Legal and Regulatory Framework
This section covers our findings and recommendations with regard to law and regulation. Open Ownership reviewed provisions in the Subsoil Law relating to beneficial ownership, two versions of draft regulations relating to its implementation, and other information provided by SCIESU.
Definition of Beneficial Ownership
The Subsoil Law obliges companies holding subsoil licenses to disclose their beneficial ownership, and mandates SCIESU to collect and publicly publish it. This provides the foundation both for compliance with EITI Standard provisions on beneficial ownership and the Kyrgyz Republic’s leadership on beneficial ownership transparency in the extractives sector.
The 10% ownership threshold used in the Subsoil Law to determine beneficial ownership will enable useful information to be captured and avoid excessive quantities of information, although as a principle Open Ownership’s view is that it is best to declare all ownership and not use a threshold. The Subsoil Law does not specify how this information should be published by SCIESU (see recommendation 2).
The Subsoil Law includes a clear definition of beneficial ownership, covering three key categories of control: shares, votes and power to appoint Board members. However the definition does not extend to informal methods of control or control via proxies.
Recommendation 1: The definition of beneficial ownership should include a category of ‘other influence or control’
This addition would capture informal methods of control over a legal entity, i.e. not legal ownership of voting rights or shares. In particular, it provides an explicit method for declaring beneficial ownership when control is exercised via an informal proxy. Formal and informal proxy arrangements are well known methods of maintaining control or benefit from a company, and these can be used to hide the identity of the true beneficial owner. Although some people may still submit false information, this amendment would enable law enforcement to take action, and potentially uncover other offenses.
Regulations to balance transparency and data protection
The law clearly mandates the collection and public publication of information on beneficial owners. However, there are currently no regulations in place to enable SCIESU to implement the provisions in the Subsoil Law. Under Kyrgyz law, regulations are needed to describe how SCIESU should collect and publish the information required by the Subsoil Law. Draft regulations have been developed and are nearing the final stage of government approval process; Open Ownership is commenting separately on their content.
Following the passing of the law “On Subsoil” (2018), regulations were drafted to specify how the beneficial ownership provisions in the law are implemented. These regulations do not contain sufficient detail, and this has caused a lack of clarity over exactly what information about beneficial owners must be collected, and what must be published. The lack of clarity in regulations is also likely to have contributed to a lack of clarity about which data points will be published publicly versus just collected and held by SCIESU. This was reflected in companies’ concerns about what data will be made public.
Amended regulations are required as soon as possible to enable SCIESU to progress with technical aspects of beneficial ownership disclosure. These should be sufficiently specific about what data is to be collected and published in order to deliver the provisions in the Subsoil Law and achieve meaningful beneficial ownership transparency. SCIESU is taking steps to resolve this by drafting an amended set of regulations.
Recommendation 2: Regulations should specify what data is to be collected, and what data is to be published publicly
Specifying what data is to be published publicly provides an additional safeguard that publication is fully compliant with relevant privacy and data protection law. The disclosure form that companies use should clearly indicate for each field whether or not the data will be published publicly, which should alleviate companies’ concerns. Further legal advice may be useful to determine how publication operates within existing data protection principles and on the appropriate wording to include on the draft disclosure form to seek consent from beneficial owners for their information their information to be used, stored and shared publicly, including with third parties and in public databases.
Treatment of Politically Exposed Persons
The Subsoil Law requires SCIESU to comply with EITI reporting requirements, meaning that beneficial owners must declare whether they are a Politically Exposed Person (PEP), and this must be published. This is reflected in the draft disclosure form. However, there is some uncertainty among companies and SCIESU staff about who qualifies as a PEP. Therefore, we recommend in order to meet the timescale required by EITI, PEP is defined in the disclosure form in reference to the definition in existing Kyrgyz anti-money laundering law. Longer term, the legal definition of PEP should be reviewed and kept up to date with international best practice.
Recommendation 3: The definition of Politically Exposed Person for purposes of beneficial ownership should reflect that already in use in Kyrgyz law, but longer term this definition should be reviewed and compared with international guidance
Changes and Updates to Information
The Subsoil Law does not include an explicit requirement for companies to notify SCIESU of changes to their beneficial owners after the initial license application has been submitted. This is a serious loophole, and could enable companies to circumvent publication of their true beneficial owners.
Recommendation 4: Companies should be required to submit revised beneficial ownership information when their ownership changes
This requirement should be made clear in relevant law and/or regulation and forms. We recommend that the conditions that trigger an update are: a change in beneficial owner; a change in the nature of the beneficial ownership interest; a change in the level of beneficial ownership interest; and, a change in the personal details of the beneficial owner. In the UK a ‘relevant change’ to either the interest held by a beneficial owner or the details of the beneficial owner must be registered on the company’s own register within 14 days and with the central register at Companies House within a further 14 days.
Scope of the beneficial ownership register
Open Ownership did not find provisions within the Subsoil Law that specified how companies bidding for a license via auction are to be treated. The provisions shared with us do not specify that beneficial ownership information must be collected and published for applicants and bidders, in addition to license holders. Whilst operationally this is clearly SCIESU’s intent – and is required for EITI compliance – this should be clear in the law and/or regulations. To avoid loopholes and maximise the usefulness of data, all beneficial owners and license types should be included within the regime.
Recommendation 5: Entities applying for licenses through all license-issuing mechanisms should be required to declare their beneficial owners
Treatment of listed companies and state-owned enterprises
Where a license is owned by a publicly listed company or a state owned enterprise, the Subsoil Law does not specify what information should be collected about such entities. SCIESU’s draft disclosure form requires the applicant company to disclose whether any of the entities in their ownership chain are publicly listed companies. If so, it requires the following information: name of the listed company, the percentage of shares held, the market the company is listed on, the stock code and a link to the stock market listing. These disclosures meet the current EITI requirements on beneficial ownership but will not maximise the possibilities of useful and linkable data for Kyrgyz Republic’s license register.
Recommendation 6: Exemptions, such as for publicly listed companies or state-owned enterprises, should be limited in scope, clearly defined, and useful data about the entities should be collected
SCIESU should clarify that the exemption for publicly listed companies applies only to the block of shares legally owned by the publicly-listed company; where a company is part-owned by a publicly-listed company, other beneficial owners should declare in line with the regulation. If publicly-listed companies are to be exempted, then the list of markets with acceptable disclosure requirements should be specified, as in the UK. This will reduce the possibility of regulatory arbitrage as companies avoid disclosure rules by listing on exchanges with low transparency requirements.
With regard to state-owned enterprises, the OECD has identified that these present an additional risk of corruption (due to the involvement of politically exposed persons), but can also be a way to safeguard economies through improved governance. Open Ownership therefore recommends that where the ultimate owner of a license-holding company is a state or a state-owned enterprise, the name and identifiers for the legal entity owning the license should be collected and published. Details of the information fields that should be collected are provided in Annex A.
Sanctions for Non-Compliance
The Subsoil Law allows SCIESU to terminate a company’s license in case of non-submission of beneficial ownership information, or submission of incorrect information. is is a strong provision and should help ensure compliance. However, aside from this, the Subsoil Law does not contain other sanctions for companies failing to comply, such as fines or suspension of license. Similarly, it does not contain provisions to sanction the beneficial owners themselves.
Whilst the ability to revoke a license for non-submission or the submission of incorrect beneficial ownership information is powerful on paper, the number of sanctions may be small in practice because SCIESU does not intend to undertake verification (see later section).
Recommendation 7: Suspension of license and fines should be considered in addition to termination of license in cases of non-compliance, and SCIESU should be empowered to ask companies to make corrections or submit missing information
SCIESU should consider suspension, rather than revocation, of license for non-submission of information, in order to drive up compliance and limit the administrative impact on SCIESU of dealing with non-compliance. To encourage consensus and compliance around the beneficial ownership transparency regulations, SCIESU should be empowered to contact companies asking them to correct information that it suspects to be incorrect, outdated or missing. This is particularly important when knowledge of how to comply with the new regulations is low.
For companies that do not comply following initial steps, the Kyrgyz Republic should consider legislating for fines and/or other penalties, both for companies, company officers and beneficial owners – this approach is operational in the British and Danish systems, among others. In the UK, beneficial owners may be sanctioned for failure to respond to requests for information from companies about their beneficial owners, or knowingly or recklessly making a false statement to the register. They can also be sanctioned for failing to notify a company that they are a beneficial owner, even if they haven’t been contacted by the company.
 Schedule 1 of The Register of People with Significant Control Regulations 2016.
 OECD. “State-Owned Enterprises and Corruption: What Are the Risks and What Can Be Done?” Paris: OECD Publishing, 2018. https://doi.org/10.1787/9789264303058-en.