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Explanation of beneficial owners

1. SIA (Limited liability company) and AS (Stock company)

Pursuant to Section 1, Clause 5, sub-clause a) of the Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing (hereinafter – Law), a beneficial owner is a natural person who is the owner of the legal person - or who controls the legal person, or on whose behalf, for whose benefit or in whose interests business relationship is being established or an individual transaction is being executed, and it is at least regarding legal persons — a natural person who owns, in the form of direct or indirect shareholding, more than 25 per cent of the capital shares or voting stock of the legal person or who directly or indirectly controls it. The referred provision provides for the indications of beneficial owners, i.e. a beneficial owner is always a natural person who owns or in whose interests a specific legal person has been established or operates or who exercises direct or indirect control over a legal person. It should be indicated that in case of direct shareholding or control, the beneficial owner controls the legal person directly, while in case of indirect shareholding or control the control is exercised through another – natural or legal person.

In the Guidance on Transparency and Beneficial Ownership published by the Financial Action Task Force (FATF) in October 2014, beneficial owners are explained as a natural person who “ultimately” owns or controls a “customer” and/or a natural person on whose behalf a transaction is being conducted.  It also includes those persons who exercise ultimate control over a legal person. A reference to “ultimately owns or controls” and “exercise ultimate control” refers to situations in which ownership/control is exercised through a chain of ownership or by means of control other than direct control. An essential indication of the definition of the beneficial owner is that it exceeds legal ownership and control. FATF definition is focused on a natural person who actually owns a legal person and who exercises the ultimate powers of management of a legal person or uses assets of a legal person as well as a natural person who actually exercises control over a legal person (regardless of whether a person holds an official position in the legal person or not).

 It should be indicated that in case of direct shareholding or control, a beneficial owner controls the legal person directly, and it may derive from the implementation of the ownership or legal control (for example, a member of the board of directors).  While in case of indirect shareholding or control, the control is exercised through another – natural or legal – person. The indirect control may be exercised by various means, for example, as a mutually entered contract or exercise of dominant influence (for example, dominant influence of a shareholder, stockholder or member of the board of directors in a company) financing a company, using kin relations or contractual obligations. Similarly, shareholders or stockholders of a company may mutually cooperate to increase such indirect control through another person, entering into official or inofficial contracts, as well as exercising their powers to appoint senior management in a company.

The law does not contain a specific regulation with regard to the specified responsibilities depending on the nature, type or goals of activities of a legal person.

A company definition is provided for in Section 134 of the Commercial Law. A company is a commercial company, the equity capital of which consists of the total sum of the nominal value of equity capital shares or stock. A company is a limited liability company or a stock company. A limited liability company is a private company, the shares of which are not publicly tradable objects, while a stock company is a public company, the shares (stock) of which may be publicly tradable objects. Thus, a beneficial owner of a company shall be primarily identified ascertaining of direct or indirect owners of capital shares or stock.

Taking into consideration the definition of a beneficial owner, it is always possible to determine a beneficial owner of a company in the cases where more than 25 per cent of shares or stock of a  company are directly or indirectly owned by at least one natural person. The referred natural person unless it acts on behalf of another natural person is the beneficial owner of a respective company. It is understood that if there are several (not more than three) natural persons in the company that conform to the description above, they all are deemed beneficial owners of the company.

It should be indicated that the threshold of 25 per cent referred to in the Law is an absolute minimum when the beneficial owner can be always identified.  Concurrently, many and different cases are possible in practice of how control over a company is expressed.  For example, several shareholders (stockholders) have agreed on the procedure of exercising the voting rights, including but not limited to:

  1. having agreed that any of the shareholders (stockholders) shall always vote the same as another shareholder (stockholder);
  2. having agreed that the shareholder (stockholder) with a large percentage of shares/stock shall not attend meetings to allow a shareholder (stockholder) with a smaller percentage of stock to take decisions;
  3. having agreed that someone can individually appoint the majority of the council or board of directors, etc.

There can also be a situation when one natural person directly or indirectly owns less than 25 per cent of shares (stock); however, the percentage of shares (stock) of other shareholders (stockholders) is so small, as well as the referred shareholders (stockholders) in fact do not attend shareholders’ (stockholders’) meetings that it is established that the natural person with the largest percentage of shares (stock) is the one who controls the company. Similarly, control over a company is established in cases when several shareholders (stockholders) are legal persons controlled by one and the same natural person. It should be indicated that it is not possible to provide an explanation for all situations as each case is individual and a board of directors of a legal person should be aware of (should determine) whether any natural person has real control over the legal person.

In addition, it should be taken into account that:

  • If the owner of shares or stock of a company is a legal arrangement (for example, a type of a right-holder which is not recognized in the Republic of Latvia – trust), the definition of a beneficial owner laid down in Section 1, Clause 5, subclause b) of the Law shall be applicable to determination of a beneficial owner.  Pursuant to the referred provision, a beneficial owner is a natural person who is the owner of the legal person or who controls the legal person, or on whose behalf, for whose benefit or in whose interests business relationship is being established or an individual transaction is being executed, and it is at least regarding legal arrangements — a natural person who owns, or in whose interests a legal arranagement has been established or operates, or who directly or indirectly exercises control over it, including who is the founder, trustee or supervisor (manager) of such arrangement; Taking into consideration the above, in such case the beneficial owner in the legal arranagement shall be determined according to the previously mentioned definition;
  • Pursuant to Section 18.2, Paragraph six of the Law, the legal person may omit the submission of the information to the Register of Enterprises of the Republic of Latvia on the beneficial owner, if the beneficial owner is a stockholder in such stock company the stock whereof is listed on a regulated market, and the manner of exercising control over the legal person stems only from the status of the stockholder. Having regard of the above, if the above case refers to any of the shareholders or stockholders of a company, in this part a company when submitting information to the Register of Enterprises of the Republic of Latvia may indicate that the beneficial owner is a stockholder in such stock company the stock whereof is listed on a regulated market, and the manner of exercising control over the legal person stems only from the status of the stockholder.

It should be indicated that a legal person is a legal fiction, behind which in any case there are natural persons who organize, manage or control it therefore a situation where there is no beneficial owner is not possible – it may only be impossible to determine it pursuant to the definition provided for by the Law.  Therefore the Law does not provide for registration in the registers kept by the Register of Enterprises of the information that a legal person does not have a beneficial owner.

In the cases where a  company has exercised all possible means of determination and has concluded that it is impossible to determine any natural person — beneficial owner, as well as doubts that company has a beneficial owner are excluded, it shall be acknowledged in the application, including the justification.

Concurrently, it should be taken into account that in cases when it is impossible to determine a beneficial owner of a legal person, pursuant to Section 18, Paragraph seven of the Law, the subjects of the Law provided for in Section 3 of the Law (for example, credit institutions, external accountants, sworn notaries, etc.), may consider as a beneficial owner of a legal person a person holding a position in the senior management body of such legal person. Accordingly, in the cases when information shall be registered in the Register of Enterprises that it is not possible to determine of a beneficial owner, pursuant to the Law, in order to enable the subjects provided for by Section 3 of the Law to perform customer due diligence - a legal person when completing customer due diligence questionnaires shall indicate as a beneficial owner one, several or all members of the board of directors taking into consideration assessment of the subject of the Law on the significant circumstances.

It should be indicated that if the only shareholder or stockholder of a company shall be a legal person, in which it is impossible to determine beneficial owners, in the company itself it is mainly possible to determine a beneficial owner.  Namely, unless special internal conditions in relation to taking decisions exist, the persons that are authorised to represent the respective shareholder/stockholder control taking of decisions in a respective company and therefore should be regarded as beneficial owners of the respective company.

Determining of beneficial owners 

Pursuant to the procedure provided for by Section 18.1 of the Law, a natural person, if he or she has the grounds to believe that he or she has become a beneficial owner of a company, has an obligation to immediately report this fact to the company. Similarly, shareholders or stockholders of a company, if they act on behalf of another person, are obliged to disclose it to the board of directors of the company. The board of directors of a company is obliged, if it has reasonable grounds, to determine whether a  company has no beneficial owners, as well, whether the received (ascertained) information about the beneficial owners is true.

Time periods

Pursuant to Section 18.1, Paragraph four and Section 18.2, Paragraph one of the Law, a company shall, without delay, but not later than within 14 days from getting to know the respective information, submit to the Register of Enterprises the application for the registration of information on the beneficial owners.

It should be indicated that pursuant to the first sentence of Section 18.2, Paragraph two of the Law, upon submitting an application to the Register of Enterprises for the registration (incorporation) of a company or changes in the composition of shareholders or members of the board of directors of a company, information on the beneficial owners of the  company must be indicated in the application in accordance with the requirements of Section 18.2 of the Law.

            Taking into consideration the above:

  • In case of registration of a new company, information about beneficial owners must be also indicated in the application for registration;
  • A company shall, without delay, but not later than within 14 days from getting to know the information about a beneficial owner or changes to the relevant information, submit to the Register of Enterprises the application for the registration of information on the beneficial owner or for the registration of changes in such information.

Data to be submitted

Data on the beneficial owners to be stored in a company are provided for by Section 18.1, Paragraph four of the Law.  Pursuant to Section 18.2, Paragraph one of the Law, the information provided for in Section 18.1, Paragraph four of the Law is to be submitted to the Register of Enterprises as well.

Upon request of the Register of Enterprises of the Republic of Latvia, in order for it to be able to ascertain of the credibility of the submitted information, a company shall submit:

  • documentary justification of the control exercised;
  • a document confirming conformity of the information identifying the beneficial owner:
    • a notarially certified copy of a personal identification document;
    • a statement issued by a foreign population register;
    • other equivalent documents;
  • a document justifying acknowledgment that it is not possible to determine a beneficial owner.

It should be indicated that pursuant to the provisions of Section 18.1, Paragraph four of the Law the information on the beneficial owners (including documentary justification of the control exercised) must be stored also by the legal person itself.

The following data shall be registered in the registers kept by the Register of Enterprises regarding the beneficial owners of companies:

  1. the given name;
  2. surname;
  3. personal identity number (if the person has no personal identity number - date, month, year of birth, number and date of issue of the personal identification document, country and authority which issued the document);
  4. citizenship;
  5. country of residence;
  6. the type of implemented control over a company:
    1. through the status in a legal person (if the beneficial owner is a direct owner or directly controls a legal person):
      1. as a shareholder;
      2. as a stockholder;
    2. as an individual person who implements control (if the beneficial owner is an indirect owner or indirectly controls the company):  
      1. on the basis of the authorisation agreement;
      2. on the basis of ownership (for example, if the beneficial owner is the owner of a shareholder or stockholder of a company – legal person);
      3. through a legal arrangement as a founder;
      4. through a legal arrangement as a trustee;
      5. through a legal arrangement as a manager;
      6. on the basis of business relationship;
    3. other (free text field with a possibility to write in an undefined type);
  7. information about a person through which control is exercised (to be indicated if any of the types of exercising control over a company referred to in sub-paragraph 6.2. or 6.3. is indicated);
    1. regarding natural persons: the given name, surname, personal identity number (if the person has no personal identity number — date, month, year of birth);
    2. regarding legal persons (may be also foreign legal persons) — a name, registration number and legal address).

It should be indicated that the threshold of more than 25% laid down in Section 1, Clause 5, subclause a) of the Law if shares belong to a natural person, is a minimum threshold, from which identification of a beneficial owner is mandatory, namely, in the case shareholding of a natural person exists to such extent, there can be no objections that it is impossible to identify the beneficial owner or that the respective person is not a beneficial owner. The exception is possible in a situation if a respective natural person is controlled by another person or another type of control exists (for example, agreement on allocation of control) among shareholders (stockholders).  Taking into consideration the above, in the cases when in a company several shareholders (stockholders) conform to the previously mentioned definition of a beneficial owner, no situation is possible where only one of the shareholders (stockholders) exercises control over a company through a status in a legal person – as a shareholder or as a stockholder. In such situations another type of exercising control should exist as well that should be indicated in the application for registration of a beneficial owner, including the information about a person through which control is exercised. 

Pursuant to the second sentence of Section 18.2, Paragraph two of the Law - if a company has exercised all possible means of determination have been exhausted and it is not possible to determine any natural person - beneficial owner  , as well as doubts that a company has a beneficial owner are excluded, it shall be acknowledged in the application, including the justification. In such case it shall be registered in the commercial register that it is not possible to determine a beneficial owner.