22 March 2022 - In recent months many important changes have been made across all regions regarding the rules around beneficial ownership in an effort to enhance transparency.
The implications of the rule changes differ across jurisdictions, and below we outline some of the most important developments across the Americas, Europe, and Asia that asset owners around the globe need to be aware of.
In December 2021, the Department of Financial Crimes Enforcement Network (“FinCEN”) issued a notice of Proposed Rulemaking to implement the beneficial ownership information reporting provisions of the Corporate Transparency Act (“CTA”).
The CTA itself was passed into law as part of the National Defense Authorization Act in January 1, 2021. It instructs the Treasury Department to issue regulations that will require certain US companies (hereafter referred to as “Reporting Company”) to disclose their beneficial owners to FinCEN.
The first set of proposed regulations were published by FinCEN on December 7, 2021 (the “Proposed Rules”). The proposed rules address who must report beneficial ownership information, when they must report, and what information they must provide, as well as containing other stipulations.
Below we outline in more detail some of the key points and what they mean for companies.
The Proposed Rules distinguish two types of reporting companies:
- Domestic reporting companies - entity created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe within the US.
- Foreign reporting companies - entity formed under the law of a foreign country and that is registered to do business in any state or tribal jurisdiction within the US.
The definition of a Reporting Company is also interpreted to include any entity that is created by the filing of a document with a secretary of state or similar office. While the Proposed Rules provide more clarity about the definition of a reporting company they open the possibility for differences between states by determining that reporting companies are legal or business forms typically created by a filing with a secretary of state or similar office.
The Proposed Rules do not add more exempt entities, even though the CTA provides FinCEN with the authority to do so.
However, one interesting point in the clarification to the ‘subsidiary exemption’ is that the Proposed Rules seem to determine that only full ownership or control by one or more exempt entities will qualify and all a subsidiary to opt for such exemption.
CTA defined a Beneficial Owner as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise:
- exercises substantial control over an entity, or
- owns or controls 25% or more of the ownership interests of the entity.
The Proposed Rules require a Reporting Company to identify one beneficial owner under the ‘substantial control’ category, irrespective of whether there are any other individuals that satisfy the ownership component, or if exclusions to the definition of beneficial owner apply.
The Proposed Rules also further define what constitutes substantial control and introduce a catch-all provision which recognizes that control exercised in novel and unorthodox ways can still be considered substantial.
As for the 25% ownership, the Proposed Rules state that this threshold includes equity interest, capital or profit interest in a limited liability company or partnership, proprietary interest, instrument convertible into any of the other listed interests, and options.
It adds that an individual may further directly or indirectly own or exercise substantial control through a variety of other means.
The Proposed Rules to do not add new categories of exclusions from the beneficial owner definition, but there is also no process provided in the Proposed Rules as to how entities should evidence this, or how FinCEN will verify exemption claims.
The Proposed Rules also change the definition of a “company applicant” hence including a person who directs or controls the filing of an application to register a reporting company done by another person.
The Proposed Rules include the filing deadlines for information reports under the CTA, with varying timeframes depending on whether companies are domestic or otherwise.
A domestic reporting company that has been incorporated or a foreign reporting company registered to do business in any state in the US before the effective date of the final regulations would have to file its initial report within one year of the effective date of the final regulations.
- A domestic reporting company that has been incorporated or a foreign reporting company registered to do business in any state in the US after the effective date of the final regulations would have to file its initial report within 14 days of formation or registration.
All reporting companies would also have to file an updated report within 30 days following a change with respect to any information the reporting company previously submitted to FinCEN, and a corrected report needs to be filed within 14 days after a reporting company becomes aware that previously provided information is no longer accurate.
The Proposed Rule requires reporting companies to reports to FinCEN information about:
- the reporting company itself, and
- each beneficial owner and company applicant.
The Proposed Rules also clarify that while only reporting companies are directly required to file reports or applications with FinCEN, individual beneficial owners and company applicants may provide information about themselves to reporting companies in order for the reporting companies to comply with their obligations under the CTA.
Crucially, the accuracy of the database may therefore depend on the accuracy of the information supplied by individuals as well as by reporting companies.
This therefore introduces the concept of individual liability for individuals involved in the reporting process that willfully provide false or fraudulent information to be filed.
This seems to go a step further than the civil and criminal penalties applicable to the reporting by the Reporting Company as stipulated in the Act.
The Proposed Rules were open for comments until February 7, 2022, and FinCEN also plans to issue additional rulemaking.
The Act authorizes FinCEN to determine an effective date for beneficial owner reporting, but FinCEN does not provide this in the Proposed Rules. Instead, it seeks comments on the timing of the effective date and other factors to be considered.
On January 10, 2022, the Singapore parliament passed The Corporate Registers (Miscellaneous Amendments) Bill (the ‘Bill’), which amends the Companies Act and Limited Liability Partnerships Act to give effect to recommendations from the Financial Action Task Force.
The new rules introduced under the Bill will mean:
- Local and foreign companies registered in Singapore need to create and maintain a register of nominee shareholders and the respective nominators, and they are required to update this register within 7 days of being informed about any changes. Nominee shareholders will also be required to inform the company of their nominee status and their nominators within 30 days.
- Companies and LLPs are already required to maintain a register of registrable controllers. However, there may be occasions whereby the company or LLP has no registrable controller or has not been able to identify a registrable controller with significant interest or control. Now, the Company or LLP will have 2 business days to identify all individuals with executive control over the company or the LLP (including directors, CEOs and partners), and record them as registrable controllers.
Other relevant changes brought about by the Bill include:
- Local companies will need to update their register of nominee directors within 7 days of being informed of about any changes.
- Foreign companies will need to update their register of members within 30 days after any change in the particulars contained in the register.
Failure to comply with any of these provisions may render the company, each of its officers and/or the shareholder liable for a fine of up to $5,000.
It is important to state that none of the registers referenced above are open to the public.
Meanwhile, the Accounting and Corporate Regulatory Authority ("ACRA) has also conducted a public consultation which closed 28 January 2022 seeking the comments from the public on further changes enhancing the transparency of beneficial ownership. None of the consultation points involved public disclosure of beneficial owner information.
On 23 November 2021 the Dutch government approved the proposed law implementing a register of ultimate beneficial owners (UBOs) for trusts. The trust UBO register will be publicly accessible and shall contain information on the ultimate beneficial owners of trusts and similar arrangements, including Dutch mutual funds (fonds voor gemene rekening).
The obligations to obtain and disclose information in the trust UBO register sits with the trustee or the person or company fulfilling a comparable position who resides or is established in the Netherlands.
Alternatively, they apply to a trustee or person or company fulfilling a comparable position who resides or is established outside the EU and acquired Dutch real estate, or enters into a business relationship with an obligated entity in the Netherlands on behalf of the trust. No registration requirements will exist in the Netherlands if the trust and its identified UBOs are registered in the trust register of another EU member state.
In the case of a Dutch mutual fund, the manager will be considered as the trustee.
For the definition of UBO the proposed law follows the Anti Money Laundering and Terrorist Financing Act of 2018. The following functions in a trust are considered as UBO:
- Individuals exercising control over a trust
- Manager and legal title holder of the mutual fund (fonds voor gemene rekening)
- All beneficiaries of the trust or participants in the mutual fund
Small Interest Exemption
Beneficiaries and mutual fund participants with an (ownership) interest of less than 3% will not be registered in the Trust register. If no beneficiary can be found with an (ownership) interest of at least 3%, the trustee may describe the group in which interest the trust is primarily established or operated. Similarly, when no individual can be identified as a beneficiary, the trustee may record a description of the person or group of persons who would qualify as the beneficiary or beneficiary group.
The effective date of the trust UBO register is still to be determined. However, it is expected that the Trust register may come into force later this year. [KI(1] Trustees are expected to have three months to register the UBOs of trusts. After this transition period, trustees must comply with the ordinary registration period of one week, whereby changes of the UBO also need to be registered within one week.
Failure to comply with any of these obligations could result in criminal or administrative sanctions, including imprisonment for up to two years.
Citco continues to monitor global developments on the topic of UBO transparency. We welcome the opportunity to support you in terms of compliance activities across all of our offices, and if you have any questions about the specific topics touched on here, or about any of our services, please do reach out to:
T: +1 305 577 0233
Dennis van den Broek
T: +31 6 2971 0072
T: +65 6571 1615