Getting to ultimate beneficiary: Goal and means
Disclosure of information on ultimate beneficiaries is recommended by Financial Action Task Force on Money Laundering and Organization for Economic Cooperation and Development
Ukraine came up with an innovative initiative in the worldwide campaign tackling underground economy. The government cannot rely, therefore, on solution available elsewhere: at the glance, the move falls short of the ambitious objectives it sets standing alone against the legal incentives in the off-shore jurisdictions.
Pursuing anti-corruption and anti-money laundering reform in the wake of elections, the government had advocated the bill that obliges the businesses to disclose their beneficial owners. On the day when Verkhovna Rada passed the law, Prime Minister Arseniy Yatseniuk stated that an “off-shore era in Ukraine has ended; now every civil servant will be under the microscope. Those who illegally hold something will be brought to justice”.
Although domestic politics played the major role, – the post-revolutionary demand for anti-corruption policy as well as electoral campaign of the incumbent Petro Poroshenko’s Block and People’s Front ‑ new piece of legislation is also aimed to reap international praise. Accordingly, expected implementation need to be analysed from both angles: domestic law-enforcement and international standards.
Substance of the Rules
Ultimate beneficiary was defined as an individual who has a ‘substantial influence or control’ over the company. Any attorney, agent or intermediary cannot qualify as the beneficiary. The influence is sufficient, if an individual has 25% or more shares or votes. The law has also obliged the businesses to report on ‘material stakeholders’ that behold at least 10% of the shares or votes.
The law refers to ultimate beneficiaries as persons exercising a ‘substantial influence or control’ over the entity, but does not include beneficiaries without control or excercising a limited control over the entity, such as in the trust or charity foundation. The trust or the charity foundation is not controlled by its founders, but can be created for the benefit of certain legal or natural persons (beneficiaries) and is often used for the family-owned businesses. Similar exemption is granted to the special-account mutual investment funds (paiovi investytsiini fondy), which are not legal entities and, thus, do not have to disclose their beneficiaries.
This issue has been highlighted by the European Parliament which is planning to extend definition of the beneficial owners. According to Fourth European Union Anti-Money Laundering Directive the beneficial owners should cover not only determined beneficiaries, but also beneficiaries of charity and other foundations which operate for the benefit of the class of persons. That is, the EU looks that the beneficiary can be a group or a person, a notion that champion of the bill – Ukrainian Government – could not miss but managed to ignore.
As of 25 November 2014, all privately-owned companies (legal entities) must identify their ultimate beneficiaries and subsequently update this information on the regular basis; such entities are responsible for keeping appropriate records. If new legal entity is established or the company amends any other data in the Companies’ Register, the founders or the company respectively must report ultimate beneficiaries and holders of substantial stakes to the state registrar.
Full name, citizenship, passport details and residence address of ultimate beneficiaries and material stakeholders will be publicly available.
Failure to submit proper information to the state registrar can result in imposing a fine of up to EUR 500 on the company’s manager.
Disclosure of information on ultimate beneficiaries is recommended by Financial Action Task Force on Money Laundering (FATF) and Organization for Economic Cooperation and Development (OECD) – the international bodies active in fighting terrorism and international financial crimes. In an outset, the law, jointly with the anti-corruption bills and restated law on financial monitoring, is a tremendous leap in fighting against corruption, terrorism, money laundering and tax evasion. Not the least, it would be welcomed by the International Monetary Fund and other donors.
In the practical domain, the Ukrainian laws circumscribe the privacy stronger than other countries fighting tax evasion. The tax havens, being the lower end of the anti-money laundering fight, do not reveal information unless the criminal investigation is in the progress. Many other countries, even when collect or intend collection of such information, will not make it fully available to the public. With the higher standards of disclosure, Ukraine eventually may lose sympathy of the private investors and family-owned companies; however, in the first years it would be hard to determine the share of the capital flight that can be attributed to this transparency.
Clearly this law will not bring the off-shore age in Ukraine to the end: other countries that offer more privacy will create stumbling blocks for investigation of the data submitted to Ukrainian register. Although such material barriers may remain for years or even decades, a a lot can still be improved. There is an obvious gap in the bilateral instruments between Ukraine and its trade partners with respect to international cooperation: exchange of information, technical and legal assistance, extradition of criminals, recognition of the judgements. One example of the treaties between Ukraine and Cyprus, the largest net importer of capital in Ukraine provides a good picture where the implementation of the law can fall short: nominal shareholders, directors, corporate secretaries and corporate (as opposed to personal) management may disguise the ultimate beneficiary (just as this was happening so far). Ukraine has no instrument to induce or extract truthful information from Cypriot subjects. Responsible Ukrainian diplomats, regulators and law enforcement bodies need to follow the goals of the law or, to put it differently, must catch up with their long time outstanding objectives to ensure the rule of law.
Domestic Enforcement Plains
Registrars must be sufficiently trained to properly implement the law: so that the disclosure does not turn into burdensome but formal submissions, as it happened in the case with identification for the financial monitoring purposes. Neither the business community will welcome registrar’s zealousness, nor should beauracratic approach discriminate compliant entities, while perpetrators will face no jeopardy. The registrars, financial monitoring, fiscal and competition authorities, and law-enforcement bodies must develop mechanics and procedures for random cross-check of information on beneficiaries within Ukraine. The registrars also need to acquire expertise (obviously currently lacking) in interacting with relevant foreign and international bodies directly and through the relevant government agencies. Though, the latter agencies never appeared effective or knowledgeable about procurement of information abroad. Possibly, special enforcement units must be created within authorities involved with identification of the ultimate beneficiary from this or the other angle, namely, State Registration Service (corporate registers), State Committee on Financial Monitoring (anti-money laundering), Anti-Monopoly Committee (market power), State Fiscal Service (transfer pricing), National Bank (insider deals and anti-money laundering) etc. This way the government should ensure that the disclosure of the beneficiary does not end with submission of information to the registrar but is foul proof.
Was there a stick?
The law targeted multi-national or, at least, transnational corporate structures. However, the infringing companies will be subject only to an insignificant fine for a failure to submit mandatory information. Liability for misleading information and similar offences had been omitted. Notably, the parliament has not approved criminal liability for “non-submission or submission of a known to be false beneficial ownership information” which was deleted from the final draft of the law before its approval.
The corporate officer is unlikely to be held liable without a wilful misconduct or negligence. In order to comply, existing Ukrainian company has to request beneficial ownership information from its shareholders up the stream of the ownership but can do little if the data has not been granted or its provision has been delayed.
A bold ideawas suggested by the UK Corporate and Individual Tax Transparency Bill: directors and beneficial owners of the company become personally liable for the debts of the company, if they fail to deliver required information. The Bill was an effort to qualify instransparency as a fraud but the UK Parliament scrapped the proposal arguing an extra compliance burden on the taxpayers. In Ukraine, the insolvency law and, in the past, in the Commercial Code reflected the inception of the “piercing the corporate veil” principle, i.e. ignoring limited liability of each legal entity with its assets only; however, such principle has never enjoyed a meaningful application. In our view, this and similar dependence on the shareholder (e.g. insolvency of the subsidiary through insider deals) can be two instances when the beneficial owners cannot limit their liability with the – monies paid for shares; moreover, a general principle should be reinstated in the Commercial Code: the upstream group pays, based on the subsidiary liability principle, for the debt of Ukrainian affiliate that has resulted from the upstream willful or negligent actions or omissions.
The law will, and there is no doubt to it, contribute to the transparency of business environment in Ukraine. However, it is only a first step to catch up with OECD practices and the law can half-achieve its goals only through the development of the government institutions as well as expansion of the bilateral cooperation with the trade partners of Ukrainian state. While the law is quite clear procedurally, the law will benefit from expansion of its substantive norms as well as from ultimate beneficiary’s stimuli to comply. In particular, the law could contain a ‘time bomb’ for the beneficiaries acting in bad faith.
 http://uk.reuters.com/article/2014/10/14/uk-ukraine-crisis-idUKKCN0I31IZ20141014 (visited on 18 November 2014).
 The law refers to the law on financial monitoring for the definition of “material stake holder”. However, this definition will lapse on 7 February 2015 when a Restated Financial Monitoring Law (also adopted on 14 October 2015) will become effective. It is unclear, therefore, how the material stake will be determined thereafter. One possibility is an analogy to the financial institutions (10 per cent or above). The other is amendment of the Restated Financial Monitoring Law.
 Moreover, the anti-money laundering law also legitimized circulation of the investment certificates issued by such investment vehicles without identification of the ultimate holders.
 Article 3(5)(b) of the Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing /COM/2013/045 final – 2013/0025 (COD) / http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52013PC0045 (visited on 18 November 2014)
 Single State Register of Legal Entities and Private Entrepreneurs in Ukraine (aka EDRPOU).
 Equivalent in UAH at current rate.
 The liability for various manipulations with data is well-established in the anti-trust and anti-money laundering laws as well as in the Tax Code, all of which deal with disclosure of the controllers and beneficiaries; therefore, omission in this does not come out of incompetence or poor drafting.
 http://services.parliament.uk/bills/2013-14/unitedkingdomcorporateandindividualtaxandfinancialtransparency.html (visited on 18 November 2014)
The authors do not work for, consult to, own shares in or receive funding from any company or organization that would benefit from this article, and have no relevant affiliations