Designing sanctions and their enforcement for beneficial ownership disclosure

  • Publication date: 28 April 2022
  • Authors: Ramandeep Kaur Chhina, Tymon Kiepe

Operationalising enforcement

This briefing has outlined numerous reasons why enforcement of sanctions for BO-related offences can be challenging for implementers. A sanctions regime is credible only to the extent that it is actually used. The imposition of sanctions on those who have breached the BO disclosure requirements needs to be routine. Countries need to ensure that sanctions are robustly enforced.

Therefore, it is key that implementers and policy makers consider implementing sanctions in a way that they can be effectively enforced.

Automating sanctions

Policy makers and implementers should consider automating sanctions where possible. Systems could be developed to identify violations and enforce automated penalties. For instance in Austria and Belgium, legal entities are required to confirm on an annual basis, within a certain timeframe, that their reported BO data is up to date, accurate, and adequate. If this reporting requirement is not fulfilled by the legal entities within the prescribed timeframe, coercive penalties are automatically issued. The FATF has recognised that the automated sanctions system that was adopted by Austria has contributed to achieving an overall reporting rate of more than 93% in the country, as of July 2019.[97]

Box 9. Austria’s automated sanctions system [98]

In Austria, automated coercive penalties are used to ensure ongoing compliance with the obligation to report BO information. Authorities automatically send a reminder letter if a report is not filed within a deadline of 28 days for newly established entities, or within the initial reporting period, threatening the legal entity with a EUR 1,000 (approximately USD 1,100) coercive penalty. The penalty is imposed if the legal entity fails to report within the deadline given in the reminder, and a higher penalty of EUR 4,000 (approximately USD 4,400) is threatened. If the legal entity continues to fail to report, the coercive penalty of EUR 4,000 is imposed and the case is forwarded to a responsible fiscal penal authority.

Similarly, in some jurisdictions that automatically cross-check BO information with other government-held data sources for verification, if checks reveal that any data points of a BO declaration have not been updated on the BO register within the prescribed timescale, this can result in automated sanctions. Automated sanctions can reduce resources required for enforcement. However, if automated sanctioning systems are not carefully designed, they can be a resource burden elsewhere (for example, for the judiciary) if increased sanctions lead to a substantial increase in appeals.

Robust verification checks

Verification of BO data is a precondition to enforcing sanctions for the submission of false information, as it will help identify violations. Depending upon the jurisdiction, different verification mechanisms may be put in place.[99] For example, cross-checking with other available government registers and databases, such as asset declaration registers for politically exposed persons or tax registers, which could be useful in verifying the submitted information. There might also be other verification mechanisms incorporated within the legislative framework, such as a discrepancy reporting requirement for obliged entities.

Whenever a discrepancy between the BO information in the register and BO information another party holds is identified or reported, especially if the data is inaccurate, false, or misleading, the relevant sanctions and enforcement regime should incorporate proper procedures. This should be done whether the discrepancy was reported by automated systems, reporting entities, competent authorities, or civil society. Proper procedures should be followed by the relevant authority before they enforce any sanctions. This may include, for instance, requesting the legal entity, declaring person, or beneficial owner (if applicable) to provide further information or supporting documents on the identified discrepancy, and collecting further information from other competent authorities (such as tax authorities). If these do not lead to a satisfactory resolution, the procedure to enforce sanctions should be followed.

Sufficient capacity, resources, and legal mandate for investigations

Effective enforcement requires the capacity to impose sanctions in the event of noncompliance by the entities, but also noncompliance by the shareholders or beneficial owners who would not disclose requested information to the entity. A known track record of effective enforcement is likely to increase the overall deterrent effect in a jurisdiction.[100]

In this regard, implementers should ensure that:

  1. the designated authorities for investigating and enforcing any breaches of the BO disclosure regime have clear legal mandates;[101] and
  2. such authorities and agencies have sufficient capacity and resources (both human and technical) to carry out their functions effectively.

Lack of sufficient capacity and resources is often cited as one of the major hindrances in enforcing BO disclosure requirements. In Belgium, for instance, it has been reported that due to the limited availability of resources and the extent of the work involved, the designated authority cannot conduct systematic ex ante controls of the information registered by legal persons and legal arrangements.[102] Similar resource constraints have also been cited by the UK.[103]

Burden of proof

Another important consideration for policy makers and implementers is to determine on whom the onus lies for proving that the natural or legal person has breached the requirements of the BO disclosure regime or not. It can be placed on the investigators, the enforcement authority, or the natural or legal person. Again, this may vary depending upon the legal system of each country. For administrative or civil fines and sanctions, placing the burden of proof on the natural or legal persons may greatly enhance the quality and accuracy of the BO data submitted on the register. This is the practice adopted in Slovakia. If a natural or legal person has submitted complete, accurate, and up-to-date data on the register, it will be less burdensome for them to prove the accuracy of the submitted information than imposing such an obligation on the investigators, for whom it might become more resource-intensive and time-consuming, especially in countries with limited verification mechanisms. This approach may also be effective for other declarations that are difficult to verify, such as from non-resident legal entities and non-resident beneficial owners.

Box 10. Reversal of burden of proof in Slovakia [104]

In Slovakia, there is a proceeding that requires the company to verify the data they submitted on the Register of Public Sector Partners, which is maintained by the Registration Court, on the submission of a query by anyone that the Registration Court finds to be reasonable. This creates a reverse burden of proof that is based on two principles:

  1. it is reasonable to require people who register data to prove it is correct, for they have the best access to the data; and
  2. it is fair for the burden to be on owners because they benefit most from the ownership.
End notes

[97] Best Practices on Beneficial Ownership for Legal Persons, FATF, 66.

[98] Ibid.

[99] See: Kiepe, “Verification of Beneficial Ownership Data”.

[100] A Beneficial Ownership Implementation Toolkit (Paris: OECD and the Inter- American Development Bank, March 2019), 37, https://www.oecd.org/tax/transparency/beneficial-ownership-toolkit.pdf.

[101] See: “Corporate Transparency and Register Reform: Powers of the Registrar”, Department for Business, Energy and Industrial Strategy.

[102] Best Practices on Beneficial Ownership for Legal Persons, FATF, 46.

[103] See: “Draft Registration of Overseas Entities Bill: Report of Session 2017-2019”, House of Lords, House of Commons, and Joint Committee on the Draft Registration of Overseas Entities Bill, 20 May 2019, 40-42, https://www.parliament.uk/globalassets/documents/joint-committees/draft-registration-overseas-entities/Report.pdf; “Review of the Implementation of the PSC Register: BEIS Research Paper Number 2019/005” Department for Business, Energy and Industrial Strategy, March 2019, 35, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/822823/review-implementation-psc-register.pdf.

[104] Kiepe, Ponsford, and Russell-Prywata, “Early Impacts of Public Registers of Beneficial Ownership: Slovakia”, 3.

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