UBO registers: the emerging monsters in our midst

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Trust Corporation International, St Peter Port

michael.betley@trustcorpci.com

Report on IBA Private Client Tax Committee session at the 25th International Private Client Conference

Tuesday 3 March 2020

Session Chair:

Gerd Goyvaerts Tiberghien, Antwerp

Speakers:

Gertel Ciniglio de Perez Fabrega Molino, Panama City

Nuno Cunha Barnabé Abreu Advogados, Lisbon

Christopher Martin Concord Trust Company, Bedford, New Hampshire

Line Alexander Glotin UGGC Avocats, Paris

Ures Feller Prager Dreifuss, Zurich

There is a difference between acceptable privacy and unacceptable secrecy. However, legitimate confidentiality is becoming lost in the midst of new regulations and directives. Individual privacy rights are being usurped in the drive for transparency and in an attempt to unearth tax evasion and prevent money laundering.

The panel looked at the implementation of the Fifth EU Money Laundering Directive, its planned implementation in regard to the various beneficial ownership registers, and how both EU Member States and non-EU countries are developing their own approaches to the gathering of relevant information on ultimate beneficial owners (UBOs).

While the aim of the Directive is to prevent criminal activity, the scope of the Directive which is relevant for the vast majority of private clients is not to do with money laundering but in addressing tax irregularities – which may now be treated as a criminal offence. Identifying criminal activity is not the intention of the establishment of UBO registers; rather they aim to identify who controls 25 per cent or more of an entity. Many consider the imposition of the Directive as a breach of privacy rather than an acceptable tool to combat crime. What can we learn from the approaches from how differing EU Member States are implementing the Directive and from those who are not subject to the same requirements? Further, what should we, as practitioners, be concerned with regarding the cross-border consequences between differing approaches?

European approach: Portugal

Portugal was one of the first adopters in 2018, with the implementation of the Fourth EU Money Laundering Directive. It has developed an implementation plan for the Fifth EU Money Laundering Directive which looks to go beyond the policy requirements. Portugal appears to be an aggressive standard setter with the aim of raising the regulatory bar. While the Portuguese position is still a work in progress, it decided early on to adopt more aggressive standards from the outset. In that regard, it does not distinguish between companies and trusts but it does try and address what might be considered to be ‘legitimate interests’ which should be considered and, where appropriate, protected.

Anyone in Portugal will have a right to access the information on the UBO register and there is no register of those seeking access. This is, however, a requirement under the Directive; Portugal’s approach could be challenged in the future if it is implemented without having appropriate safeguards in place. At the moment there is no way of knowing who is accessing the UBO register and the reasons why they are gaining access.

It is important to note the consequences for non-compliance and the severe penalties which can apply. Similarly, it should be noted that for a trust or company to own and register property interests, they will need to file a tax payer number and full disclosure requirements will be needed in relation to the corporate entity or trustees. If a company has not filed the relevant UBO details, then certain corporate transactions cannot legally take place, such as a change in share capital or payment of dividends. Wider consequences might be that recalcitrant companies cannot bid for public tender contracts or seek EU funding. It remains to be seen whether or not non-compliant companies can apply for a parent subsidiary tax exemption. On the flip side, the EU Commission recognises that privacy is a ‘legitimate interest’ and data protection should prevail such that the management around UBO registers needs to be proportional.

While the Portuguese position goes beyond what might be expected, it has not yet been fully implemented. Some of the measures and penalties may be regarded as too aggressive to the extent to which, in themselves, they may be considered illegal such as the imposition of a withholding tax for non-compliance. As such, it is foreseen that a number of the facets of the Portuguese framework are likely to be refined during the implementation phase, but it still demonstrates how each EU Member State will interpret the Directive differently. One safeguard is that ‘legitimate interests’ is a growing concern which is likely to influence the final outcome.

European approach: France

France was also an early adopter and, in its hurry to demonstrate its compliance, drafted the relevant filing forms too hastily. They are not regarded as fully fit for purpose.

In France, French companies in existence from August 2017 are expected to be compliant and grandfathered in. New strict timetables apply such that the UBO registers need to be completed within 15 days of incorporation or 30 days following a corporate restructuring. The severity of the French penalties are making third party advisers – such as lawyers, accountants and tax filing agents – nervous as they are responsible for the filing requirements for companies that they represent.

There is still a great deal of uncertainty as to the classification of a ‘direct’ or ‘indirect’ beneficial owner. If you do not or cannot file the appropriate details in accordance with the Tax Code, identifying the right legal and individual persons, then a 3 per cent tax will be applied.

The French tax authorities require supporting verification documents on the UBO and, as a consequence, professionals involved in corporate transactions will seek the required documentary verification in advance in order for them to correctly file within the time limits, otherwise sanctions and penalties will apply. Recent French court rulings on what ‘true evidence’ means for identifying the UBO is helpful, but also demonstrate the consequences of filing incorrect information. What is also clear is that, where there are multiple advisers involved, there needs to be greater co-ordination to ensure that there is accurate and consistent reporting as incorrect reporting can be regarded as a criminal offence. This is made more difficult because the Tax Code may require disclosure to be made in a certain way, but cross-references and definitions may be different under the Commercial Code. Navigating these different filing requirements can be an issue for the uninformed.

Determining shareholder control is also a key element of the new French requirements, such that each meeting of a board of directors needs to be carefully considered when it comes to identifying who is exercising corporate control. Corporate records need to be maintained addressing this.

Further difficulties arise where different types of ownership (direct or indirect) are in use, for example where trustees and nominees are involved and understanding how to file the relevant details in each case.

New rules published in February 2020 establish new formalities and have created new reporting obligations. For example, protectors and other power or control holders will need to be identified. New updated filing forms will be published soon. It is also further noted that, from April 2020, the UBO register will become open to the ‘public’. However, the French trust register will continue to remain private. A new category of ‘business relationship’ is also being introduced, but at the moment it is not clear what the scope of that term means even though reporting obligations will commence in April 2020.

While the UBO register will become public (and access will be free) from April 2020, there will be exemptions and limited protection for vulnerable persons. There will be enhanced obligations imposed on professionals and service providers, who will be held accountable for the control and filing of the relevant information. There is concern that, where there are discrepancies between the trust and UBO registers, the authorities will look to target tax payers and professionals where errors and discrepancies have been identified and impose sanctions on them.

The extent of the imposition of the French trust and UBO register has led to international investors banning the holding of French assets simply to avoid the reporting requirements and penal sanctions. It is possible that other EU countries may be added to this list, which may limit international capital flows into those countries.

Non-EU countries: the United States

In regard to the disclosure of beneficial ownership information, it was noted that there are no trust registers in the US but there are registries for other forms of legal entity such as LLCs and corporations. The requirement, however, is to maintain limited information on the register at company level. However, from a practical and commercial perspective, the information being sought has evolved: in particular, when looking at foreign investors transacting in the US where UBO information will be required by various stakeholders and related parties to the transaction. There has also been some case law guidance on who might be regarded as a UBO in regard to US trusts, which was set out in the North Carolina ‘Kaestner case’.

From a practical perspective, financial institutions and banks, in particular, have become increasingly demanding in regard to the customer due diligence they require when foreign trusts open US bank accounts. This includes names and addresses of the trust/trustees, together with relevant tax ID numbers and increasingly similar details for the authorised signatories of the relevant trust company. One growing issue is in relation to foreign structures owned by US trusts where the foreign intermediaries require details of the trustee ‘owners’. There are no ‘owners’ of discretionary trusts but, in order to assist in the completion of a transaction or dealing with foreign domestic reporting, the US trustees often strike a compromise and provide information which is technically incorrect but acceptable to the foreign person or registries. Prior to providing that information, it is always sound to seek prior approval from the persons whose information is being disclosed and get the support of any local counsel as to how the information is provided to prevent any unintended consequences.

As mentioned earlier, US banks and investment managers generally avoid holding French assets directly, and increasingly even indirect French assets. Where there is indirect ownership of French assets, then this is often supplemented with the French filing requirements in order to avoid the 3 per cent tax.

The US is also trying to manage its new label as the ‘new Switzerland’ in the sense of providing a home for those who do not wish to disclose information. As a consequence, US advisers remain highly cautious when new clients approach them with a hope and expectation of avoiding their international reporting obligations and, in particular, the Common Reporting Standard (CRS). There may well be situations where CRS itself can be mitigated, but there are multiple reporting requirements – and the Internal Revenue Service has a very long arm when it comes to taxing its citizens and penalising non-compliant foreign investors. Many professional advisers now have a reporting matrix to make sure that all the various types of reporting are undertaken at the right time as well as co-ordinating with other related parties to ensure consistency.

Non-EU countries: Switzerland

Overall, Switzerland has taken a blended approach. Switzerland is in Europe but does not belong to the European Community. While Switzerland recognises trust law (and therefore trusts) it has no trust law of its own. Switzerland has no trust or other beneficial ownership register and currently has no intention to introduce such registers. Indeed, there was a proposal to introduce a beneficial ownership register in 2016, which the Federal Government rejected.

The one significant money laundering issue which has been identified and which Switzerland has addressed is in relation to the issue and holding of bearer shares. It is estimated there are still up to 50,000 companies which have issued bearer shares. It is now compulsory to have a register of bearer shares held at company level and, in turn, details of registered shares and the ultimate owner or holder of those shares. From 1 November 2019, the new bearer share legislation required all bearer shares to be formally registered by 2024, otherwise penalties and sanctions will apply, ultimately leading to the removal of certain rights in relation to those non-compliant bearer shares. Federal rules do not apply to bearer shares for companies which are listed on the Stock Exchange but in all other cases there are reporting obligations for all holders of bearer shares. The first deadline is May 2021 for all bearer shares to be formally recognised on a register at company level. There are some transitional provisions especially relating to ‘lost owners’.

The Federal Tax Authority has the power to inspect the company registers which must be maintained and made available to the relevant authorities.

Non-EU countries: Panama

The developing trends and initiatives relating to the holding of key personal information commenced with a 2011 requirement for Panamanian registered agents to hold verification information and documentation for know your customer (KYC) purposes.

This further evolved in 2013 (which was extended in 2015) to introducing a system to identify and register bearer shares. More recently, Project 57 was introduced in 2019 which establishes, for the first time, the establishment of a private register to hold and manage information in regard to the beneficial owners of Panamanian entities. The register applies to all entities registered in Panama, including those foreign entities which are managed in Panama. The law also establishes a new supervisory organisation called the Superintendents for the Supervision and Regulation of Non-Financial Entities, which will be responsible for managing the registry.

The information to be included in the new registry for the company will include its name, registration number and the date of registration. The underlying information concerning the UBOs will include their full name, personal ID number/passport number (or similar alternative recognised ID documents issued by a relevant government), the UBO’s domicile, date of birth and nationality. There will be a grandfathering in relation to existing companies, but any newly incorporated companies will need to provide the information to the registry within 15 working days of establishment.

The Superintendents will wish to know the specific UBOs which control (directly or indirectly) 25 per cent or more of the shares, quotas or voting rights in the relevant legal entity. The exception to this will be those that are publicly listed or where the entity belongs to an international organisation or state. Further registered agents will be obliged to maintain all relevant beneficial ownership information for five years from the date of the dissolution of the company. Non-compliance brings with it various sanctions which will include the suspension of legal corporate rights and for the company to function commercially.

Where companies become ‘orphaned’, and no trace or communication can be established with the last known shareholders, then there are provisions to allow the Registered Agent to ‘renounce’. The companies will be struck from the Panamanian register through this formal process. The register will not be publicly accessible but the registrar has the authority to provide information to other government agencies for legitimate reasons.

From the implementation of the law, registered agents will have six months to complete the registry details (for all existing companies which they act for). For dormant or orphaned companies falling within the period five years before the introduction of the law, it was suggested that these companies would fall into the strike-off regime, such that existing clients or advisers will not need to be concerned with a process of remediation.

Discussion topics

What should we fear from activist investigative journalism?

The EU anti-money laundering directives fully recognise ‘legitimate interests’ and there are remedies to help rectify and address abuses. However, engaging with activist journalism may be fruitless. More should be done to address the illegal theft of data in this regard but, nevertheless, interacting with journalists should be done with care, if at all. Their aim is to get quotes and provoke court action to either validate their stories or to provide greater longevity to the issues through encouraging a response through the courts.

We should also be cautious when believing that registers which are said to be private really are private. An example was given where client information was uploaded into one register, only to find within weeks the client was being summoned by the local tax authority to participate in an interview to discuss his tax affairs. It was clear that during the interview they had gained access to the register and were able to present what might otherwise have been considered to be private or confidential information that was held. You should therefore provide information with your ‘eyes wide open’.

Can lawyers help clients avoid UBO registration?

DAC 6 sets out anti-avoidance rules to prevent non-disclosure. In the Netherlands, there is an existing loophole due to the mismatched timing of respective legislation which means that there is a gap as to when information needs to be uploaded into the relevant register. There are legitimate ways of mitigating the required information flow and, in particular, when looking at threshold levels of ownership. For example, for family-owned businesses, shares can be transferred to other family members in order to reduce individual holdings to below the 25 per cent reportable threshold. Indeed, it was also suggested that these thresholds would actively encourage quicker succession planning to be implemented, which should be considered as a positive response.

The intention behind UBO registers is to encourage simpler and more transparent ownership and to move away from more opaque ownership structures. This intention is certainly bearing fruit with many corporate structures being actively simplified. Another consequence of the requirement to disclose information and leading to greater transparency is a developing theme within family businesses leading to greater professionalisation of those businesses. Wider share ownership amongst families, together with more robust governance frameworks, create stronger businesses which are less likely to be scrutinised by third parties.

Finally, we should not forget the power of connectivity due to the information sharing between registers, which is only likely to increase with a greater number of registers being established and the different aspects of reporting which are being required. As a consequence, it is a timely reminder for clients and professional advisers that, increasingly, there are fewer places to hide even for legitimate confidentiality – but we should take a stand before our individual privacy rights are entirely eroded.

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