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Cracking down on Beneficial Ownership

April 22nd, 2015 - Posted by Debbi Lyle Essey in Anti-Money Laundering

The UK has become one of the first major economies to place strict rules on the disclosure of beneficial ownership following the passing of the Small Business, Enterprise and Employment Act 2015 at the end of March.

The act makes it a legal requirement for companies to maintain a public register of anybody who has significant control of the organisation, including anybody who owns or controls more than 25% of shares or voting rights; anybody who can appoint or remove directors; and anybody who has the right to influence or control the company significantly.  The legislation comes into force in January 2016.

But the passing of the act is far from the end of the story when it comes to disclosing who actually controls companies which are not listed on the London Stock Exchange (which has its own strict rules around disclosure).  It is likely to be at least two years before new rules around disclosure come into force at an EU level.

The EU's Fourth Money Laundering Directive (MLD4) is designed to improve existing anti-money laundering and counter-terrorist financing legislation and will include provisions around beneficial ownership.  So far, the only EU states other than the UK to have enacted their own beneficial ownership legislation are the Netherlands and Denmark.

Switzerland is moving towards partial enforcement of disclosure of beneficial ownership.  The Swiss Financial Market Supervisory Authority FINMA is consulting on a revised version of its FINMA Anti-Money Laundering Ordinance which would direct fund management companies, CIS investment companies and CIS asset managers to identify both the subscriber of fund units and the beneficial owner.

However, despite the UK's recent move, the disclosure of who actually controls a company trading here – particularly banks and financial institutions – still faces significant obstacles, not least from Britain's overseas territories which are holding out against any such move.  The British Virgin Island and the Cayman Islands, where a number of financial bodies are registered, have both been given until November to comply with the UK's move and implement central registers or similar systems.

Bermuda, which already has its own central register, has been told to make the information it stores more accessible to law enforcement agencies.

The British Virgin Islands consulted companies based there and found that four out of five were opposed to a central register because of the cost of complying, its impact upon their competitiveness and the risk of fraud.  However, it said that it was committed to implementing rules to achieve the same result and that it was receiving help from the British government.

The Cayman Islands has also refused to introduce a central register, but its government added that it would enact legislation requiring corporate service providers to produce beneficial ownership information to tax, regulatory and law enforcement agencies within 24 hours of a request.

Neither of these offers go anywhere close to the UK's new rules, which will open up a degree of transparency about companies based in Britain hitherto unknown.  Companies House will have to be notified about those with controlling interests in a company, potentially making this information available to anybody.  The EU's proposal merely refers to giving those with "a legitimate interest" access to the information at an EU level.

Meanwhile, the genealogy of companies controlled further afield is likely to remain as murky as ever.

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