dic­tion, or per­tain to a def­i­nite type of trust, like ex­press trusts in the UK. But if no such cri­te­rion is met, the trust may be ex­empt from the above.

In con­clu­sion, the UBO when choos­ing a proper strat­egy for in­ter­na­tional struc­tur­ing of its busi­ness should take into ac­count risks and chal­lenges re­lated to prov­ing a le­git­i­mate source of rev­enue gained by in­cor­po­rated en­ti­ties in fu­ture for fur­ther suc­cess­ful com­pli­ance within fi­nan­cial in­sti­tu­tions and au­thor­i­ties, when declar­ing and pro­tect­ing fi­nan­cial as­sets and plan­ning fur­ther in­vest­ments.

Volodymyr Voro­biov Se­nior Part­ner of LE­MAN In­ter­na­tional Law Group, PH.D. in In­ter­na­tional Law

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