Beneficial ownership disclosure: when private becomes public

The most controversial part of the Fourth Anti-Money Laundering Directive (4th AMLD) is probably going to be the Register of Beneficial Ownership. The controversy arises since certain information which is considered private and which legitimately could be kept as such, will now be made available to a number of persons – possibly also to the wider public in certain situations.

As part of the implementation of the 4th AMLD, the EU is ensuring that all of its member states will have a Central Register of Beneficial Ownership for corporate entities, trusts and other legal entities. After several discussions and amendments to the original draft, the directive will come into force on June 26, 2017.

The directive is the EU’s implementation of the guidelines issued by the Financial Action Task Force (FATF) in 2012, and in certain situations the wording of the directive mirrors the wording issued in the mentioned guidelines.

It is important to understand what information is to be included in this register as well as who will have access to it. In order to establish this, we must understand the definition of the term ‘beneficial owner’ in accordance with the directive.

As per article 3(6) of the directive, a beneficial owner is defined as: “any natural person(s) who ultimately owns or controls the customer and/or natural person(s) on whose behalf a transaction or activity is being conducted…”

There is a minimum criterion for corporate entities, trusts and other legal arrangements similar to trusts.

In the case of corporate entities, the minimum holding is of 25 per cent. Any natural person, holding, directly or indirectly, more than 25 per cent interest in the entity will be regarded as a ‘beneficial owner’. Furthermore, in case no person can be identified who holds such an entitlement, the natural person(s) who holds the position of senior managing official(s) will be regarded as the ‘beneficial owner(s)’.

In the cases of trusts; the settlor, trustee, protector, beneficiaries and any other natural person exercising ultimate control over the trust, are considered to be the ‘beneficial owners’.

In the case of legal entities such as foundations and legal arrangements similar to trusts, the natural person(s) holding equivalent or similar positions to those referred to in the case of trusts will be regarded as the ‘beneficial owners’.

While the discussion as to ‘who is the beneficial owner of the income?’ could go on forever, the directive solves this by casting a very wide net over the term, especially with regards to the individuals being disclosed in the context of a trust arrangement. It is also interesting to note that the directive makes no distinction between a ‘discretionary trust’ and a ‘non-discretionary trust’. Whereas in the latter arrangement the beneficiaries have ‘mandatory’ income interest, in the discretionary trust, the income of the beneficiaries is up to the trustee’s discretion – however, the same reporting obligations apply under both arrangements.

The Central Register must contain adequate, accurate and current information on the beneficial ownership and shall be accessible in all cases to: (a) competent authorities and Financial Intelligence Units; (b) obliged entities, that is, credit institutions, financial institutions, auditors, external accountants, tax advisors, notaries and other independent legal professionals, estate agents etc; and (c) any person or organisation that can demonstrate a legitimate interest.

For persons or organisations referred to in point (c), the directive states that such persons shall access at least the name, date of birth, the nationality and country of residence of the beneficial owner as well as the nature and extent of the beneficial interest held. It is therefore assumed that the persons in (a) and (b) will have access to far more information.

For companies and other legal persons, the directive recommends a public beneficial ownership register, while for trusts and similar legal arrangements, a private register is recommended.

This is a real game changer. Whereas today, beneficial owners of companies or trusts are only known to the professional handling their affairs and the bank, once this directive comes into force, the beneficial owners’ personal information shall become available to the persons mentioned in (a) to (c) above.

Arguments against the introduction of such a register are not only motivated by motives of tax transparency, or rather the lack of it – but also because of privacy issues. One may also pose the question as to whether such a register is actually compatible with the guarantees contained in the EU’s Charter of Fundamental Rights.

Article 30(9) of the directive provides an exemption to the level of access referred to in points (b) and (c) above, “on a case by case basis in exceptional circumstances, where such access would expose the beneficial owner to the risk of fraud, kidnapping, blackmail, violence or intimidation, or where the beneficial owner is a minor or otherwise incapable”.

While this could provide some comfort, the term ‘exceptional circumstances’ and the fact that the onus is on the person seeking privacy, make it seem as though the threshold to be exempt will be quite high indeed.

The UK is one of the member states which has forged ahead with the Central Register. However, the details of which entities and beneficial owners are subject to this register are still being discussed and we are expected to have further details in the coming months.

The introduction of this Central Register follows on the heels of the introduction of the Foreign Account Tax Compliance Act (Fatca) implemented by the US a few years ago. We then saw the implementation of a Fatca ‘copycat model’ in most other developed jurisdictions, particularly across the EU and the introduction of automatic exchange on information. We are now seeing these measures taken one step further with the Beneficial Ownership Register.

The debate as to whether we have now taken it a step too far – and whether these measures are actually in breach of fundamental human rights – is ongoing and will escalate further.

However, while these representations go on, most countries will continue to introduce and implement these measures in a world wide attempt to combat tax evasion, enhance transparency and freeze out non co-operative states.

This is most certainly the final death knell to the traditional tax havens of yesteryear and we must remain abreast of these developments in order to assist consumers with the necessary direction that they require to navigate these often-turbulent waters.