European beneficial ownership bureaucracy is a major headache for both entities that have to register (‘registering entities’) with the beneficial ownership register [1] (‘ubo-register’), as for ‘obliged entities’ [2] like banks and auditors.
Everyone involved with European beneficial ownership bureaucracy should prepare for revision of the rules through a new European AML/CFT [3] regulation: AMLR [4].

The European Commission, the Council and the Parliament still believe in the AML/CFT concepts, even though the failure of the system is apparent. The same applies to the illusion that – at the expense of undermining the data protection of the ‘beneficial owners’ (‘ubo’s’) registered – through the ubo-register crime can be countered.

Currently a draft AMLR is discussed and the amendments proposed by the LIBE and ECON committees are discussed as well. Some major changes regarding ubo/ubo-register are mentioned here.

Broadening the ubo-definition: ‘control through other means’ by having links with family members of directors/owners/controllers
In the draft AMLR ‘control through other means’ is explained in the recital (66):

Control through other means may include the right to appoint or remove more than half of the members of the board of the corporate entity; the ability to exert a significant influence on the decisions taken by the corporate entity; control through formal or informal agreements with owners, members or the corporate entities, as well as voting arrangements; links with family members of managers or directors or those owning or controlling the corporate entity; use of formal or informal nominee arrangements.

See article 42 draft AMLR.

The definition of ‘beneficial owner’ is is considerably widened by the inclusion of all family members of managers, directors, owners and controllers. This is improper and unnecessary and will lead to new gathering of personal data.

Broadening the ubo-definition / registration duty: lowering the percentage for the identification of beneficial ownership of legal entities to 5%
The Commission in article 63 draft AMLR proposes to present reports to the European Parliament and to the Council assessing the need and proportionality of lowering the percentage for the identification of beneficial ownership of legal entities that are registered in the ubo-register.
The ECON and LIBE committees do not want to wait for that. They propose to lower the threshold of control through ownership to 5% plus one of the shares or voting rights or other ownership interest, to be assessed on every level of ownership, read recital (65) in their draft:

(65) Detailed rules should be laid down to identify the beneficial owners of corporate and other legal entities and to harmonise definitions of beneficial ownership. While a specified percentage shareholding or ownership interest does not automatically determine the beneficial owners, it should be one factor among others to be taken into account. Control through ownership interest of 5% plus one of the shares or voting rights or other ownership interest should be assessed on every level of ownership, meaning that this threshold should apply to every link in the ownership structure and that every link in the ownership structure and the combination of them should be properly examined.

Proof of the ‘pseudo-ubo’
There are many registering entities that do not have a ‘real’ ubo (though the current definition is already ridiculously broad), e.g. many Dutch ‘stichtingen‘ in the nonprofit sector do not have a ‘real’ ubo.
When there is no ‘real’ ubo the senior officials of the entity are designated as ubo’s (‘pseudo-ubo’s’), even though they are registered with the trade register. The European lawmakers think that having a pseudo-ubo is extraordinary and require extra proof if there is such a pseudo-ubo. It leads extra bureaucracy (article 45 draft AMLR):

• the corporate or other legal entities shall keep records of the actions taken in order to identify their beneficial owner(s);
• the corporate or other legal entities shall provide (a) a statement, accompanied by a justification, that there is no beneficial owner or that the beneficial owner(s) could not be identified and verified and (b) details regarding the senior managing official(s).

The committees in their draft report add extra bureaucracy:

entities shall keep records of the actions taken in order to identify their beneficial owner(s), and provide additional information on a risk-sensitive basis, including resolutions of the board of directors and minutes of their meetings, partnership agreements, trust deeds, powers of attorney or other contractual agreements and documentation.

No explanation is given for these strange requirements.

The ubo who is a ‘high-net-worth individual’
The committees propose to qualify high-net-worth individuals as high risk, see recital 60a and article 36a of their draft. There will be many high-net-worth individuals, as the committees’ definition of such a person is (article 2(1)(27a) draft report):

a natural person who owns at least EUR 1 million or the equivalent in national currency in liquid financial assets

Certain high-net-worth ubo’s are super-high risk, according to the LIBE ECON proposal, that are those:

whose wealth derives prominently from the extraction of natural resources, from links with politically exposed persons or from the exploitation of monopolies

and they are added to Annex III of AMLR.

The definition of ‘politically exposed person’ will include siblings
The ubo may be a ‘politically exposed person’ (PEP) and is high risk then. The definition of PEP currently includes parents and children of the ‘primary’ PEP. According to the draft-report of the ECON LIBE committees siblings of a primary PEP also will be high risk.

Yearly verification of the ubo
According to the Commission’s draft obliged entities every year have to check the ubo-information (article 21 draft AMLR):

the obliged entity has a legal obligation in the course of the relevant calendar year to contact the customer for the purpose of reviewing any relevant information relating to the beneficial owner(s) or to comply with Council Directive 2011/16/EU

In article 44 (2) draft AMLR the Commission requires that registering entities shall update their ubo-information on an annual basis.

Non-EU legal entities to be registered in the ubo-register
Read the explanatory memorandum by the Commission, regarding AMLR:

Beneficial ownership information
The provisions on beneficial ownership information in the proposal build on those in current EU AML/CFT legislation, including the concept of beneficial ownership and the requirement for all corporate and other legal entities to obtain and hold adequate, accurate and current beneficial ownership information. More detailed rules are provided to identify the beneficial owner(s) of corporate and other legal entities, and a harmonised approach to the identification of beneficial ownership is laid down. With regard to express trusts and similar legal entities or arrangements, provisions are provided to ensure the consistent identification of beneficial owners across Member States when similar situations are faced, including an empowerment for a Commission implementing act. The proposal includes disclosure requirements for nominee shareholders and nominee directors, and introduces the obligations to register their beneficial ownership in the Union for non-EU legal entities that either enter into a business relationship with an EU obliged entity or acquire real estate in the Union.

See also article 48 draft AMLR and the fine-tuning in the committees’ draft.

It is interesting to see that if a non-EU legal entity is asking legal advice to which AMLR applies [5], this entity has to register its ubo’s in the country of the legal adviser. The same applies when a non-EU legal entity buys an art object in the EU with a value of EUR 10 000 or more [6].

Final remark
The European lawmakers love bureaucracy and will be applauded by compliance industry. Hopefully there is enough money in Europe to pay for compliance. Of course, it doesn’t help fight crime, but that’s okay. The most important thing is that lawyers and compliance industry can benefit.

Data protection damage must be accepted as a societal fact by the ‘beneficial owners’… or are they protected by GDPR against greedy European lawmakers?

Notes

[1] Please note that the ‘beneficial owner’ under European anti-money laundering legislation sometimes does not own anything and should be distinguished from the beneficial owner for tax purposes. For that reason the UK the first type of beneficial owners is referred to as ‘People with Significant Control’ (PSC). In Dutch: ‘uiteindelijk belanghebbende’, ‘ubo’.
[2] Companies that have to detect crime on behalf of the government and report suspicious transactions to that same government (‘obliged entities’).
[3] AML = anti-money laundering, CFT = countering terrorist financing. AML refers to all proceeds of crime, so in practice obliged entities have to conduct general crime detection.
[4] AMLR = Anti-Money Laundering Regulation, latest draft is to be found here. See also the draft report by ECON/LIBE proposing amendments to the draft AMLR.
[5] AML/CFT legislation only applies to certain activities of lawyers, including buying and selling of real property or business entities (article 3 (b) draft AMLR).
[6] Article 3 (i), (j) draft AMLR.

NB This article was published too early so the version sent by mail may differ from this version.

This is part 3 of the series Horrors of European legislation against crime (AML/CFT) that describes the European plans to fundamentally change AML/CFT legislation.