Context of Beneficial Owner Transparency
The growing pressure on governments and companies to increase transparency has resulted in a global shift towards increased disclosure around beneficial ownership.
In this context, the European Union has recently revisited its legal framework on anti-money laundering and counterterrorist financing with the Fourth and the Fifth Anti-Money Laundering Directives, also known as the “AML” Directives.
While the Fourth AML Directive requires each Member state of the European Union to establish a register of beneficial owners of companies and other legal entities, the Fifth AML Directive will push transparency one step further by making the registers accessible to the public. This new level of transparency will come into force in 2020.
These regulatory changes on beneficial ownership transparency impact the way companies report on their shareholders and the level of transparency granted to the general public.
Examples for Asset Managers
In Luxembourg, where the register of beneficial owners was recently established, all companies, including mutual funds and the Luxembourg branches of foreign entities, must comply with the new disclosure requirements.
The companies must provide the register with data on their beneficial owners, including name, surnames, nationality, place of birth and country of residence.
However, not all shareholders are in the scope of the disclosure requirements. A beneficial owner is defined as any natural person who ultimately owns or controls, directly or indirectly, more than 25 percent of the shares or voting rights of the entity or who controls it by other means. If no natural person owns more than 25 percent, the person holding the position of senior managing official is named in the central register.
For investment funds, this definition of beneficial owner applies to the overarching legal entity registered, at the “umbrella” level
A simple example
A dedicated fund in Luxembourg is created by two partners, each owning 50 percent of the shares. They must disclose their personal information to the register of beneficial owners. This information will be publicly available.
A vast scope to this legislation
Indeed, for example, if an External Asset Manager decides to invest, for one of its clients, in a Luxembourgish company (e.g. private company, investment fund) in a way the client finally controls the company, directly or indirectly (e.g. client owns more than 25% of voting rights), the board of directors of this company will report client’s personal information to the register of beneficial owners, and this information will be publicly available.
Cascading through multiple levels of ownership
For example, if a client owns a Luxembourgish holding company which owns an investment fund incorporated in Luxembourg that invests over 25% in a Luxembourgish private company (owning >25% voting rights), the board of directors of each entity will report client’s personal information to the register of beneficial owners. Indeed, each Luxembourgish company has the same reporting obligation and the beneficial owner must be considered applying a transparency principle (any natural person who ultimately owns or controls, directly or indirectly, more than 25 percent of the shares or voting rights of the entity or who controls it by other means).
The difference between having 25% of shares, 25% of AuM and 25% of voting rights
For example, if a client is the sole investor of a sub-fund of a Luxembourgish umbrella, but this sub-fund only represents 15% of the total AuM of the umbrella (e.g. sub-fund C), the client will not be reported to the register of beneficial owners. However, if the number of shares of this sub-fund represents more than 25% of the total number of shares outstanding (e.g. NAV/share amount is very different between umbrella’s sub-funds; sub-fund C = 68%), the client will be reported to the register of beneficial owners. The opposite also works (sub-funds A and B).
If a company issues different type of share (e.g. with/without voting right), it has to be taken into account to determine who the beneficial owners are.
“Controlling the entity by other means”
If 30% of a company is owned by a family (Father 10% - Mother 10% - Son 5% - Daughter 5%), even if none of them directly owns more than 25% of the company, the family members will be considered as beneficial owners if they act “together” during company’s General Meetings, as they control the company “by other means”. All family members will therefore be reported to the register of beneficial owners.
Access to Register information across the EU
The Fifth AML Directive makes the registers across the European Union accessible to the public at large. This may be a source of privacy concerns for investors.
The general public will have access to the information on the beneficial owner, except for specific information relating to the person’s private or business address and their identification number.
An exemption from such access to the register may be allowed in exceptional cases—such as the exposure of the beneficial owner to a risk of fraud, kidnapping, blackmail, violence or intimidation, or when the beneficial owner is a minor or otherwise legally incapable. The national authorities will have unlimited access to all the information of the register.
In addition to increased transparency on the beneficial owner of companies, the Fifth AML Directive provides similar rules for trusts and other legal arrangement. The register will gather information on the settlor, the trustee, the protector (if any) and the beneficiaries or the class of beneficiaries. For example, Luxembourg requires the disclosure of the beneficial owners under fiduciary agreements. In the case of trusts and similar arrangements, the register will be made accessible to persons who can demonstrate a legitimate interest.
Consequences of failing to comply with registration on the register, or providing inaccurate, incomplete or out-of-date information may give rise to a fine up to EUR 1.250.000.
More transparency to come
Beyond Europe, other countries are also following suit in an attempt to increase transparency. A recent study shows that thirty-four jurisdictions around the world have beneficial owner registration laws, and eleven more by 2020, including the Bahamas. In most cases, these registries publicly accessible.