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11.08.2020

Practical aspects of the obligation to notify a true beneficiary

iFinanses published an article by Zane Eglīte-Fogele, partner of PRIMUS DERLING, and Tatjana Sinkeviča, Associate of PRIMUS DERLING which describes practical aspects of the obligation to notify a true beneficiary.

On 29 June 2019, amendments to the Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing (hereinafter- the Law) have entered into force, supplementing the rules on the obligation to disclose the true beneficiary.

According to the amendments, when registering a new legal person or registering changes to existing legal entities, including changes to the true beneficiary, the Enterprise Register of the Republic of Latvia (hereinafter referred to as the Enterprise Register) has the right to request a documentary justification for the control exercised by the true beneficiary, as well as a document confirming the relevance of the information identified by the true beneficiary by temporarily suspending the registration.

True beneficiaries of legal persons and legal arrangements

According to the definition in Article 1(5) of the Law, the true beneficiary is a natural person who:

  • Holds, in the form of direct or indirect participation, more than 25% of the capital shares or voting rights of the legal person, or
  • Directly or indirectly controls it.

One of the most common errors allowed by legal entities in identifying the true beneficiary is focusing only on the first point of the definition of the true beneficiary, or participation. In particular, the fact that no member holds more than 25% of a legal person’s capital shares or voting rights shares is automatically accepted and reported to the Enterprise Register that it is not possible to clarify the true beneficiary.

However, it should be noted that, as defined by the Law, the true beneficiary is not only a natural person who, in the form of direct or indirect participation, holds shares of a legal person, but also a person who directly or indirectly controls them.

Therefore, in each case, it is necessary to assess not only the aspect of the participation, when identifying legal entities of the true beneficiary, but also whether a person does not exercise control over the legal person in any other way. Such control may be exercised by a variety of means, such as a mutually agreed participant/shareholder, on the basis of a trust agreement, by exercising its powers to appoint senior management in an undertaking through creative links, etc.

In the case of legal arrangements, it should be noted that the true beneficiary is a natural person who owns or is in the interest of which a legal arrangement has been established or operates or who exercises control over it, whether directly or indirectly, including who is the founder, trustee or supervisor of such arrangement (manager).

Branches and agencies of foreign entities registered in the registers carried by the Enterprise Register will be required to disclose information on the true beneficiary by 1 January 2021. If the true beneficiary is not registered by 1 January 2021, branches and representations of the foreign entity will be excluded from the register.

According to the Law, the legal person, if he or she considers that he or she has become a true beneficiary, shall immediately notify the legal person concerned of that fact. The legal person shall, on his or her own initiative, identify and identify his orher true beneficiary if it has grounds to question the information submitted to it regarding the true beneficiary or if it has not been submitted. Where a natural person who fulfils all the criteria for the characteristics of the true beneficiary acts for the benefit of another person, he or she shall notify the legal person thereof without delay.

The true beneficiary must submit and the legal person should keep not only the information on himself but also the supporting documents on the legal person through which the control is exercised.

In practice, there is a situation where the true beneficiary is a foreign natural person or the true beneficiary exercises control directly or indirectly through a foreign legal person, the Enterprise Register exercises its rights and requests the submission of a documentary justification and documents for the control exercised by the true beneficiary for the identification of the true beneficiary, both in the situation of the registration of new information on the true beneficiary and in the case of registration, details of the true beneficiary have already been registered in the Enterprise Register and the application shows that this information has not changed.

If the true beneficiary is a foreign natural person, one of the following documents shall be submitted to the Enterprise Register for the identification of the true beneficiary:

  • a copy of a notarially certified personal identification document;
  • a statement of the foreign population register,
  • or other documents equivalent to those documents.

If the true beneficiary is a natural person who has been assigned a personal identity number in Latvia, it is not necessary to submit a notarially certified copy of the personal identification document or a statement of the population register. That requirement shall be enforceable for foreign natural persons.
If the true beneficiary exercises control directly or indirectly through a foreign legal person and the documentary justification for the control previously carried out was not submitted to the Enterprise Register, the evidence shall be submitted by applying for changes to the Enterprise Register. If the documentary justification is not submitted by applying for the change, the Enterprise Register will be entitled to request the submission of a documentary justification by suspending the registration of the change.

Documents supporting information shall be regarded as extracts from the foreign commercial register or other documents of a similar legal force attesting the registration of a foreign company, as well as an indication of the members of the relevant foreign company and the division of shares belonging thereto into the company. In the event that a foreign commercial register extract does not contain that information, it would be necessary to provide in addition a document which, in accordance with the relevant foreign law, includes information regarding the participants of the legal person.

When submitting an application to the Enterprise Register, the application shall include, in the following cases, the information concerning the legal person’s true beneficiary:

  • registration or establishment of a legal person;
  • making changes to shareholders;
  • changes to the members of the Management Board.

At the same time, it should be noted that Article 18.2 of the Law lays down the obligation of a legal person to disclose his or her true beneficiary by submitting an application to the Enterprise Register for registration of information regarding the true beneficiary or any changes made to such information, without delay, but not later than within 14 days of the date of disclosure of the relevant information.

Similarly, Article 18.2, Paragraph three of the Law states that if a member (shareholder), member or owner through which the true beneficiary exercises control in a legal person loses his or her status in the relevant legal person, the legal person shall, without delay, but not later than within 14 days of the date of the relevant information, submit an application for change to the Enterprise Register or an application showing that the true beneficiary has not changed and indicating the member (shareholder), member or owner through which the true beneficiary exercises control.

By applying for changes to the Enterprise Register and indicating in the application that the information on the true beneficiary has not changed, it would be necessary to make sure that the information previously notified has not really changed.

It is important to point out that, in accordance with the Law, any legal person must also keep such documentary grounds for information on the way in which control of the legal person is exercised, i.e. information about the members or shareholders exercising control over the legal person, after the disclosure of the true beneficiary.

The Law contains the following exceptional cases of disclosure of the true beneficiary:

  1. Where the legal person has made use of all possible means of clarification and has concluded that it is not possible to identify any natural person who would be in compliance with THE status OF THE PLG, and doubts that the legal person has A PLG have been excluded, this shall be confirmed in the application, stating the reasons. Similarly, the Enterprise Register may request the submission of supporting documents, namely documents obtained by the Board of the Legal Entity, so that it can be concluded by all possible means that there id no true beneficiary.
  2. Information regarding the true beneficiary for the register of companies, if the true beneficiary is a shareholder in a stock company whose shares are listed on the regulated market and the way in which control over the legal person is exercised is derived only from the status of the shareholder.
  3. In other cases, if the regulated market is not a direct shareholder/shareholder, it would be necessary to indicate also the person through which the control is exercised, to add appropriate justification to the application by disclosing the structure of all the shareholders/shareholders to the listed stock company.

The consequences of not providing information or providing false information may be different – both administrative responsibility for not submitting information or documents specified in regulatory enactments to the Enterprise Register and criminal liability for not providing information and providing false information is provided for. It is important to note that responsibility may be applied to both the natural person itself if it has not informed the board of the legal person that it has become a true beneficiary, or has provided false information on this fact, to the Board of Governors for failing to provide information or documents or for the provision of false information to the Enterprise Register.

It is important to point out that if a member of the Management Board, without submitting an application for registration of the true beneficiaries of the Enterprise Register, has caused losses to the public (for example, the company has been terminated in accordance with the Company Register decision), civil liability can be applied to the Management Board in addition to the second paragraph of Article 169 of the Commercial Law, provided that the Board of Governors, the Member does not demonstrate that he has acted as a good and careful master in the current situation, i.e. he has not even been allowed to be careful.

In view of the strict penalties for infringements, it is recommended that both the true beneficiary and the Board of Governors properly document the actions taken in connection with the clearance and notification of the true beneficiary so that, in the event of a dispute, the true beneficiary can demonstrate that he has informed the public whether a member of the Board can certify that he has acted as a good and careful master and has used all possible means to clarify the true beneficiary.

It would also be advisable for the Management Board to introduce a control mechanism for the true beneficiary verification in order to avoid being responsible for not providing timely information to the Enterprise Register on changes to the information concerning the true beneficiary and, if necessary, not to delay registration of the changes notified in the Enterprise Register.

The full article in Latvian available in August issue of iFinanses.