Recommended action noticing untrue information about BO
In order to ensure transparency in business, including the beneficial owners of legal entities (BOs), the Register of Enterprises (the Register) has accumulated massive amounts of data on BOs. Falsifying information about BOs to the Registry is a criminal offense; therefore, the Registry, in cooperation with the State Police, advises on recommended actions upon noticing untrue information on the BO.
Overall, 83% of all legal persons have disclosed their BOs; in the segment of LLC, the disclosure rate is even 97%.
Overall environment – relatively transparent and fair
“Despite the fact that there are cases of complex ownership chains and involvement of foreign individuals, Latvia still has a relatively transparent business environment and honest entrepreneurs. This is proven by the fact that for most of the 91,000 LLCs, information about BOs was already submitted to the Registry and we were able to register it by default. Moreover, most companies with complex chains of owners also fulfilled their duty to disclose information on BOs in good faith. In some cases with complex ownership chains, the Registry used the new tool provided by the legislator to request documentary justification for registration of a BO, which should have been available to the company since 2017,” tells Guna Paidere, the Chief State Notary of the Register of Enterprises.
In-between “a carrot and a whip”
At the same time, a small group of companies ignored the Register’s invitation to disclose their BOs. In other words, according to the winding-up legal procedure, as soon as the Register issues a ruling on termination of activities, the board of directors is revoked and winding-up is announced, inviting liquidators to apply. Usually in such cases the bank closes access to the bank account because the company is left without an official. “Since we informed entrepreneurs both directly and indirectly through media, business organizations, and the EDS of the State Revenue Service, it is hard to believe that these companies were really unaware of the BO disclosure obligation. It seems more plausible that these companies did not believe that the Register will actually initiate winding-up due to the non-disclosure of the BO,” says Guna Paidere. For companies disclosing their BOs, the termination ruling was revoked and activities were re-commenced. “We believe that winding-up due to non-disclosure of BOs has not affected real, working companies, instead affecting only empty shells" says Guna Paidere. Due to failure to disclose a BO, 413 high-risk LLC were deleted.
Criminal liability for provision of untrue information
In accordance with Article 1951 of the Criminal Law, knowingly providing false information or failing to provide information on the BO to the Register is a criminal offense. The said offence shall be punishable with imprisonment for a time period up to one year or a temporary term of imprisonment or forced labor or a fine. If the offences in question have caused significant damage to the State or business, or to the legitimate interests of another person – deprivation of liberty for a time period up to two years or temporary deprivation of liberty, or forced labor or fine.
The State Police statistics show that between 2017 and November 2019, 68 criminal proceedings have been initiated under Article 1951 of the Criminal Law, including a sufficient body of evidence for criminal prosecution in 57 cases.
“Criminal investigators are looking forward to new opportunities in criminal investigation and detection, because up to now investigators did not have information on the natural persons who effectively control legal persons. The new capabilities can be expected to change the algorithm for criminal investigations. In other words, in the days of past, the predominant principle said that the primary crimes were fraud or tax evasion or so-called “money mules” and the investigators detected false information on BOs through investigating the aforementioned crimes; however, situation might change in the future. Now, data mismatches and hiding information on BOs could become an axis that helps investigators get to the point of corruption, tax fraud, serious conflicts of interest and other serious crimes,” says Kristaps Kalniņš, the head inspector of the Criminal Intelligence Management Administration of the Main Criminal Police Administration, the State Police.
What entrepreneurs and people should do
Anyone in their daily routine can find discrepancies between the BO registered in the Register and the reality of life. It is important to distinguish between cases where information has been found to be potentially untrue and cases where the information has been found to have a clerical error. Such findings call for appropriate actions.
- Information or suspicions about a criminal offence
If it is established that information contained in the Register relating to a BO is likely to be untrue, it should be understood that a criminal offence has been committed if the suspicions turn out to be true. In order for those responsible to be held liable under the Criminal Law, they must be reported to law enforcement authorities. In such cases, the Registry can only assist law enforcement authorities by providing information at its disposal. It is therefore not efficient to report allegedly falsified information on the BOs to the Register, as at present the Register can only forward received applications to the State Police.
In these cases, the application must be addressed to the State Police – either in person or electronically, by signing it with a secure electronic signature and sending to e-mail email@example.com.
- BO addresses the board of directors
The registered BOs who do not agree with the information provided by the board of directors of the legal person to the Register should first of all address the board of directors of the legal person with an explanation of the relevance of the information.
- Clerical errors – the Register
Information on detected clerical errors in registers maintained by the Registry may be submitted to the Registry both now and in the future. Such errors shall be corrected in accordance with the procedure established by the Law on the Register of Enterprises of the Republic of Latvia. You can inform about errors by sending an application signed with a secure e-signature to firstname.lastname@example.org or by submitting an application through e-service Application to Institution at www.latvija.lv.
In regard to the BOs registered in July 2019 by default, the registration was done on a statutory basis. That is, pursuant to Article 41 of the Transitional Provisions, if the legal person had not filed a separate application for the registration of the BO before 1st July 2019 and information on that BO had been submitted within the scope of other statutory obligations and control of a person derived solely from the status of a shareholder of the LLC, a member of a partnership, a sole proprietor of an individual company or farm or fishing farm or a member of the board of directors of an entity, it was considered that the legal person has notified about its BO. The Register, without making a separate decision, registered the said persons before 1st July 2019 as the BOs in the respective registers. In cases like these, a legal person shall bear responsibility for truthfulness of the registered information.
If a legal person identifies a change in the composition of the BOs, then in such a case it shall apply for a change in the composition of the BOs in the Register.
Proper order for legal subjects – under way
Special arrangements are currently being established for the exchange of information between public authorities and entities subjected to the Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing ("the Law"), such as outsourced accountants, lawyers, insolvency administrators, banks, etc. This special reporting scheme will enter into force on 1st July 2020.
Although the methodology is still being developed, it is already known that under this procedure the Register will provide information to the State Police on cases where subjects of the Law, as well as supervisory or control authorities have found false information. The said persons will have access to a separate case reporting service, as it is essential for the Register to distinguish between who is a whistleblower. Upon receipt of such information, the Register will also record a warning to the relevant legal person, as reported in the registration file, that the information on the BO may be false. However, such arrangements will not take effect until 1st July 2020. In addition, after this date, all other persons (not subjects of the Law) will have to report on possibly untrue information about BOs just like before, that is, to the State Police.