Concealing Impossible to Disclose
“Ukraine was one of the first to fulfill the FATF requirement regarding the disclosure of ultimate beneficial owners of legal entities”points out Olena Kibenko, Managing Partner at Kibenko, Onika & Partners Law Firm
— What scope of information on beneficiaries of legal entities is subject to disclosure in Ukraine?
— As of today, the legal entities should submit to the State Registrar of Companies information on their beneficial owners (controllers). In particular, the Unified State Register of Legal Entities and Individuals-Entrepreneurs shall contain the following information on the beneficial owner of legal entities: full name, passport details, country of citizenship and place of residence. Ukrainian companies were required to submit information on their beneficiaries by September 25, 2015. Thus, companies can be held liable to a fine should they fail to provide such information.
— How effective is the implemented model?
— Ukraine was one of the first to fulfill the FATF requirement regarding the disclosure of ultimate beneficial owners of legal entities. But at the same time, the mechanism for implementing norms contained in national legislation leaves much to be desired. The point is that a company’s disclosure of information on its beneficiary does not require any supporting documents. Therefore, some companies dare to submit to the Register information on its nominal shareholders rather than on the actual beneficiaries. Furthermore, some companies consider it possible to submit information on individuals who have nothing to do with the company or do not exist at all. The only way to figure out inaccurate information is by comparing the data in the Register: for example, a number of legal entities include the same names of nominal values (this practice has been successfully applied abroad).
— How is the information on beneficiaries of legal entities disclosed in foreign countries?
— Disclosure of information on beneficial owners has been actively discussed abroad for several years. Among the issues of great current interest are the following: procedures for the provision of information, accessibility of the Register of Beneficial Owners of Legal Entities, etc. As of today, the EU Parliament has approved the 4th EU Directive aimed at combating money laundering (4th Anti-Money Laundering Directive, AMLD). In accordance with the provisions of this Directive, all EU member states must implement it within two years in their national legislation. The Directive foresees the establishment of the Centralized Register of Beneficial Owners of Companies and Organizations. It is anticipated that the information from this Register will be available to public authorities (including the financial supervisory authorities), as well as organizations carrying out the procedure “know your customer” (KYC). It is expected that the Register of Ultimate Beneficiaries will be created in 2017. Third-party access to the Register of Beneficiaries is determined by each country independently according to the provisions of its national legislation on personal data protection and other regulations.
— What country’s experience merits attention?
— In this regard, we recall the procedure for creating a registry of beneficial owners in the UK, which was one of the first to work in this direction. Changes in legislation will come into force in 2016. It is specified that companies should establish their beneficiaries on their own and submit the appropriate information to the regulatory authorities. In addition to the responsibility taken by the Director of the company on creation of the register of beneficiaries (including imprisonment), the provision is made for the liability of a beneficiary. After the beneficiary has been determined, he is sent a request to confirm the validity of his data (in future, such confirmation must be forwarded to the Registrar of Companies). If the beneficiary refuses to confirm his details or to provide any other information, the company has the right to impose restrictions upon the beneficiary. In this case, the controller of the company is deprived of the right to manage the company, to dispose of its stake in the company or to receive any payments. The company’s register of beneficiaries must be stored either in the company or in the Companies House. The General Register is to be publicly available, except for some personal data.
— What can be inferred from comparing the Ukrainian mechanism of disclosure of information on beneficial owners of legal entities and foreign experience in this area?
— Ukrainian law does not stipulate any mechanism to force information out of those individuals, who are considered beneficial owners of companies, as is done in England. It completely removes the burden of liability from beneficiaries and shifts it to the companies’ leaders, who may be held administratively liable to a fine of 5,100-8,500 UAH for failure to submit information on the controller of the company. The leaders of the companies, in their turn, can evade liability by making a request for the information on a beneficiary to their foreign participant/shareholder and receiving a “polite refusal”.
If the information, submitted to the Register, is proved to be inaccurate, then a case on criminal responsibility for providing false information to the State Registrar (Article 205-1 of the Criminal Code of Ukraine) may be opened, which can be punished by restriction of freedom for up to two years.
— The question of disclosure of information on beneficiaries is closely related to the process of exchanging information on the accounts of non-residents. What is the situation in this area?
— Indeed, in October 2014 an agreement on the automatic exchange of information on the accounts of non-residents was signed in Berlin. The agreement foresees an annual automatic exchange of information on the accounts of non-residents between the regulatory authorities of the countries of which they are nationals. The information to be exchanged between the countries includes the personal data of individuals, state of account, including income of the account holder. Where the account holder is a legal entity, the information is to be transmitted to the country of which the beneficial owner of the company is a national. The first exchange of information on the accounts of non-residents is scheduled for 2017 on the basis of 2016. It is difficult to say when and how this agreement will affect Ukrainian beneficiaries and whether the information will be transferred to Ukraine, which is not a party to the agreement. But I am convinced that sooner or later Ukraine will be bound to accede to the agreement.
— What impact should Ukrainian businesses expect from implementing the mentioned innovations, and what risks may arise?
— First of all, the creation of the Unified Registry of Beneficial Owners of Companies and the exchange of information on the accounts of non-residents will have an impact on tax planning schemes that were previously used in Ukrainian business. The concept of banking secrecy will significantly change and will no longer exist in the form in which it exists today. The provision of information on accounts by a foreign bank to the tax authorities at the location where the Ukrainian beneficiary of a foreign company has its registered office may result in the rejection to use foreign companies or legalization of ownership of their shares. In addition, the rejection of conventional jurisdictions could trigger a search for new favorable tax jurisdictions in countries that have no intention to fulfill the requirements set by the EU regarding the establishment of a registry of beneficial owners and exchange of information on the accounts of non-residents.
In addition, based on the example of the UK, regard must be paid to the fact that violation of legislation in the sphere of disclosure of information on beneficiaries of companies involves the imposition of rather serious penalties. Moreover, not only will the Directors and representatives of the companies be held liable, but also the beneficiaries of these companies. This could lead to an outflow of Ukrainian capital from the United Kingdom, which used to be one of the most popular jurisdictions for incorporation.
Part of the business environment, on the contrary, now understands that the age of careless use of offshore companies and nominal values has gone for good and it’s time to build new legal and safe-for-work schemes.