Fighting fraud and terrorism through ultimate beneficial owners registers

Luke Mizzi, junior associate at Mamo TCV, gives his views on how the new register that companies are obliged to keep with details of their ultimate beneficial owners, will help curb abuse

Luke Mizzi, Junior Associate at Mamo TCV
Luke Mizzi, Junior Associate at Mamo TCV

One of the most challenging tasks for due diligence teams on the lookout for connections to money laundering, bribery and corruption is to uncover the identities of ultimate beneficial owners of entities, properties and third-party business partners. Can Ultimate Beneficial Ownership (UBO) registers help prevent financial crime?

By way of introduction the new regulations impose an obligation on all existing companies registered within Malta to ensure that up to date information on the beneficial owners is held at the company’s registered office. Such information includes details such as the name, date of birth, country of residence and extent of beneficial interest (being 25% of the voting rights) held by each beneficial owner of the company. 

The regulations also impose a mandatory filing of such information to the Malta Financial Services Authority (“MFSA”) on an annual basis. Furthermore, in the case of companies that wish to register any form of change in shareholding which occurs through either a transfer, increase or reduction of shares, transmission, restricting of share capital or changes of voting rights it is now a requirement to submit a form confirming whether such change in shareholding will result in the change in the ultimate beneficial ownership of the company. 

The creation of beneficial ownership registers in the European Union member states provides further transparency to the finance sector by ensuring that the true owners of corporate entities are adequately identified and reported to the authorities, thus making it far more difficult to use corporate entities to engage in financial crime such as money laundering and corruption. 

Such information provided by companies shall be easily accessible to national competent authorities and financial intelligence analysis units. The new regulations shall thus facilitate the work of such authorities in investigations of illicit activities and provide an adequate tool for ongoing monitoring. Such an initiative shall save an invaluable amount of time for both authorities and companies in the gathering of the required information on beneficial ownership. 

In addition, the regulations also provide that such information may be exchanged with the national competent authorities and financial intelligence analysis units of other states. This is also coupled with the fact that there shall be an interconnection of the registers of each European Union and EEA member state by means of the European Central Platform and the European e-Justice portal. Such a system shall undoubtedly facilitate the sharing of information between member states in cross-border investigations.

How will these UBO registers affect customer onboarding at financial institutions?

It must be noted that customer onboarding processes already require financial institutions to identify the respective beneficial owners. Such a task may often prove to be a long process particularly when the entity’s beneficial ownership is spread over many layers. By having information on beneficial ownership freely available to financial institutions, the legislator has provided an invaluable mechanism which shall result in a faster and more adequate due diligence process as the required information shall be readily available. The UBO register should make it easier for such institutions to immediately identify the entity that they shall be conducting business with. Such a factor will result in a reduced level of risk and make it easier for businesses to work with new clients. 

However, it should be noted that the new regulations specifically state that financial institutions and other entities that are required to perform due diligence on new customers, must not solely rely on the UBO register to fulfil customer due diligence obligations. Thus, the UBO registers are not meant to bypass customer onboarding procedures but aim to strengthen them by providing a faster access to such information. 

The 2016 leak of 11.5 million files from the database of Panama-based law firm Mossack Fonseca highlighted the challenges due-diligence teams face. More than a year later, the fallout of the Panama Papers continues, strengthening the push towards greater transparency. Is a UBO register enough to improve EU transparency of company ownership?

In reality the need for increased transparency of corporate entities has been felt since the start of the current decade with Swissleaks, setting the ball rolling for a number of key transparency initiatives across the globe. This has been coupled with increased awareness on the circulation of funds received through terrorist financing throughout the world economy. It is fair to say that we are now moving towards a far more transparent global financial system and this is a trend which will continue in the coming years. Through holistic mechanisms and increased global co-operation, the new laws shall ensure that there will be no place to hide illicit gains. 

The UBO Registry was first introduced in the fourth anti -money laundering directive which was drafted by legislators in 2014. However, following the colossal uproar generated by the Panama Papers, it was universally agreed that further transparency initiatives are required in order to restore confidence in the global financial system.  This thus resulted in amendments being proposed to the registry’s access, well before the UBO registry was even introduced in the majority of member states. 

The fifth anti-money laundering directive which is currently in the pipeline extends the accessibility of the UBO register. Originally, the fourth directive stipulated that information on beneficial ownership is to be made available to competent authorities, financial intelligence analysis units and persons who demonstrate a “legitimate interest.” The proposed new directive has gone one step further and aims to have a system by which all European Union citizens shall have access to information on beneficial owners without the need to demonstrate a legitimate interest in such information. Thus, what is being proposed by European Union legislators is an unprecedented open pan-European registry which shall be accessible by all European citizens. 

The initiatives taken by the European Union in the context of anti-money laundering and terrorist financing go hand in hand with the measures taken in the field of international taxation. Consequential to the international investigations conducted on Credit Suisse in relation to high levels of tax evasion, several initiatives seeking to promote the automatic sharing of taxable information between states were initiated.  The United States Foreign Tax and Compliance Act (FATCA) provided for the automatic sharing of taxable information on US Citizens. Following this, the Organisation for Economic Cooperation and Development proposed an international automatic information exchange model which later became known as the Common Reporting Standard (CRS) and created a system of automatic exchange of information on taxable persons between more than ninety-eight states. In pursuance of their obligations under such legislation, further due diligence procedures are being imposed on companies. 

This has undoubtedly increased the level of company transparency. The recent anti-money laundering and tax evasion measures have also targeted the use of nominee shareholders. Such mechanisms conceal the ownership of company shares as the actual owner of the share enters into an agreement with a third party to hold such controlling interest on his behalf. Due diligence procedures are thus required to be performed on such nominee shareholders under both anti-money laundering legislation and CRS compliance. 

Another method in which beneficial ownership was previously concealed was through the use of bearer shares. These types of shares are not registered and are solely evidenced by the physical ownership of the share certificate as opposed to publicly registered details. Thus, they are easily transferable between parties as the physical document is the sole means of evidence. The issuance of bearer shares is not permissible under Maltese law. However, for a number of years such shares could be issued by publicly traded companies. Recent amendments to the Malta Companies Act have completely prohibited the issuance of bearer shares in Malta for both public and private companies.  

UBO registers could be a real opportunity for Financial Services to simplify the CDD process – providing a valuable data source for a host of organisations required to carry out detailed customer checks. This could even be a first step towards providing central KYC utilities – with governments investing in the compliance process, rather than businesses carrying the full cost of AML. But in the current regulatory climate, organisations need to be 100% sure that they can rely on what is held in the registers without any increased risk. What is to guarantee that these registers will actually have accurate information within them?

The legislator has sought to ensure that each company’s information is kept up to date and as accurate as possible. As previously stated, the regulations impose obligations on companies to hold up to date information at their registered office and make a filing to the registry of companies on an annual basis.  In the case of a change in shareholding, a company must submit a form confirming whether such change in shareholding will result in a change in the ultimate beneficial ownership. In this aspect, the MFSA may impose daily penalties on companies that fail to comply with such regulations. Such a measure is aimed at encouraging compliance with these regulations and ensuring that the information provided remains accurate.

Additionally, as from 1 January 2018, all companies wishing to be registered or re-domiciled into Malta are required to submit a form identifying each ultimate beneficial owner of the company and the nature and extent of the beneficial interest held. The form is to be submitted at incorporation stage along with the draft Memorandum and Articles of Association of the Company. The regulations stipulate that the Registrar of Companies shall not approve the registration of the Company unless he is satisfied that the requirements under such regulations have been complied with.

The MFSA has also been granted the power to issue administrative penalties ranging up to €5,000 on any company officer, shareholder or beneficial owner who knowingly supplies false or misleading information to the MFSA in pursuance of the obligations under these regulations. Such an offence may also lead to imprisonment for a term not exceeding six months. 

How will the data be accessed and by whom?

The new regulations specify that access to such a register shall be granted to national competent authorities such as the MFSA and the Malta Gaming Authority as well as the FIAU and the national tax authorities. In certain instances, access may also be granted to other competent authorities within Malta such as the Comptroller of Customs when carrying out duties relating to the cross-border movement of cash and other financial instruments. 

In addition, accessibility shall also be granted to “subject persons” for the purpose of carrying out customer due diligence. The term “subject persons” in this context refers to any person that is engaging in licensable activity such as the business of banking, investment services, insurance business and fund administration services. The data will be accessed by registration via an online platform and information shall be requested against payment. 

Crucially, any person or organisation may request access to the name, date of birth, country of residence and extent of beneficial interest held by the beneficial owners of a Company if a “legitimate interest” is demonstrated.  Such a “legitimate interest” is further defined as the satisfactory demonstration that the information requested shall be crucial in combatting money laundering or the financing of terrorism.  

The final decision in this regard rests with the Registrar of Companies who is to determine each request on a case by case basis. Access shall be granted on the basis of the applicant’s track record and by means of relevant documentary evidence. 

 

This Q&A is not intended and does not purport to give any sort of legal, tax or financial advice.

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