Beneficial ownership in law: Definitions and thresholds

Recommendations for a robust definition

Despite the challenges mentioned above, some early evidence of good practice is emerging. As an overarching principle, BO should be clearly and robustly defined in law. Open Ownership (OO) has identified five key components that provide necessary minimum standards for such definitions of BO. The first three relate to the key constituent parts of BO definitions, whilst the last two address how best to enshrine these in law.

1. A definition should state that the beneficial owner must be a natural person. Even when companies own companies, individuals almost always appear at the end of the ownership chain. Whilst this may seem like an obvious point, a number of jurisdictions still do not meet this requirement. For instance, a 2019 review of legal approaches to BOT in the extractive industries found that 7 out of 16 countries surveyed did not explicitly state that beneficial owners should be natural persons. [7]

2. BO should cover both ownership and control interests. The concepts of ownership and control over a legal vehicle are distinct and should be defined separately. However, both should be key components of an overall legal definition of BO. The definition of control should include formal and measurable means, such as controlling 25% of votes, or having the right to appoint board members. Informal methods of control should also be included in the definition, such as cases where an individual is able to direct board decision-making despite not being a legal shareholder, through familial or other ties. It is these latter types of control that have sometimes received less attention when countries draft their BO definitions. For instance, a 2015 assessment of G20 BO principles implementation found that China’s definition of BO had a limited conception of control that only extended to shareholders with voting rights and did not include other forms of de facto control. [8]

3. BO should encompass both indirect and direct interests. Both ownership and control can be held directly as well as indirectly through a chain of interest or nominee shareholders or directors (therefore BO is also often termed ultimate BO). A definition that does not cover indirectly exercised control or ownership will merely cover legal ownership and fail to capture BO adequately. Kazakh law provides an example of how countries might address this. Article 47 of its Subsoil and Subsoil Use Code explicitly states that: “Indirect control means the ability of a person or organization to control another organization through a third organization(s), between which there is the direct control.” [9]

Box 1: Definitions in international policy

Historically, there have been some differences between jurisdictions in their definitions of BO, [10] creating substantial challenges for data users. [11] However, in recent years, definitions have converged somewhat and there are now a number of commonly accepted international definitions that incorporate the three components outlined above. For each of these guiding definitions, national definitions still need to be adopted or transposed in line with the guidance, taking into account the country’s own legal context. As a result, we still see definitions diverge between countries, which, at times, causes negative consequences. For instance, EU member states are implementing different BO definitions, resulting in some countries having weaker definitions in terms of supporting the EU’s desired policy impact on anti-money laundering (AML). A person may be considered a beneficial owner according to one country’s definition but not according to the neighbouring country’s definition (see, for instance, the example described in Box 2).

  • In 2014, the G20 endorsed the High Level Principles on Beneficial Ownership Transparency, which included “Principle 1: Countries should have a definition of ‘beneficial owner’ that captures the natural person(s) who ultimately owns or controls the legal person or arrangement”.
  • The FATF recommendations – covering 37 jurisdictions and 2 regional bodies, as well as 9 FATF-style regional bodies (FRSBs) – defines BO as “the natural person(s) who ultimately [including indirectly] owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.” [12]
  • The EU, in their Fourth Anti-Money Laundering Directives (AMLD4) – covering 27 member states – echoes this definition closely, defining the beneficial owner as “any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted.” [13]
  • The Extractive Industries Transparency Initiative (EITI) Standard – covering 53 implementing countries – defines BO as “the natural person(s) who directly or indirectly ultimately owns or controls the corporate entity.” [14]

When seeking to enshrine these three constituent parts of BO definitions in law, countries should adhere to the following two principles:

4. There should be a single and unified definition of BO in a jurisdiction, preferably in primary legislation. All other laws involving BO should refer to this law. This, as discussed below, could include varying thresholds for disclosure. It is not uncommon for a jurisdiction to develop different definitions of BO in different areas of the law, such as one in AML laws and another in legislation relating to public procurement. Mexico, for instance, currently has multiple definitions across the Law for the Prevention and Identification of Illicit Transactions, the Securities Market Law, and the Credit Institutions Law, among others, [15] and is working to harmonise these as part of its efforts to create a public register by 2023. Armenia, meanwhile, defines BO differently and uses different thresholds in its 2008 AML law and in the 2019 State Registration Law, which governs extractives disclosures. Whilst such an approach may be helpful in initiating new BO disclosure requirements, it may result in confusion during implementation and potentially increase the reporting burden on companies. Having a single definition – with potential variations in thresholds for disclosures – minimises loopholes and makes it easier to produce corresponding forms for data collection. If necessary, certain additions to a unified definition can be added to the law for specific sectors – for example, where further details are required to support policy impact.

5. Legislators should aim to create a broad catch-all definition of what constitutes BO, and couple this with a non-exhaustive list of example ways in which BO can be held. This is because those seeking to use legal entities for illicit gain are constantly devising new ways to derive economic benefits from and exercise control over companies, meaning that a definition based solely on a purportedly comprehensive list of typologies would need constant revision. Moreover, each legal context also retains its own set of vulnerabilities that may be exploited, making any effort to create an exhaustive international list also impractical. Therefore, the best approach is for countries to use a broad definition of BO, and complement this with examples that outline specific mechanisms of ownership or control that fall within the definition. The broad definition is important for investigators needing to understand whether specific individuals can be said to be beneficial owners of a company. The list of examples assists companies subject to disclosure requirements to fulfil their reporting obligations accurately. For the holding of shares and voting rights, either directly or indirectly, countries often set percentage thresholds, as will be discussed later in this briefing.

Disregarding any of the five components outlined above can leave loopholes in a BO disclosure regime that may undermine its effectiveness.

Box 2: Slovakia – A case study on BO definitions

Slovakia’s Register of Public Sector Partners, established in 2017, is a BO register for private entities that provide goods and services to the public sector, or acquire assets or receive qualified financial contributions from the public sector. As of June 2020, it contained 78,608 beneficial owners and 28,358 companies. [16]

Slovak law used to contain multiple definitions of BO for different sectors. However, during its implementation of the EU’s AMLD4, Slovakia replaced these with a unified definition with Act no. 315/2015 (Act on the Register of Public Sector Partners and on Amendments to Certain Laws). This defined the “final beneficiary” in Slovakia’s primary legislation on anti-money laundering (Act no. 297/2008) as:

“(1) Every natural person actually managing or controlling a legal entity, a natural person (entrepreneur) or a non-investment pooled asset fund, and every natural person for whose benefit the parties mentioned here above carry out their activities or business is deemed a final beneficiary; final beneficiaries are in particular,

  • a) in the case of a legal entity that is neither a non-investment pooled asset fund nor an issuer of securities admitted to trading on a regulated market, that is subject to requirements for provision or disclosure of information under a specific regulation, 37) equivalent legal regulations of a Member State or equivalent international standards, deemed final beneficiary shall be a natural person who
    • 1. has a direct or indirect share or their total sum of at least 25% in voting rights in a legal entity or its registered capital, including shares registered to bearer,
    • 2. is entitled to appoint, otherwise nominate or dismiss a statutory body, management body, supervisory body or control body of the legal entity or any member of the bodies thereof,
    • 3. exercises control of a legal entity otherwise than stated in items (1.) and (2.) above,
    • 4. is entitled to at least 25% of economic interest in the business of the legal entity concerned or in other activity undertaken by the legal entity,
  • b) in the case of a natural person-entrepreneur, [17] deemed final beneficiary shall be a natural person entitled to at least 25% of economic interest in the business of the natural person-entrepreneur concerned, or in other activity undertaken by the natural person-entrepreneur,
  • c) in the case of a non-investment pooled asset fund, deemed final beneficiary shall be a natural person who
    • 1. is the founder or incorporator of the non-investment pooled asset fund; where the founder or incorporator is a legal entity, deemed final beneficiary shall be a natural person under subparagraph (a),
    • 2. is entitled to appoint, otherwise nominate or dismiss a statutory body, management body, supervisory body or control body of the non-investment pooled asset fund or the members of the bodies thereof, or is a member of a body which is entitled to appoint, otherwise nominate or dismiss those bodies or any member thereof,
    • 3. is a statutory body, management body, supervisory body or control body or a member of the bodies thereof,
    • 4. receives at least 25% of funds provided by the non-investment pooled asset fund where future beneficiaries of the funds have been specified; where future beneficiaries of the funds have not been specified, a group of people having a significant benefit from the foundation or operation of the non-investment pooled asset fund shall be deemed a final beneficiary.

"(2) Where there is no natural person that would meet the criteria listed in paragraph (1)(a), top management members shall be deemed final beneficiaries; the statutory body, a member of the statutory body, procura holder and senior manager reporting directly to the statutory body are deemed members of top management.

A natural person not meeting the criteria under paragraph (1), subparagraphs (a), (b), or (c), items (2.) through (4.) on his/her own, but meets at least one of those criteria jointly with another person acting in concordance or sharing the same procedure shall also be deemed a final beneficiary.” [18]

Slovak lawmakers tried to stay as close as possible to the intention of the EU definition that they were transposing, whilst simultaneously adapting it to the national context. As such, it has maintained all components of the EU definition, but with the addition of some provisions on joint control and coordinated action that were based on practical Slovak experiences of wrongdoing. This means that whilst somebody may not meet the definition or threshold for BO individually, they may still do so in conjunction with one or more others. Joint control and coordinated action is assumed, for instance, if people are family members, or if different shareholders show a similar voting history.

The Slovak definition mentions a number of specific criteria (“in particular”) for BO, whilst also remaining broad in other areas, thereby preserving the definition’s substantive nature. For instance, an expensive car owned by a company, but driven by somebody not employed by that company (enjoyment of assets) would be covered by the phrasing in (1) c) 4: “significant benefit”, which covers any type of economic benefit that someone is not entitled to by law. It is not uncommon in Slovakia for companies to allow politicians to drive their luxury cars. The definition also covers those who may not have any control in the moment, but can instantly acquire control when they wish to do so.

Differing BO definitions across countries can mean that an individual may be identified as a beneficial owner of a company in one country, but not in another. This has already been seen in cases where multinationals have local subsidiaries in both Slovakia and the neighbouring Czech Republic, and thus are subject to different reporting requirements in the two countries. [19] At the time of writing, the proposed wording in a new Czech law on BO, due to be passed in November 2020, did not include examples (missing the words “in particular”), but was phrased as an exhaustive list of criteria under which someone could be considered a beneficial owner. This risks reducing BO from a substantive concept to something legal and formal. In Slovakia, if somebody holds 24.9% of the shares – thereby falling beneath the disclosure threshold – and other shareholders do not hold more than 1% each, this person would still have to disclose their beneficial ownership if, for instance, the company bylaws allow that person to make substantial decisions. The robustness of the Slovakian definition has been tried and tested in the courts. A court cannot identify beneficial owners, but can rule on whether a specified individual is or isn’t a beneficial owner – for instance, if a company is challenged on their disclosure in which under Slovak law the burden of proof is placed on the company. The court has already had more than a dozen rulings regarding beneficial ownership. This has also included removing companies from the register, and thereby making them ineligible to bid for state contracts. [20]

Footnotes

[7] Afghanistan, Cameroon, Colombia, Republic of Congo, Kazakhstan, Liberia, and Malawi. See: Extractive Industries Transparency Initiative, “Legal approaches to beneficial ownership transparency in EITI countries”. June 2019. Available at: https://eiti.org/files/documents/legal_approaches_to_beneficial_ownership_transparency_in_eiti_countries.pdf [Accessed 29 September 2020].

[8] Transparency International, “China Beneficial Ownership Transparency”. 2015. Available at: https://www.transparency.org/files/content/publication/2015_BOCountryReport_China.pdf [Accessed 29 September 2020].

[9] Adilet, “On Subsoil and Subsoil Use”. 27 December 2017. Available at: http://adilet.zan.kz/eng/docs/K1700000125 [Accessed 29 September 2020].

[10] World Bank, “The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It”. 2011. Available at: https://star.worldbank.org/sites/star/files/puppetmastersv1.pdf.

[11] Refinitiv, “Beneficial ownership: Are you ready for 5AMLD?”. 19 June 2019. Available at: https://www.refinitiv.com/perspectives/financial-crime/beneficial-ownershipare-you-ready-for-5amld/ [Accessed 29 September 2020].

[12] Financial Action Task Force Guidance, “Transparency and Beneficial Ownership”. October 2014. Available at: http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf [Accessed 29 September 2020]. http://www.fatf-gafi.org/media/fatf/documents/reports/Guidancetransparency-beneficial-ownership.pdf.

[13] Official Journal of the European Union, “Directive (EU) 2015/849 of the European Parliament and of the Council”. 20 May 2015. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32015L0849&from=EN [Accessed 29 September 2020].

[14] Extractive Industries Transparency Initiative, “Beneficial ownership: Revealing who stands behind the companies”. Available at: https://eiti.org/beneficialownership [Accessed 29 September 2020].

[15] EITI México, “Apuntes para la divulgación de beneficiarios reales de las empresas extractivas en México”. 25 November 2019. Available at: https://www.colaboratorio.org/wp-content/uploads/2019/11/BREITIMX-vf-25112019.pdf [Accessed 29 September 2020].

[16] Ministerstvo Spravodlivosti Slovenskej Republiky, “Rozšírené vyhľadávanie”, Available at: https://rpvs.gov.sk/rpvs/Partner/Partner/VyhladavaniePartnera [Accessed 23 June 2020].

[17] A natural person-entrepreneur is a simple organisational and legal form found in Slovakia, and a way to conduct business without founding a legal entity, similar to a private entrepreneur or self-employment.

[18] SlovLek, “297/2008 Coll.” 25 October 2016. Available at: https://www.slov-lex.sk/pravne-predpisy/SK/ZZ/2008/297/vyhlasene_znenie.html [Accessed 29 September 2020].

[19] See Open Ownership, “Early impacts of public registers of beneficial ownership: Slovakia”. September 2020. Available at https://www.openownership.org/uploads/slovakia-impact-story.pdf [Accessed 14 October 2020].

[20] See, for instance, Ministerstvo Spravodlivosti Slovenskej Republiky, “Zverejňovanie súdnych rozhodnutí a ďalších informácií (InfoSúd)”. November 2018. Available at: https://obcan.justice.sk/infosud/-/infosud/i-detail/rozhodnutie/3b90ffbc-a519-4e53-9627-329d6708b85d%3A4744e659-e5a2-42b3-a069-06abc5302a19 [Accessed 29 September 2020].

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