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