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Noerr | Central registers of beneficial ownership information: upcoming EU Money Laundering Regulation will significantly increase transparency obligations

  • Uniform EU-wide definition of “beneficial owner”
  • More natural persons classified as beneficial owners
  • More transparency obligations for trusts

On 20 July 2021, the European Commission introduced a package of legislative proposals to combat money laundering, including a draft EU Money Laundering Regulation (COM/2021/420) and a sixth EU Money Laundering Directive (COM (2021) 423). The EU Money Laundering Regulation harmonises provisions on issues such as CDD identity verification and identifying beneficial owners. The sixth EU Money Laundering Directive includes certain requirements in regard to national central registers of beneficial ownership information (“central registers”).

As matters stand, the EU Money Laundering Regulation will enter into effect three years after it is passed by the European Parliament and the Council. The Member States must transpose the sixth EU Money Laundering Directive into national law by three years after it is passed by the European Parliament and the Council. Currently, the date on which the EU Money Laundering Regulation enters into effect and the deadline for transposing the sixth EU Money Laundering Directive into national law are both set for 1 January 2025.

Uniform definition of “beneficial owner” means more transparency

The EU Money Laundering Regulation is to include the first consistent definition of “beneficial owner” and its application across the internal market. In the future, according to this definition, which is basically the same as that currently enshrined in German law, the beneficial owner of a legal entity is any natural person who ultimately owns or controls a legal entity or express trust or similar legal arrangement. This basic definition has not changed from the currently valid definition of the fourth EU Money Laundering Directive (modified by the fifth EU Money Laundering Directive).

However, the EU Money Laundering Regulation includes a reworked definition of direct and – now – indirect control via ownership rights and a definition of control via other means.

Control in multi-level ownership structures starting at more than 25% of shares or voting rights at every ownership level in the future

According to the current status of the draft EU Money Laundering Regulation, in multi-level ownership structures, a natural person will be assumed to have control via ownership rights if that person owns more than 25% of the shares, voting rights or other ownership of every link in the ownership structure by means of which that person holds ownership rights in the entity whose beneficial owner is being identified.

This is a significant expansion of the definition of beneficial owner in the fourth EU Money Laundering Directive as well as currently applicable law in Germany and the vast majority of other EU Member States. According to current German law, ownership of more than 25% of the shares or voting rights was sufficient to identify the beneficial owner only at the first level of the ownership chain, i.e. at the level of direct shareholders of an entity obliged to identify its beneficial owner (“obliged entity”). Starting at the second level of the ownership chain, a majority of shares or voting rights was usually necessary to constitute control. The wording of the EU Money Laundering Regulation, i.e. that even an “other ownership interest” can result in control via ownership rights and thus beneficial ownership, also permits the conclusion to be drawn that in the future it will be permissible to include not only ownership of shares and voting rights but also other rights as factors in identifying a beneficial owner. For example, in several EU Member States, even according to the current legal situation, earnings sharing is considered one indicator of beneficial ownership. Accordingly, a natural person who is (directly or indirectly) entitled to more than 25% of the earnings of an obliged entity is also a beneficial owner. It remains to be seen how broadly the competent authorities will interpret the term “other ownership interest”.

Significant increase in number of situations qualifying as “control via other means”

The first step in identifying control via other means continues to be using the criteria in Art. 22(1)-(5) of the Accounting Directive, which state that means of control include:

  • a majority of voting rights;
  • the right of a shareholder to appoint or remove a majority of the members of the administrative, management or supervisory body;
  • the right of a shareholder to exercise a dominant influence pursuant to a contract entered into with that undertaking or to a provision in its memorandum or articles of association.

The draft EU Money Laundering Regulation provides for additional means of control:

  • the right to appoint or remove more than half of the members of the board or similar officers of the corporate entity even without being a shareholder;
  • the ability to exert a significant influence on the decisions taken by the corporate entity, including veto rights, decision rights and any decisions regarding profit distributions or leading to a shift in assets;
  • formal or informal agreements with owners, members or the corporate entities, provisions in the articles of association, partnership agreements, syndication agreements, or equivalent documents even without being a shareholder;
  • voting arrangements;
  • links with family members of managers or directors/those owning or controlling the corporate entity;
  • formal or informal nominee arrangements.

The European Commission is also to be entitled to make recommendations to Member States on the criteria to identify the beneficial owners of types of corporate and other legal entities existing under national laws.

If it is not possible to identify the natural person who is the beneficial owner after all available means have been exhausted, companies are to be obliged to provide information on the members of their management boards (as is currently the case) and on a person with sufficient knowledge of the institution’s money laundering risk exposure (a new requirement) in the context of customer due diligence (CDD) and national central registers of beneficial ownership information. This person can be a member of the board of directors; however, the person usually designated in practice would probably be the anti-money laundering compliance officer. According to the wording of the EU Money Laundering Regulation, a statement accompanied by a justification that there is no beneficial owner must be entered into the central register. It is likely that such justifications will usually consist of information on the control structure of the obliged entity. There is no indication in the draft EU Money Laundering Regulation on the extent to which these documents will be accessible to the public.

The above requirements will not apply to companies listed on a regulated market or to bodies governed by public law. These entities will not (or no longer) be obliged to enter their beneficial owners into a central register under the draft EU Money Laundering Regulation.

The draft EU Money Laundering Regulation contains several unclear legal terms that will need to be clarified by interpretation and further detailed information from the competent authorities. Because the draft is currently only available in English, the implications of some of the currently unclear terms with regard to German law will probably also come more clearly into focus when the German translation of the draft’s wording becomes available. It is already clear that, according to the draft EU Money Laundering Regulation, even passive influence on an entity will be sufficient to establish control and thus beneficial ownership. This indicates that the changes brought about by the EU Money Laundering Regulation are leaning towards the opinion expressed by the German Federal Office of Administration (Bundesverwaltungsamt  – “BVA”) in its 19 August 2020 FAQs on central registers of beneficial ownership information (“BVA-FAQ 2020/III”). There, the BVA assumed the existence of control based on contractual or actual veto rights (“blocking control”) or certain management rights (see our article dated 22 September 2020). In response to unanimous criticism from legal practitioners, the BVA revised this expanded opinion at the beginning of 2021 (see our article dated 25 February 2021).

Another legal consequence of the draft EU Money Laundering Regulation is that companies domiciled in Germany and listed on a regulated market must initially report their beneficial owners to the German central register (the “Transparency Register”) when the German Transparency Register and Financial Information Act (Transparenzregister- und Finanzinformationsgesetz – TraFinG) enters into effect on 1 August 2021 (with a transition phase ending on 31 March 2022; see our article dated 17 June 2021). However, these companies will no longer be obliged to report their beneficial owners when the EU Money Laundering Regulation enters into force (presumably on 1 January 2025) according to its current draft version.

Reporting obligation for entities domiciled in non-EU countries with operations in the EU

The draft EU Money Laundering Regulation also provides that even entities domiciled in non-EU countries must report their beneficial owners to at least one EU Member State’s central register if they enter into a business relationship with an entity domiciled in the EU and subject to money laundering law obligations, e.g. banks, insurers, lawyers or tax advisors or acquire ownership of real estate in the EU.

This increases the number of obliged entities many times over because, like its predecessors, the EU Money Laundering Regulation contains an extensive catalogue of entities subject to anti-money laundering obligations. Non-EU countries that have (or wish to have) business operations in the EU will not be able to avoid having business dealings with such entities subject to anti-money laundering obligations and thus being obliged to report their beneficial owners to an EU Member State’s central register. This is in line with the EU’s declared goal of setting a worldwide standard for combating money laundering, as it has done for data protection with the GDPR. In practice, this approach will probably lead to substantial impediments to the business operations of not only non-EU entities but also the EU-domiciled business associates of such entities. Such impediments result from the fact that CDD and thus the beginning of business dealings with these entities may be delayed until the non-EU entity has been entered into an EU Member State’s central register.

Small increase in number of beneficial owners of foundations and similar structures

For foundations and similar structures, the draft EU Money Laundering Regulation adds only a few beneficial owners. For example, according to the draft’s wording, beneficiaries of foundations can be beneficial owners of the foundation even if they have no right to claim performance from the foundation. The BVA’s FAQs have not yet been clear on this point. However, more persons indirectly become beneficial owners by virtue of the expansion of the term “control” because natural persons who can exercise control over the foundation are beneficial owners of the foundation. As stated above, the EU Money Laundering Regulation substantially increases the number of these controlling persons.

Trustees’ obligation to disclose express trusts to the entity and hold certain information on the trustor

The draft EU Money Laundering Regulation also introduces an express legal obligation on the part of trustees to disclose their status to obliged entities that are taking customer due diligence measures. In this context, trustees are also to be under the same obligations as an obliged entity under money laundering law to obtain, hold and keep current certain information on the trustor, the trust or similar legal arrangement and the beneficial owner of the trustor.

This will lead to increased administrative work for trustees because they will now need to set up internal processes to obtain, hold and update the necessary data on the trust.

Increase in data to be reported on beneficial owner

The draft EU Money Laundering Regulation is also intended to increase the amount of information on the beneficial owner that must be reported. Additional information that will be subject to reporting includes: place of birth, additional nationalities, national identification number and tax identification number of the beneficial owner. A description of the control and ownership structure will also have to be reported to the central register.

Sixth EU Money Laundering Directive: Member States to retain responsibility for operating their central registers

The changes in everyday practice resulting from the draft sixth EU Money Laundering Directive are less dramatic. For example, each Member State is to retain responsibility for maintaining its central register. The regulatory authorities for CDD and central register obligations are likewise to remain at national level. However, an EU-wide agency is to be created (the EU Anti-Money Laundering Authority – AMLA), which is to be entitled to issue regulations at EU level for the national regulatory authorities. The intent here is to harmonise the administrative approaches to money laundering within the EU.

If you have any questions on the EU Money Laundering Regulation, the sixth EU Money Laundering Directive or potential need for action regarding your obligations under money laundering law or regarding the central register (particularly reporting, corrections, requests for access restrictions, proceedings related to fines or court actions), feel free to contact us. We keep a watchful eye on developments regarding money laundering and central registers and are in constant contact with the responsible authorities.

Authors:

  • Dr Gerald Reger, Partner & Co-Head, NOERR
  • Felix Link, Senior Associate, NOERR
  • Dr. Michael Josef Braun, Senior Associate, NOERR
  • Dr Christian Haagen, Associate, NOERR

Compliments of Noerr LLP – a member of the EACCNY.