Introduction

On 15 November 2016 the Department of Finance published the European Union (Anti-Money Laundering: Beneficial Ownership of Corporate Entities) Regulations 2016 (SI 2016 of 560) (“the Regulations”). The Regulations are the first step in the transposition of the Fourth Anti-Money Laundering Directive (EU 2015/849) (“AMLD4”), which is due for transposition into Irish law by 26 June 2017.

AMLD4: The Fourth Anti-Money Laundering Directive 

AMLD4 is the latest significant upgrade to the EU legislative programme in the area of anti-money laundering. It has the aim of further strengthening the EU’s defences against money laundering and terrorist financing and ensuring the soundness, integrity and stability of, and confidence in, the financial system as a whole. AMLD4 ultimately requires each Member State to establish a central register of beneficial ownership of corporate and other legal entities, including trusts, by 26 June 2017.

The concept of disclosing beneficial ownership is seen as a deterrent to criminal activity at EU level that may be disguised behind complex ownership structures. AMLD4 implements recommendations by the Financial Action Task Force (FATF), which is considered a global reference for rules against money laundering and terrorist financing. On some issues AMLD4 expands the FATF’s requirements and provides for additional safeguards. AMLD4 is a minimum harmonising Directive, providing Member States with the scope to adopt more stringent provisions.

Coinciding with the EU efforts in this field, there has been a push globally, led by the OECD, to develop a new, single, global standard for exchange and interlinking of beneficial-ownership information. By way of example, the Council of the EU recently adopted a Directive granting access for tax authorities to information held by authorities responsible for the prevention of money laundering. This Directive will require Member States to provide access to information on the beneficial ownership of companies, the objective of which is to enable tax authorities to access that information in monitoring the proper application of rules on the automatic exchange of tax information.¹

The Regulations

The Regulations require companies and other legal entities incorporated in Ireland to take all reasonable steps to hold adequate, accurate and current information on their “beneficial owners” on an internal beneficial-ownership register with effect from 15 November 2016. This internal register should be distinguished from the central register that is required under AMLD4. The requirement to maintain an internal register means that entities in scope should be in a position to produce information on their beneficial owners easily once the requirements of AMLD4 in relation to the central register come into force. It is expected that these central-register requirements will be in place by mid-June 2017 and, for corporate entities, will be operated by the Companies Registration Office (CRO).

It should be noted that, although AMLD4 makes provision for the disclosure of the beneficial ownership of trust structures, this aspect of the Directive has not yet been transposed in Ireland.² The aspects of AMLD4 dealing with trust structures are dealt with below.

Definition of beneficial owner

With regard to corporate entities, the Regulations refer to the definition of “beneficial owner” contained in Article 3 of AMLD4. The term means a natural person who ultimately owns or controls a legal entity through direct or indirect ownership of a sufficient percentage of the shares or voting rights or ownership interest in that entity. A shareholding of 25% plus one share or an ownership interest of more than 25% held in that entity by a natural person will be an indication of direct ownership. A shareholding of 25% plus one share or an ownership interest of more than 25% held by a corporate entity, which is under the control of a natural person(s), or by multiple corporate  entities, which are under the control of the same natural person(s), will be an indication of  indirect ownership.

Scope

The Regulations apply to all corporate and other legal entities incorporated in Ireland, including companies and other bodies  corporate, except for those:

1. “listed on a regulated market that is subject to disclosure requirements consistent with the law of the  European Union, or
2. subject to equivalent international standards which ensure adequate transparency of ownership information.”

Disclosure requirements consistent with the law of the EU are stated to include the Transparency Regulations.³ Unfortunately, neither AMLD4 nor the Regulations provide any definition of the term “regulated market”. It may be taken that main markets within the EU (for example, the main market of the Irish Stock Exchange) would come within the scope of the exemption. The exemption may also apply to a company listed on a non-EU main market, if it has disclosure requirements that are consistent with the law of the EU, although the Regulations do not have precise guidance on this limb of the exception, nor on whether secondary markets are included. Furthermore, limb (b) of the exemption, covering “international standards which ensure transparency of ownership information”, has not been expanded upon, so there have been difficulties in interpreting this limb and the types of company that could avail of it.

Neither AMLD4 nor the Regulations provide any exemptions in a group scenario, and it seems that every entity that is in scope within a group is required to produce its own beneficial- ownership register. Where a company is a subsidiary of a company listed on a regulated market, according to the wording of the Regulations, the subsidiary is not itself exempt from the requirement to maintain a register of beneficial ownership. It is open to interpretation as to whether such a subsidiary is obliged to “look behind” the listed parent company, which is itself exempt from maintaining a register, and list the beneficial owners (if any) of that parent as its beneficial owners.

Obligations under the Regulations

Under the Regulations every relevant entity in scope must take all reasonable steps to obtain and hold adequate, accurate and current information on the following in respect of its beneficial owners:

• name,
• date of birth,
• nationality,
• residential address and
• a statement of the nature and extent of the interest held by each beneficial owner.

The beneficial-ownership register must also include details of:

• the date on which the natural person was first added to the beneficial-ownership register as a beneficial owner and
• the date on which the natural person ceased to be a beneficial owner (if applicable).

The Regulations do not prescribe the form the beneficial-ownership register must take.

Obligations of the relevant entity

How does a relevant entity gather information and maintain its internal register of beneficial ownership? 

Where the relevant entity does not have the required information on its beneficial ownership, it must serve notice on any natural person whom it has reasonable cause to believe to be a beneficial owner, requesting that person to state whether or not he or she is a beneficial owner and, if so, to confirm or correct the necessary information (e.g. to provide any details that are missing) so that the beneficial-ownership register can be completed. A natural person served with the notice is obliged to comply with the request for information within one month of the date of the notice.

What is a third-party notice, and when may a relevant entity serve a third-party notice?

The relevant entity may (but is not obliged to) give notice to any other person (whether or not a natural person), which it has reasonable cause to believe has knowledge of the identity of a beneficial owner, requiring that person to state whether it knows the identity of any beneficial owner or the identity of any other person likely to have knowledge of a beneficial owner and, if so, to supply details of any such person and to state whether or not the particulars are being supplied with the knowledge of such person(s). A person on which a third-party notice is served must comply with the notice within one month of the date of the notice. Information does not have to be disclosed where the recipient of the notice could claim legal professional privilege in legal proceedings in respect of the information sought.

What if the relevant entity cannot identify a beneficial owner?

If it has not been possible to identify a beneficial owner after exhausting all possible means to do so, and provided that there are no grounds for suspicion by the relevant entity that a beneficial owner actually exists, or where there are doubts as to the beneficial ownership, the senior managing of financials (SMOs) of the relevant entity must be entered on the beneficial- ownership register as the “beneficial owners”. The term “senior managing official” is defined in the Regulations as “including a director and a chief executive officer”. In such circumstances, the relevant entity must also keep records of all of the steps taken to ascertain the beneficial owners. It should be recognised that, in the case of some corporate entities, there may not be any beneficial owners, e.g. because the relevant entity’s ownership may be so broad-based that no person(s) have control or a sufficiently large direct or indirect ownership interest. In such cases the directors, CEO and (if any) other senior managing officials of the relevant entity will need to be entered on the beneficial-ownership register as the “beneficial owners”. This provision means that individuals who possibly have no legal or beneficial-ownership interest in the entity but who are directors or the CEO of it may be deemed to be its beneficial owners if the entity cannot identify any other individual(s) who are its beneficial owners.

Does a relevant entity have any ongoing obligations?

The beneficial-ownership register must be updated when there has been a relevant change in beneficial ownership, i.e. where a natural person ceases to be a beneficial owner, or when there has been a change in the stated particulars. Where a relevant entity learns of such change or has reasonable cause to believe that such a change has occurred, it must serve notice on the natural person concerned seeking updated information, unless the information has already been provided by or on behalf of the natural person.

Obligations of the beneficial owner

Beneficial owners are obliged to notify the relevant entity of their status as a beneficial owner where they are aware, or ought to be aware, that they are a beneficial owner. This obligation arises only where the person’s particulars are not already entered on the relevant entity’s beneficial-ownership register or where the person has been given notice by the relevant entity to provide particulars on beneficial ownership.

It should be noted that the obligation arises independently, whether or not notice has been served on the beneficial owner.

Natural persons are also obliged to notify the relevant entity if they cease to be beneficial owners or if their particulars on the beneficial- ownership register change.

Sanctions and other consequences

Failure by a relevant entity or the recipient of a notice to comply with any of the obligations set out above is a criminal offence and can result in the imposition of a fine of €5,000 on summary conviction.

Where the name of a person is incorrectly entered in or omitted from a relevant entity’s beneficial-ownership register, or where default is made or unnecessary delay takes place in noting that a person has ceased to be a beneficial owner, an application can be made to the High Court to rectify the beneficial-ownership register.

Who Can Access the Central Register?

As mentioned above, the central register should be distinguished from the internal register that is required under the Regulations. Under the Regulations, there does not appear to be any right of inspection of the internal register. However, as it stands, AMLD4 provides that the information on the central register must be accessible to:

• competent authorities and financial intelligence units (FIUs),
• “obliged entities” (including investment funds and banks), when carrying out customer due diligence measures, and
• those who can demonstrate a “legitimate interest” in the information.

Member States may provide for wider access to the central register, and it remains to be seen whether Ireland will avail of this option. The Regulations do not deal with this aspect of AMLD4.

It should be noted that there is no definition of the term “legitimate interest” in the legislation, although AMLD4 states that Member States should ensure that persons who are able to demonstrate a legitimate interest with respect to money laundering, terrorist financing, and offences such as corruption, tax crimes and fraud are granted access to beneficial-ownership information, in accordance with data-protection rules.

In exceptional circumstances laid down in national law, where the access to information on beneficial ownership would expose the beneficial owner to the risk of fraud, kidnapping, blackmail, violence or intimidation, or where the beneficial owner is a minor or otherwise incapable, Member States may provide for an exemption from such access to all or part of the information on beneficial ownership on a case-by-case basis.

The European Commission has proposed an amendment⁴ to AMLD4 (“AMLD5”) that would require the information on the central register to be made available to the public; however, it is unclear whether this will be adopted in the final text of the amendments. As part of these amendments to AMLD4, the Council of the EU has suggested that Member States define “legitimate interest” as a criterion for accessing beneficial-ownership information. It is also proposed that Member States be given competence to establish appeal mechanisms against decisions that grant or deny access to beneficial-ownership information. As it stands, the proposed amendments are being negotiated by the European Parliament and the Council. AMLD5 has been given priority as a concrete objective under the Maltese Presidency of the Council of the EU, which runs until June 2017.

Trusts and Other Legal Arrangements Having a Structure or Functions Similar to Trusts

It is important to note that a charity that is an incorporated entity in Ireland must comply with the provisions as outlined above as and from 15 November 2016. Similar provisions will apply to trusts and other unincorporated entities once Article 31 of AMLD4 has been transposed into Irish law. AMLD4 provides that Member States should require that any legal arrangements governed under their law that have a structure and functions similar to a trust are treated as legal arrangements similar to trusts for the purposes of the beneficial-ownership rules.

With regard to trusts, AMLD4 provides that a “beneficial owner” is any natural person who ultimately owns or controls the trust and/or the natural person on whose behalf a transaction or activity is being conducted and includes at least:

1. “the settlor;
2. the trustee(s);
3. the protector, if any;
4. the beneficiaries, or where the individuals benefiting from the legal arrangement or entity have yet to be determined, the class of persons in whose main interest the legal arrangement or entity is set up or operates;
5. any other natural person exercising ultimate control over the trust by means of direct or indirect ownership or by other means.”

A number of amendments to AMLD4 have been suggested in relation to the provisions requiring a trust to maintain a beneficial-ownership register. It is proposed that a trust or similar legal arrangement should be considered to be administered in the Member State where the trustees are established. A further proposal suggests that Member States must notify the European Commission of the categories, description of the characteristics, names and where applicable the legal basis of the trusts and legal arrangements within 12 months of the entry into force of the amending Directive. On expiry of that period, it is suggested that the Commission should publish, within two months in the Official Journal of the European Union, the consolidated list of such trusts and legal arrangements having a structure and functions similar to trusts. As mentioned above, these proposed amendments to AMLD4 are currently being negotiated by the Council and European Parliament at EU level.

Conclusion

As of 15 November 2016, corporate entities are obliged to establish internal registers of beneficial ownership.

Article 31 of AMLD4, which deals with trusts and legal arrangements having a structure or functions similar to trusts, has not yet been transposed; however, this is on the horizon, and we expect to have more clarity once this aspect of AMLD4 is transposed.

We can expect the central register to be in place by mid-June 2017, and we await confirmation of who will be granted access to the information on the central register. This is a matter for each Member State to decide, and there may be different levels of implementation across Member States.

AMLD4 has a transposition deadline of 26 June 2017. It would appear possible that Member States will transpose AMLD4 in its current form by then and implement changes later, once AMLD5 amendments have been considered.

This article first appeared in Industrial Relations News, IRN 13 on the 30th March 2017.