On May 20, 2015 the European Parliament adopted the Fourth Anti-Money Laundering Directive. On the basis of this Directive, every member state is obliged to establish a UBO register. All UBO’s of a company should be included in the register. As UBO will qualify each natural person that directly or indirectly holds more than 25% of the (share) interest of a company, not being a company listed on the stock market. In the event of failure to establish the UBO(‘s), the last option could be to consider a natural person from the higher managing personnel of a company to be the UBO. In The Netherlands, the UBO-register has to be incorporated before June 26, 2017. The expectation is that the register will bring along many consequences for the Dutch and European business climate. When one does not want to be unpleasantly surprised, a clear image of the upcoming changes will be essential. Therefore, this article will attempt to clarify the concept of the UBO register by analyzing its characteristics and implications.
The Fourth Anti-Money Laundering Directive is a product of European making. The idea behind the introduction of this Directive is that Europe wants to prevent money launderers and terrorist financers from using the current free movement of capital and the freedom to supply financial services for their criminal purposes. In line with this is the desire to establish the identity of all UBO’s, being persons with a considerable amount of authority. The UBO register forms only a part of the changes brought forth by the Fourth Anti-Money Laundering Directive in achieving its purpose.
As mentioned, the Directive should be implemented before June 26, 2017. On the subject of the UBO register, the Directive outlines a clear framework. The Directive obliges member states to bring as many legal entities as possible within the scope of the legislation. According to the Directive, three types of authorities must have access to the UBO data in any case: the competent authorities (including the supervisory authorities) and all Financial Intelligence Units, obliged authorities (including financial institutions, credit institutions, auditors, notaries, brokers and providers of gambling services) and all persons or organizations who can demonstrate a legitimate interest. The member states are, however, free to opt for a fully public register. The term “competent authorities” is not further explained in the Directive. For that reason, the European Commission asked for clarification in her proposed amendment to the Directive of July 5, 2016.
The minimal amount of information that must be included in the register is the following: full name, month of birth, year of birth, nationality, country of residence and the nature and extent of the economic interest held by the UBO. Additionally, the definition of the term “UBO” is very broad. The term does not only include a direct control (on the basis of ownership) of 25% or more, but also a possible indirect control of more than 25%. Indirect control means control in any other way than through ownership. This control can be based on criteria of control in the shareholders’ agreement, the ability to have a far-reaching impact on a company or the ability to, for instance, appoint directors.
The Dutch framework for the implementation of the legislation on the UBO register is largely outlined in a letter to minister Dijsselbloem dated February 10, 2016. Regarding the entities covered by the requirement of registration, the letter indicates that almost none of the existing types of Dutch entities will remain untouched, except the sole proprietorship and all public entities. Also listed companies are excluded. Unlike the three categories of persons and authorities entitled to inspect the information in the register as chosen on a European level, The Netherlands opt for a public register. This is because a restricted registry entails disadvantages in terms of cost, feasibility and verifiability. As the registry will be public, four privacy safeguards will be built in:
3.1. Every user of the information will be registered.
3.2. Access to the information is not granted for free.
3.3. Users other than the specifically designated authorities (authorities which include amongst others the Dutch Bank, the Authority Financial Markets and the Financial Supervision Office) and the Dutch Financial Intelligence Unit will only have access to a limited set of data.
3.4. In case of risk of kidnapping, extortion, violence or intimidation, a case-by-case risk assessment will follow, in which will be examined whether the access to certain data may be closed off if necessary.
Users other than the specifically designated authorities and the AFM may only access the following information: name, month of birth, nationality, country of residence and the nature and extent of the economic interest held by the beneficial owner. This minimum means that not all institutions that have to do compulsory UBO research can derive all their required information from the registry. They will have to gather this information themselves and conserve this information in their administration.
Given the fact that the designated authorities and the FIU have a certain investigative and supervisory role, they will have access to additional data: (1) day, place and country of birth, (2) address, (3) citizen service number and/or foreign tax identification number (TIN), (4) the nature, number and date and place of issue of the document by which the identity was verified or a copy of that document and (5) documentation which substantiates why a person has the status of UBO and the size of the corresponding (economic) interest.
Expectations are that the Chamber of Commerce will manage the register. The data will reach the register by submission of the information by the companies and legal entities themselves. A UBO may not refuse participation in the submission of this information. Furthermore, obliged authorities will also, in a sense, have an enforcement function: they have the responsibility to communicate to the register all information in their possession, which differs from the register. Authorities entrusted with responsibilities in the area of combating money laundering, terrorist financing and other forms of financial and economic crime will, depending on the size of their task, be entitled or required to submit data that differ from the register. It is not yet clear who will be formally in charge with the enforcement task with regard to the (correct) submission of the UBO data and who will (possibly) be entitled to issue fines.
Despite the strict requirements, the UBO legislation does not seem to be waterproof in all aspects. There are a number of ways one can ensure that one falls outside the scope of the UBO registry.
4.1. The trust-figure
One can choose to operate through the figure of the trust. Trust figures are subject to different rules under the directive. The directive requires a register for trust-figures as well. This specific register, however, will not be open to public. In this way, the anonymity of the persons behind a trust remains secured to a further extent. Examples of trust figures are the Anglo-American trust and the Curaçao trust. Bonaire also knows a figure comparable to the trust: the DPF. This is a particular type of foundation, which, unlike the trust, possesses legal personality. It is governed by the BES legislation.
4.2. Transfer of seat
The Fourth Anti-Money Laundering Directive mentions the following regarding its applicability: “… companies and other legal entities established within their territories”. This sentence implies that companies, which are established outside the territory of the member states, but later move their company seat to a member state, are not covered by the legislation. For example, one can think of popular legal concepts like the Jersey Ltd., the BES B.V. and the American Inc. A DPF may also decide to move its actual seat to the Netherlands and to continue to pursue activities as a DPF.
The question is whether the European Union will want to perpetuate abovementioned possibilities on avoiding the UBO legislation. However, there are currently no concrete indications that changes will take place on this point in the short term. In her proposal tabled on July 5, the European Commission requested a couple of changes in the Directive. This proposal did not include changes concerning the foregoing. Furthermore, it is not yet clear whether the proposed changes will actually be implemented. Nevertheless, it will not be wrong to take account of the proposed changes and the possibility that other changes will be made at a later point. The four major changes as currently proposed are as follows:
5.1. The Commission proposes to make the registry fully public. This means that the directive will be adjusted at the point of access by individuals and organizations which can demonstrate a legitimate interest. Where their access could previously be limited to the earlier mentioned minimum data, the registry will now be fully disclosed to them as well.
5.2. The Commission proposes to define the term “competent authorities” as follows: “.. those public authorities with designated responsibilities for combating money laundering or terrorist financing, including tax authorities and authorities that have the function of investigating or prosecuting money laundering, associated predicate offences and terrorist financing, tracing and seizing or freezing and confiscating criminal assets”.
5.3. The Commission asks for a greater transparency and a better possibility of identification of the UBO’s through interconnection of all national registers of the member states.
5.4. The Commission furthermore proposes to, in some cases, lower the UBO rate of 25% to 10%. This will be the case for legal entities being a passive non-financial entity. These are “.. Intermediary entities that do not have any economic activity and only serve to distance the beneficial owners from the assets”.
5.5. The Commission suggests to alter the deadline for implementation from June 26, 2017 to January 1, 2017.
The introduction of the public UBO register will have far-reaching implications for enterprises in the member states. Persons directly or indirectly possessing more that 25% of the (share) interest of a company not being a listed company, will be forced to make a lot of sacrifices in the area of privacy, increasing the risk of blackmail and kidnapping; despite the fact that the Netherlands has indicated that it would do its best to mitigate these risks as much as possible. In addition, some instances will receive greater responsibilities regarding the noticing and transmitting of data that differ from the data in the UBO register. The introduction of the UBO register may well mean that one will shift focus to the figure of the trust, or a legal institution established outside the member states which can then transfer its real seat to a member state. It is not sure whether these structures will remain viable options in the future. The currently proposed amendment of the Fourth Ani-Money Laundering Directive does not contain any changes at this point yet. In the Netherlands, one mainly has to take into account the proposal for the interconnection of national registers, a possible change in the 25%-requirement and a possible early implementation date.