In order to ensure better transparency of legal persons registered with the Register of Enterprises, including their formal and “true” owners or natural persons who are true beneficiaries (TB) of legal persons, the legislator awards the Register of Enterprises new authorities.
All statutory norms shall be binding upon all legal persons registered with the Register of Enterprises, that is, not only subsidiaries of foreign merchants in Latvia but also local LLCs and JSCs as well as entities, societies, farm and fishing households, individual merchants, partnerships, cooperative companies, European economic interest groups, European business companies, trade unions, religious organizations, and political parties.
The new authorities of the Register shall be set by the amendments to the Law on the Prevention of Money Laundering and Terrorism Financing (LPMLTF) approved by the Parliament (Saeima) in the final reading on Thursday, 13th June. The amendments will come into effect on the next day after the announcement.
From here on out, the Register will have new rights and duties: to request (when a company or organization is being registered) additional information as to the TB and to use more effective liquidation procedure if no TBs are disclosed. Furthermore, the register will have a duty to register TBs of several Latvian legal persons registered before 1st December 2017, based on the disclosure by default, and to cooperate with the private sector in order to find out and inform the law enforcement authorities about possible false information about TBs.
A true beneficiary (TB) is a natural person who owns or in whose interests a legal person is established or operates, or who directly or indirectly exercises control over a legal person.
TB – for every legal person
The new rights and duties of the Register along with the move towards maximum information availability is determined in order to ensure transparency of legal persons, thus reducing the use thereof for criminal purposes. The amendments incorporate measures to implement recommendations listed in the Latvian report of the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (Moneyval); furthermore, this will also help to achieve early implementation of the requirements of the AML Directive (Anti-Money Laundering Directive).
“The foreign experts addressed problems of the financial sector and business environment that have been topical to the Latvian state and population for several years now. While state officials accused for the commission of serious crimes hide behind long chains of owners through which they launder and invest money stolen from the state and society, Latvia must be the first in Europe that implements the money laundering and terrorism financing prevention regulation or the so-called AML Directive,” explains Jānis Bordāns, the Minister of Justice. Other European Union Member States currently face longer period implementation of the new regulation.
The role of the Register of Enterprises in the business environment increases
The duty of the Register will still be register and issue information. It is important to note that from here on out when registering new legal persons or changes in the existing companies and organizations, the State notaries will have rights to request additional documentary information as to the TBs. The burden of assessing the actual circumstances will still fall upon the law enforcement authorities and the Financial Intelligence Service. The Register will carry out no investigations. However, there will be an effective information exchange mechanism, involving the private sector too. As a result, the law enforcement institutions will receive the required information more efficiently. It is important to state that for provision of untrue information to the register criminal liability may be imposed upon a natural person – up to two years of imprisonment.
“It cannot be denied that the Register has a large role in ensuring transparency of the business environment, because legal persons are only fictions behind which there are actual people. Therefore, investigators who work on solving criminal offences must know which natural persons hide behind the legal persons. Therefore, the register moves onto electronization, data availability and transparency. Furthermore, as shown by the recent conference of the European Business Register Association, all registers throughout Europe currently face the need to record more and more information which then allows data researchers to analyze information, but investigators – to fight crimes,” the role of the Register is explained by Guna Paidere, the Head Public Notary of the Register of Enterprises.
Auditing starts with “aliens”
In accordance with the Latvian Assessment Report on Risks of Money Laundering and Terrorism Financing, LLCs are legal persons carrying an increased risk. Therefore, in line with the Register’s risk-based approach, the Register back in 2017 defined that LLCs are the main target group for detecting the TBs, establishing that the highest risk group (“high risk LLC”) is Latvia-registered LLCs with abroad-registered companies as their owners. The approach was based on the fact that the register lacked information as to the natural persons hiding behind the foreign legal persons – at the end of the chain. In 2017, there were 5,000 high-risk LLCs detected. Currently about 900 LLCs still have not disclosed their TBs.
“Up until now, in the public domain the Register mostly addressed high-risk LLCs, inviting them to disclose their TBs; furthermore, the Register also organized communication campaigns in cooperation with business organizations and the State Revenue Service, because in many cases these are real working companies paying taxes in the State budget. Overall in 2018, this group of LLCs had paid into the State budget more than 300 million euros,” explains G. Paidere.
Those who fail to disclose their TBs – under the hammer of justice
In accordance with the new law amendments, the capital companies (starting with high-risk LLCs) who have failed to disclose their TBs, will be subjected to a simplified liquidation procedure. The procedure stipulates the following: the Register shall send the capital company (LLC or JSC) a pre-liquidation warning inviting to disclose the TB within a month; if LLCs or JSCs fail to comply, the operations thereof shall be suspended based on the Register’s decision. The process of terminating operations and liquidation shall take place in line with the norms of the Commercial Law concerning simplified liquidation.
Inability must be justified
The new regulation establishes that in cases when a legal person has made its best efforts but failed to find out its TB – a natural person at the end of the chain of legal persons, a member of the management board of that legal person must acknowledge this inability by providing justification.
TB by default – for a part of domestic LLC, partnerships, individual merchants, farm and fishing households, and entities
The previous wording of the law stipulated certain exceptions or notification of TBs (always a natural person) by default pertaining to legal persons registered before 01.12.2017: (1) for LLC shareholders – natural persons owning more than 25% of capital shares, (2) members of a partnership of the partnership has no more than 3 members, (3) owners of individual companies, (4) owners of farm or fishing households, (5) members of the management board of entities. In cases like these, it shall be believed that the status of a TB follows from the status of the said natural persons in the records; unless there was another TB, it was not necessary to come to the Register with a separate application. If the TB was another person, the Register had to be informed by 1st March 2018. Therefore, if a legal person has not submitted other information, it shall be believed that information as to the TB is provided by default. Now (by 1st July 2019) the persons listed in the aforementioned cases, provided that the registration case will hold no other information about other TBs, will be registered as TBs of the respective legal persons. The entries in the registers will be made in order to improve the transparency of the registers maintained by the Register of Enterprises; this will take place based on the respective notifications by default, without separate decisions made by the State notary.
“When few years ago legal persons had to undergo denomination of the fixed capital or change of the fixed capital from lats to euro, we received accusations from the business organizations about bureaucracy and administrative burden. Therefore, this time legal persons, who have already provided information about their TBs for other purposes, do not need to come to the Register. However, if the officials of the legal persons know that there have been changes and not other persons are TBs, and not the ones recorded by default, I invite to update the information immediately,” invites G. Paidere.
Transparent environment – free resources
The amendments to the LPMLTF stipulate that in order to achieve transparent business environment, information held by the registers of the Register of Enterprises will be available to everybody free-of-charge starting with 1st January 2020. The date of implementing this measure shall depend on the decisions of politicians over the course of examining 2020 state budget, that is, whether they will find 1.2 million euros every year to ensure free data to all clients.
“It must be noted that availability of proper information in the Register as to the true beneficiaries is important for entrepreneurs themselves too – both when assessing their business partners and complying with requirements which are about to enter into force as per the Law on International and National Sanctions. That is, the more qualitative and accessible will be information held by the Register, the safer will be business environment, without loosing the speed which is crucial in the business,” explains G. Paidere.