New “rules of the game” for all legal persons
With the aim to ensure bigger transparency of the legal persons registered with the Register of Enterprises, among other of their official and “real” owners or those natural persons who are beneficial owners of the legal persons, the lawmaker has conferred new powers to the Register of Enterprises.
New provisions are binding to all legal persons registered with the Register i.e. not only to subsidiary undertakings of foreign merchants in Latvia but also to local SIA (limited liability companies) and AS (stock companies), as well as to foundations, unions, farms and fishing enterprises, individual merchants, partnerships, co-op companies, European economic interest groupings, European commercial companies, trade unions, religious organizations, political parties.
New rights and obligations of the Register are provided for by the amendments to the Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing (hereinafter – LPMLTF) adopted by the Saeima in the final reading on Thursday, 13 June. They shall take effect on the next day following their proclamation.
The Register of Enterprises will have new rights and obligations – the right at the moment of registration of an enterprise or organization to request additional information about its beneficial owner and apply a more efficient procedure of liquidation if beneficial owners are not disclosed. Similarly, the Register has an obligation to register beneficial owners of several Latvian legal persons established before 01.12.2017 based on their disclosure by default and an obligation to co-operate more actively with the private sector to gather information about and report to law enforcement institutions about possibly false data provided about beneficial owners.
A beneficial owner is a natural person who owns or in whose interests a specific legal person has been established or operates or who implements direct or indirect control over a legal person.
Beneficial owner - for each legal person
The new rights and obligations of the Register, as well as the move towards maximum availability of the information have been established to ensure transparency of legal persons, thus reducing possibilities to use them for criminal purposes. The amendments include measures that secure the fulfilment of recommendations provided in the report about Latvia of the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism “Moneyval”, as well as introduce the requirements of the fifth AML Directive (Anti Money Laundering Directive) well ahead of the mandatory deadline.
“Foreign experts have raised the issues of the financial sector and business environment that have been relevant to the Latvian state and public in general already for several years. While public officials who are accused of serious crimes are hiding behind long chains of owners, through which the money stolen from the state and public is “laundered” and “invested”, the Latvian state should introduce the money laundering and terrorism financing regulation or the so called fifth AML Directive as one of the first in Europe,” the Minister of Justice Jānis Bordāns explains. Other Member States of the European Union currently have a longer term for the introduction of the new regulation.
Role of the Register of Enterprises in the business environment increases
The Register will continue to register and issue information. It is important to stress that from now on, when registering new legal persons or registering changes to the existing enterprises and organizations, state notaries shall be entitled to request additional documentary information about the beneficial owners. The rights to request the documentary justification will refer also to the already registered information about the beneficial owners in the Register of Enterprises. Evaluation of actual circumstances will remain within the competence of law enforcement institutions, the Financial Intelligence Unit. The Register does not conduct investigation activities. However, an efficient information exchange mechanism shall be established, engaging the private sector as well. As a result, law enforcement institutions will receive the required information in a more efficient manner. It should be indicated that criminal liability applies to natural persons for the provision of false data to the Register - up to two years in prison now.
“The Register, without doubt, plays a great role in ensuring transparency of the business environment as legal persons are only fictions with people behind them. While, in detecting criminal offences, it is important for the investigators to know which natural persons are behind these legal fictions. Therefore, the Register is moving towards the electronization, data availability and transparency. Moreover, as the recent conference of the European Business Registry Association revealed, the current topicality of all European registers is recording of larger amount of information that consecutively later allows data researchers to analyse the information and investigators - to fight against criminals,” the Chief State Notary of the Register of Enterprises Guna Paidere explains the Register’s role.
Audit starts with “foreigners”
According to the Latvian National money laundering/terrorism financing risk assessment report, SIA have been recognized as the legal persons exposed to increased risk. Therefore, under the risk-based approach introduced by the Register, the Register already at the end of 2017 determined SIA as a primary target group in identifying the beneficial owners and SIA registered in Latvia whose owners are enterprises registered abroad - as the highest risk group or “high risk SIA”. The approach was determined by the fact that the Register had no information about natural persons behind the foreign legal persons - at the end of the chain. In November 2017 there were 5000 high risk SIA in total. At the moment, approximately 900 SIA still have not disclosed their beneficial owners.
“So far the Register had more active communication in the public space in particular about high risk SIA, encouraging them to disclose their beneficial owners, as well as organized a communication campaign in co-operation with the organizations of businessmen and the State Revenue Service, as in many cases they are real operating enterprises, which pay taxes to the state budget. In 2018 in total this SIA group paid to the state budget more than 300 million euros,” G.Paidere tells.
Persons not disclosing beneficial owners - in the crosshairs
Now – according to the new law amendments – a simplified liquidation will be applied to those companies, beginning from high risk SIA, which have not disclosed their beneficial owners so far. The procedure provides for the following: the Register sends a pre-liquidation notice to a company (SIA or AS) giving one month for disclosing their beneficial owners; if SIA or AS fails to disclose their beneficial owners, its activity is terminated based on the decision of the Register. The process of termination of activities and liquidation shall take place pursuant to the Commercial Law provisions regarding simplified liquidation.
Inability to be justified
The new regulation establishes an obligation for all legal persons in case if the legal person, having used all possible efforts, has concluded that it is impossible to determine of a beneficial owner – natural person at the end of the chain of the legal persons, a member of the board of the legal person has to confirm it by stating reasons.
Beneficial owner by default – for a part of domestic SIA, PS, IU, ZZS, foundations
The previous wording of the Law provided for exceptions or notifying of the beneficial owners (always a natural person) by default in relation to the legal persons registered before 01.12.2017 in the following cases: (1) for SIA shareholders – natural persons who own more than 25 per cent of capital shares, (2) for the members of partnerships if a partnership has no more than 3 members, (3) for owners of individual merchants, (4) for owners of farms or fishing enterprises, (5) for members of the board of foundations. In such cases it is deemed that the status of the beneficial owner of the legal person already resulted from the status of respective natural persons in specific records and unless a beneficial owner was another person – there was no need to come to the Register with a separate application. However, if another person was a beneficial owner, it was necessary to inform the Register until 1 March 2018. Therefore, if a legal person currently has not provided another information, it is deemed that the information about the beneficial owner has been notified by default. Now – until 1 July 2019 – the persons designated in the previously mentioned cases, if there will be no information about another beneficial owner in the respective registration file, will be registered as the beneficial owners of the respective legal persons. Entries in the registers shall be done for the purpose of improvement of transparency of the data included in the registers kept by the Register and will take place on the basis of the respective notifications by default, without a separate decision of the state notary.
“When a couple of years ago the legal persons had to carry out independent denomination of the equity capital or change of the equity capital for the changeover from the lats to the euros, we received objections about bureaucracy and administrative burden from the organizations of businessmen. Therefore, this time the legal persons, who have already provided the data about natural persons that are deemed beneficial owners within the framework of other obligations, do not have to come to the Register. However, if the officials of the legal persons are aware of changes and the beneficial owner currently is another person than registered by default, I would like to encourage to update this information without delay,” G.Paidere encourages.
Transparent environment – open-access resources
Under the amendments to the LPMLTF, for the purpose of securing a transparent business environment, from 1 January 2020 information from the registers kept by the Register will be provided to any person free of charge. The date of introduction of this measure depends on the decisions of politicians in the process of review of the state budget 2020, whether the annual funding of EUR 1.2 million for securing free of charge receiving of the data to the customers will be available.
“It should be taken into account that the availability of the respective information in the Register about the beneficial owners is essential for the enterprises themselves – both in assessing their business partners and in fulfilling the requirements that will come into effect in the Law on International Sanctions and National Sanctions very soon. Namely, the higher the quality and availability of the information of the Register will be, the safer the business environment will be, at the same time losing the speed less, which is so important,” G.Paidere explains.