The Commercial Law and the Law on the Prevention of Money Laundering and Terrorism Financing (AML Law) were amended this November. The amendments exclude shareholders’ obligation under the Commercial Law to disclose their company’s beneficial owner (BO). Now, the disclosure requirement has been completely revised and transferred to the AML Law. As these amendments affect every legal entity, we would like to stress the most significant aspects of the new regulation.
To begin with, what is a BO?
The AML Law states that a legal entity’s BO is a natural person, who:
- owns more than 25% of the shares or voting rights in a legal entity through direct or indirect shareholding or who
- controls them directly or indirectly.
These two points mean that even a person who owns less than 25% of the company’s share capital but controls it in some other manner would be considered as a BO and must disclose the information below.
Subjects of disclosure obligation
The subjects of disclosure obligation included in the AML Law have been significantly expanded in comparison to the previous regulation in the Commercial Law. Moreover, BO disclosure applies to all legal entities, including private limited and public limited companies, as well as Societas Europaea, and other subjects, plus associations, establishments, cooperatives and others.
Who must report about BO and determine who the BO is?
The new regulation is structured to avoid gaps in submission of BO information, and to ensure that the respective information would always be updated both by the BO and the legal entity. In particuler, under the AML Law:
A natural person who believes that they have become a BO immediately notifies the legal entity accordingly. In contrast, a legal entity must use its own initiative to determine and identify its BO, if the data filed about the BO raise cause for doubt or if data are missing.
BO identifying information
A BO must submit (and the legal entity stores) the following information about a BO:
- name, surname;
- identity code (if any) and date of birth;
- number and date of issue of personal identification document, country and institution that issued the document;
- country of permanent residence;
- how control over the legal entity is exercised, indicating data about the shareholder serving as intermediary for control, as well as documents proving control.
The latter means that when complying with the disclosure requirement, the BO provides personal information to the legal entity, as well as submitting additional documents that substantiate control, usually containing confidential data.
In addition, a natural person who qualifies as a BO following all the criteria acts on behalf of another person must immediately inform the legal entity and indicate the above data on BO.
Submission of information to the Latvian Company Register (CR)
The Law requires BO data to be registered at the CR by a separate application or together with registration of other changes to the legal entity; likewise, the CR must be informed if the BO remains the same on change of shareholders. For BO registration, state duty is payable.
The basic principle of disclosure obligation: within 14 days at the latest from becoming aware of the respective information, all legal entities registered at the CR must apply to the CR for BO registration or changes to BO information by indicating the above BO data; however, documents proving BO control need not be filed with the CR.
In addition, an application to the CR to establish a legal entity or change company shareholders or board members indicates the BO or states that the BO cannot be determined.
If a shareholder who acts as an agent for BO control over the legal entity loses its status in the legal entity, the legal entity applies to the CR to change the BO or confirm that the BO has not changed, and indicates the shareholder through whom the BO exercises control.
Disclosing BO information
The AML Law states that BO information will be available to anyone online for a fee, except information about a BO who is under 18.
Exceptions and reliefs
The law also allows some reliefs, for example, there is no need to submit information to the CR about a BO’s nationality and place of residence if
- the CR already has information about the BO with a Latvian personal code, Latvian nationality and place of residence in Latvia; and
- the CR already has information about the country that issued the BO’s personal identification document and it corresponds to their nationality and country of residence.
Likewise the law allows the following exceptions when there is no need to submit BO information to the CR:
- the BO is a shareholder of a public company and control of the legal entity results only from the shareholder’s status;
- together with the application for establishment or changes to the CR, BO information as required by the AML Law is filed with the CR during performance of other obligations and the manner of controlling the legal entity results only from the founder’s or shareholder’s status (e.g., on establishing a company with a sole founder who is also the BO, the shareholder’s register section is filed with the information specified in the AML Law), or also if this information has previously been submitted.
Most significant dates
The AML Law sets strict and limited terms to determine the BO and notify the CR:
- a legal entity’s obligation to disclose the BO comes into force on 01.12.2017;
- a natural person who is a BO or acts on behalf of another person notifies the legal entity by 01.02.2018;
- a company that has already disclosed the BO under the previous Commercial Law regulation and whose BO has not changed by 01.12.2017 submits the missing information to the CR about the BO by 01.02.2018;
- companies that have not disclosed the BO under the Commercial Law regulation file notification with the CR about the BO by 01.03.2018 (though not later than within 14 days from receiving such information);
- the CR will start providing public information about BOs from 01.04.2018.
Consequences of failure to observe the disclosure obligation
At present, the AML Law provides for sanctions and penalties only for so-called “special” subjects of the law (e.g. credit and finance institutions, organisers of lotteries and gambling activities, and others) for breaches in the field of money laundering and terrorism financing prevention, which can result in a penalty ranging from a warning, and a penalty up to EUR 1 million, to termination of the activity and annulment of licence.
For other subjects (i.e. all other legal entities) the law does not set special penalties or sanctions if the disclosure obligation is not fulfilled. However, taking into account the purpose of the new regulation, it will most likely be supplemented by sanctions applicable to all subjects of the law. Despite the above, sanctions included in the Latvian Administrative Violations Code on failure to submit data or documents to the CR can be applied to violations, ranging from a warning or penalty of EUR 70 to EUR 100. Likewise, sanctions under the Criminal Law apply to providing false data to a state institution, for which short-term imprisonment, community service or a fine can be imposed.
Finally, in the case of companies, the management board may be held liable for losses caused to the company due to non-compliance with disclosure obligations, unless the management board proves that it acted with due diligence.
Taking into account the significance of this new regulation, we ask our clients and cooperation partners to draw attention to the new disclosure obligation. For additional information or assistance, contact Sorainen or your own legal counsel.