By Virginia La Torre Jeker, J.D., Dubai
Why should anyone care about government-mandated beneficial ownership registers for legal entities?
Why might a multinational enterprise have concerns with such registers? Current news tells us more and more of them are in the works.
After years of dragging their heels, and to the surprise of many in the international community, the British Crown Dependencies of Jersey, Guernsey, and the Isle of Man announced on June 19 that they will provide public access to beneficial ownership registers. On June 11 the United States made the first steps with proposed legislation to implement beneficial ownership registers. Should you be concerned? Read on and learn why you should!
For starters, the paperwork, time and expense required to gather and regularly update the governmentally required information will be a significant burden for many businesses, especially smaller businesses that lack teams of lawyers and personnel to assist in this task. Some businesses will fall by the wayside as ever-increasing compliance burdens swallow them up. At the end of the day, economic growth will be slowed down.
Of equal concern is the real threat for a massive breach of privacy and along with it concerns about ransom demands, extortion, and theft of the wealthy. Broad access to personal information is at stake.
Depending on the precise legislation in the particular jurisdiction, information contained in beneficial ownership registers can potentially be accessed by law enforcement agencies (without a subpoena and for just about any reason), certain businesses (e.g., banks and law firms carrying out due diligence for clients) and even members of the public.
As for multinationals, many are not public and are owned by individuals; these individuals will undoubtedly have strong privacy concerns. Multinationals that are not individually-owned may be owned by hedge funds or parent companies that may not want to be exposed.
In corporate acquisitions, for example, it is common for multinationals to create special purpose vehicles precisely to hide the true buyer to simplify negotiations and help ensure the seller won’t try and increase the price. If owners are disclosed, strategies like this will become far more difficult, if not impossible, to implement.
This month of June evidenced significant international developments concerning beneficial ownership registers. Let’s first have some background before detailing the latest.
Who started it?
Beneficial ownership registers started with the European Union and its Anti-Money Laundering Directives. The Fourth Anti-Money Laundering Directive, which entered into force in June 2017, introduced the concept of the beneficial ownership register. It required corporations and other legal entities to maintain accurate and current information about their beneficial owners.
The information must be provided to the government of each EU member state and held by each member state in a central register. Generally, these registers contain the names, dates of birth, nationality, country of residence, and the nature and extent of the beneficial owners’ interests. Per the Fourth Anti-Money Laundering Directive, the register would be accessible by banks, law firms and “any person or organisation that can demonstrate a legitimate interest”.
The text of the Fifth Anti-Money Laundering Directive was published in June 2018, giving member states 18 months to enact the laws necessary to carry it out. Some countries have already done it. Among other things, the Fifth Directive goes a step beyond the earlier directive by permitting the public to have access to the beneficial ownership registers of companies even without having to demonstrate any kind of ‘legitimate interest’.
Trusts will also be required to meet greater transparency obligations, including the beneficial ownership mandates, but access to information is more circumscribed when the entity is a trust.
Generally, beneficial ownership registers for corporate entities must be made accessible to the general public (regardless of any legitimate interest) by January 10, 2020; the register for trusts and similar legal arrangements shall be made accessible to persons with a legitimate interest (as defined by each EU member State) by March 10, 2020.
The Crown Dependencies just hopped on board
On June 19, the governments of Jersey, Guernsey and the Isle of Man surprisingly announced a series of steps regarding each jurisdiction’s central register of beneficial ownership information of companies. Each island does not currently publish information about the real owners of companies incorporated there.
In the announcement, each of the Crown Dependency islands laid out the stages to be deployed in developing international standards of accessibility and transparency in line with the EU Directives. Briefly, they are:
- First, implementing the “interconnection” of the Crown Dependencies’ beneficial ownership registers of companies with those registers within the European Union, for access by law enforcement and other governmental authorities;
- Second, providing access for corporate due diligence purposes, primarily to financial service businesses and other prescribed businesses (e.g., law firms, notaries);
- Finally, implementing public access to the beneficial ownership registers in alignment with the approach taken in the Fifth Anti-Money Laundering Directive.
It has been pointed out by critics that these plans omit firm dates by which the registers will be open to public scrutiny, and lack detail on the format the beneficial ownership registers will take. It is believed that the registers are likely to come online from 2022, by which time the Fifth Anti-Money Laundering Directive would be in force across EU member states.
The United States and beneficial ownership registers – on the way?
Under the current US system, one can form a corporation or limited liability company and not have to name a single beneficial owner.
Obviously, this is in stark contrast to the EU practice outlined above. Unsurprisingly, the US system has come under fire by members of the international community and the US stands accused of fostering illicit financial transactions, tax evasion, and terrorist activity.
The US states of Delaware, Nevada, and Wyoming have frequently been highlighted as hot spots for secretive “shell” companies, where nominee officers and directors stand as strawmen hiding the identities of the true owners.
The United States’ Corporate Transparency Act of 2019
On June 11, H.R. 2513, the “Corporate Transparency Act of 2019” (the “Act”) got the “yes” vote in the House Committee on Financial Services.
This is the initial step in the legislative process before it may be enacted into law. The full text of the Act is here.
and its progress through the legislative process can be tracked here.
One predictive intelligence source gives it only a 12% chance of surmounting all of the hurdles before ultimate passage into law, while another source gives it a 34% chance. While these may be good predictions, complacency is not the order of the day.
Disclosure of beneficial owners to the US government
The Act, if passed, would amend the United States Bank Secrecy Act of 1970, the United States’ first anti-money laundering legislation. The Act would add a new section requiring companies (corporations and limited liability companies, LLCs) to annually reveal information about their beneficial owners.
Non-US entities registering to do business as a corporation or LLC under state or tribal law would be required to give similar information. As a backstop, the Act would prohibit corporations and LLCs from issuing share certificates in what is called “bearer” form.
Disclosure would be required annually and would include the identity of the entity’s beneficial owners by providing their name, date of birth, unexpired passport or driver’s license number and current address. The information would be sent to the Financial Crimes Enforcement Network, or FinCEN, a bureau of the US Department of Treasury with primary responsibility to detect and combat money laundering and financial crime.
The beneficial ownership information collected by FinCEN would be made available to federal, state, tribal, and local law enforcement agencies.
In addition, with their customer’s consent, the information would be made available to financial institutions to assist in the institution’s compliance with the customer due diligence mandates of the Bank Secrecy Act. Thus, under the Act, access to the beneficial ownership register is far more carefully circumscribed when compared to the EU.
Unlike the EU Anti-Money Laundering Directives, the US amendments do not contemplate general public access to information in the beneficial ownership registers. Such limitations would go a long way in keeping the US as a safe-haven for anonymity when compared to other jurisdictions, thereby keeping it as a great place to create a legal entity. Might I detect a financial motivation here?
Keep your eye on developments. This is sure to be a hot topic in the world of multinationals and their owners.
— Virginia La Torre Jeker, J.D. is a United States international tax practitioner located in Dubai.
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