The term “beneficial owner” originated in common law countries, notably in the United States of America with the adoption of the patriot act1)The USA PATRIOT Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act following the attacks of September 11, 2001. This law used the term “benefical owners or ultimate beneficial owner”.
The Financial Action Task Force (FATF), the body that sets international standards for combating money laundering and the financing of terrorism, sounded the alarm in 2012 when it recommended (recommendation no. 24) that2)FATF (2012), FATF Recommendations – International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation, updated October 2016, FATF, Paris, measures to prevent the use of legal entities for money laundering or terrorist financing purposes. All member countries must ensure that the information obtained is accurate, and that the information provided on beneficial owners is up to date. The European directive of 2015/8493)Presentation of the directive (EU) 2015/849 of May 20, 2015 known as the fourth anti-money laundering directive insufflates notable contributions in this direction, specifying among other things:
This constitutes genuine transparency for these asset-carrying instruments, which the FATF and OECD had identified as a means of laundering money and/or financing terrorism.
In France, until recently, the term beneficial owner was not so well known by professionals, it gained momentum after the transposition of the 4th Directive of May 20, 2015. It was transposed by both the ordinance of December1, 2016 and the law of December 9, 2016 (the Sapin II law).
But first we need to know who is the beneficial owner? What are the identification methods? Finally, we analyze its effectiveness in the fight against money laundering and the financing of terrorism.
The Financial Action Task Force (FATF) has defined a beneficial owner as This includes “the natural person(s) who ultimately own(s) or control(s) a customer and/or the natural person(s) on whose behalf a transaction is carried out. Also included are persons who ultimately exercise effective control over a legal entity or legal arrangement”.
The FATF identifies two main criteria for identifying a beneficial owner:
This definition has been almost entirely taken over by Directive 2015/849.However, before looking at the characteristics of beneficial owners (B) first identify the entities covered by the AML/CFT system (A).
A) Entities covered by the scheme
Fourth Directive 2015/849 of May 20, 2015 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing.4)Presentation of directive (EU) 2015/849 of May 20, 2015, known as the fourth anti-money laundering directive, recommendations 12 specifies in its recommendation 12 “In order to guarantee effective transparency, Member States should ensure that the identification of beneficial owners applies to the widest possible range of legal entities incorporated or created by any other mechanism on their territory”. This provision constitutes a discharge for Member States to extend as far as possible the entities that must declare their beneficial owners.
Any entity with legal personality is therefore covered (1), although some entities are excluded from the obligation to identify beneficial owners (2), because they are subject to more stringent anti-money laundering and anti-terrorist financing obligations by the financial markets regulator (AMF).
1) Companies with legal personality registered in France
France, in transposing the above-mentioned Fourth Directive, has introduced into the Monetary and Financial Code, in particular Article L.561-46, which refers to all entities required to register with the RCS, as referred to in 2°, 3° and 5° of I of Article L.123-1 of the Commercial Code.
According to article L.123-1 of the French Commercial Code :
“2° Companies and economic interest groupings headquartered in a French department and enjoying legal personality in accordance with article 1842 of the French Civil Code5)Article 1842 CC “Companies other than the joint ventures referred to in Chapter III have legal personality from the time of their registration. Until registration, relations between partners are governed by the partnership contract and by the general principles of law applicable to contracts and obligations.”</> under article L. 251-4 of the French Commercial Code,
3° Commercial companies whose head office is located outside a French department and which have an establishment in one of these departments,
5° Other legal entities whose registration is required by law or regulation.
On reading these provisions, it is easy to see that they apply to any company registered under private law and having its registered office or place of business in France. These include commercial companies (partnerships, joint-stock companies, special-status companies), civil companies (real-estate companies, special-status companies), as well as economic interest groupings with legal personality (whether for civil or commercial purposes).
Alongside these French companies, there are foreign commercial legal entities with an establishment in France, it should be pointed out that it was the ordinance of December1, 2016 that went further than the Fourth Directive, as the latter made no mention of them. But even if the range of entities subject to the obligation to identify beneficiaries is broad, there are companies that do not fall into this category.
2) Excluded entities
Companies admitted to regulated markets are not subject to this obligation. The exclusion of these categories of entities is logically justified by the fact that, in order to be admitted, they must provide a certain number of documents that not only identify the beneficial owners, but also analyze the company’s solvency for precautionary measures. This information can effectively prevent the possibility of money laundering or terrorist financing. In addition to this information, these entities are monitored by regulators (Euronext, AMF and ACPR, etc.). As the aim of the Fourth Directive is to prevent money laundering or the financing of terrorism by identifying the ultimate beneficiary of all transactions, its objective is achieved when companies admitted to the financial markets are prevented from engaging in such practices.
So who is the beneficial owner, and how can he or she be identified?
B) Characteristics of beneficial owners
When a legal entity falls into the above category, it is obliged to identify its beneficial owners to the commercial court in the place of its registered office or place of business. The beneficial owner must always be a natural person (1), even in the case of indirect ownership (2).
1) The beneficial owner is always an individual
Article R561-1 of the French Monetary and Financial Code specifies that the beneficiary must be a natural person who directly or indirectly holds more than 25% of the company’s capital or voting rights, or who otherwise exercises control over the company’s management, administrative or executive bodies, or over the general meeting of shareholders.{[(|fnote_stt|)]}Article R561-1 of the Monetary and Financial Code.
It is important to analyze certain situations which may complicate the identification of beneficial owners, either because the individual partner cannot hold the 25% of the capital, or because he transfers the right of representation to a third party.
The beneficial owner is always a natural person who meets the conditions set out in Article R561-1 of the French Monetary and Financial Code, even if the entity is indirectly owned or controlled.
2) Indirect ownership and control of the entity
The aim of the fourth European AML/CFT directive is to identify any person likely to influence important decisions within a company. A holding is said to be indirect when a company owns 25% or more of the shares of another legal entity. In this case, the beneficial owners (individuals) of the indirect holding company are identified. The situation is much more complicated in the case of a chain of holdings, but the ACPR and AMF recommend multiplying the percentage holdings to identify the BE. When, after this operation, an individual holds more than 25% of the capital or shares, he or she must be identified as a BE.
It is important to note that the 25% limit is reduced to 10% of capital when the entity presents sufficient grounds for suspicion of money laundering or terrorist financing.
A controlling interest is the direct or indirect ownership of a majority of the company’s capital, which automatically confers a majority of voting rights, in accordance with Article L.233-3 of the French Commercial Code. In this case, the person who exercises control over the entity is identified as a BE, as is any person who holds more than 25% of the capital.
If the requirement to identify a natural person as the beneficial owner helps to thwart the opacity of companies, knowing the information to be provided (A) avoids misreporting of BEs, and it is important to question the reliability of this mechanism in the fight against money laundering and terrorist financing. (B).
A) Transmission of mandatory information to the register of beneficial owners
When the entities subject to the obligation to identify beneficial owners are known, and the individuals holding the 25% capital threshold have been identified, the question arises as to what information must be included in the declaratory document, on pain of nullity.
1) Mandatory information and the right to consult information
The legal representatives of legal entities covered by Directive 2015/849 are obliged to file a pre-designed form with the clerk of the commercial court in whose jurisdiction their company’s registered office or place of business is located. This form must include all the information required by article R.561-56 of the Monetary and Financial Code.8)R.561-56 of the Monetary and Financial Code
Decree 2017-1094 of June 12, 2017, which came into force on August1, 2017, specifies that companies in the process of incorporation must declare their beneficial owners and file this document when the company is registered. This declaration has two parts: the first concerns the entity subject to the obligation and the second concerns the individual identified as the beneficial owner:
For a legal entity, the compulsory information concerns: its name or corporate name, its legal form, the address of its registered office, etc.
For natural persons: name, surname, pseudonym, type of control exercised over the company or legal entity, date on which persons became beneficial owners of the company or legal entity.
On reading these compulsory statements, we realize that they contain all the necessary measures required by the FATF and the Fourth Directive. They all required that the natural person benefiting from a transaction of last resort be identifiable.
The BE declaration form is available online, and is designed to comply with the provisions of the French Monetary and Financial Code, making it impossible to omit any mandatory information. In fact, some registrars require that declarations be made on these forms, on pain of inadmissibility. At the Bobigny Commercial Court, a dispute arose between the clerk’s office and a company when the latter wanted to file its declaration using its own form, but the clerk’s office rejected its form. The entity referred the matter to the judge responsible for overseeing the register, who ruled that “regulations do not require the applicant company to complete the form proposed by the registry 9)Tribunal de commerce de Bobigny T. com. Bobigny, May 18, 2018, Bull. Joly Sociétés 2018”This gives the company the right to use any document, as long as it contains the required information. The BE register is centralized at European level.
In France, the RBE is entrusted to a judge in each commercial court, who is responsible for settling disputes and imposing sanctions in the event of failure to declare the BE, which can go as far as refusal of the application for registration.
2) Penalties for non-compliance
Before looking at the sanctions that may be imposed by the supervisory judge, we need to examine the situations that are considered to be invalid declarations: the absence of a compulsory statement referred to in article R.561-56 of the Monetary and Financial Code, failure to sign and date the document by a manager or by a person authorized under the articles of association, failure to declare within the legal time limit. Entities created before August1, 2017, had until April1, 2018, those created after that date and those in the process of being created, have just 15 days from receipt of the receipt for filing the business creation file. For mutual funds, it’s 180 days.
Failure to include the required information or to have the document signed by persons authorized by law or by the company’s articles of association will result in rejection of the declaration of beneficial owners. This can expose the company to failure to meet the BE reporting deadline.
When an entity fails to comply with the reporting deadline, Article R.561-55 provides:
The FATF’s 2012 recommendations call on member states to take all necessary measures against any company or legal entity that fails to comply with its obligation to report BE, and these recommendations have been taken up by the Fourth European Directive. Article L.561-49 stipulates penalties for failure to file information relating to EIBs, with a penalty of six months’ imprisonment and a fine of 7,500 euros (for managers, or any person with power of control over the entity). In addition to these sanctions, there are civil and civic sanctions, as well as a management ban. For legal entities, the Monetary and Financial Code refers to the provisions of article 131-37 et seq. of the French Penal Code, which stipulate that the maximum fine applicable to legal entities is five times the fine set for natural persons by the law punishing the offence.10)Articles 131-37 and 131-38 of the penal code .
All these measures oblige the entities concerned by the obligation to identify beneficial owners to comply.
B) The need to identify the BE
The FATF, in its successive reports, has always pointed out that there are entities created solely to either conceal the criminal origin of the funds invested, or to finance terrorism. Hence the need to identify these individuals BE of these entities (2), but above all, the study of the parameters of money laundering and the financing of terrorism is essential in order to thwart them (1).
1) Money laundering and terrorist financing parameters
When a criminal activity generates profits, the individual’s objective will be to control the funds without drawing the attention of anti-money laundering authorities to his activity. Since 1996, the International Monetary Fund has measured the volume of money laundering at between two and five percent of the world’s gross domestic product.
Money laundering is the logical consequence of any criminal practice, and can occur in any sector, anywhere in the world. It’s done by hiding the identity, source and destination, or just the last two. Bleaching is a three-stage process:
The first stage consists of introducing funds into the financial system (i.e. placing funds); the second stage consists of carrying out complex financial operations with the sole aim of disguising the route taken by the assets in order to offer them anonymity; the final stage consists of introducing the funds into the normal financial circuit. These three stages can often take place in several countries, with money launderers exploiting the disparity between legal systems protecting against money laundering and the financing of terrorism. Money launderers look for the most favorable route and the most vulnerable location, and this vulnerability of the legal system is explained by the tolerance of non-identification of BE.
The less the system makes it possible to identify the originator and beneficiary of the financial transaction, the more convenient it is for money launderers. This is why the identification of BEs is an essential method in the fight against money laundering and the financing of terrorism. However, it is supplemented by other methods that can be used, for example, to find out who the identified individual is.
2) Identification of BE complementary method of LCB/FT?
The identification of the BEs of all legal entities is a measure that lays the foundations for the effectiveness of the fight against money laundering and the financing of terrorism. Behind every legal entity, there is an individual who either has a legally-obtained fund that he invests to grow legally, or a fund from a criminal source whose origin he wishes to conceal. Identifying the BE means first and foremost knowing who is behind this investment, and where it resides? if it’s in a tax haven, we need to know its activities and sources of income to ensure that it’s not involved in criminal activities.
On the other hand, if identifying the BE is a step that enables us to get to know the person, it should be noted that this measure is accompanied by others, without which we will never know if the person is politically exposed, or if he or she has already been convicted of financial offences (embezzlement, corruption, tax fraud, etc.).
To achieve this, companies have set up a process to find out more about the person, such as screening methods.
Screening means that entities (banks, insurance companies and financial institutions, etc.) adopt internal measures (Thomson Reuters, Wordcheck, etc.) to find out whether there are any convictions against the identified individual. However, we sometimes wonder whether the obligation to identify beneficial owners is not weakened by the possibility of the right to remain silent, by paying an annual 3% of the market value of the buildings.
| ↑1 | The USA PATRIOT Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act |
|---|---|
| ↑2 | FATF (2012), FATF Recommendations – International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation, updated October 2016, FATF, Paris, |
| ↑3 | Presentation of the directive (EU) 2015/849 of May 20, 2015 known as the fourth anti-money laundering directive |
| ↑4 | Presentation of directive (EU) 2015/849 of May 20, 2015, known as the fourth anti-money laundering directive, recommendations 12 |
| ↑5 | Article 1842 CC “Companies other than the joint ventures referred to in Chapter III have legal personality from the time of their registration. Until registration, relations between partners are governed by the partnership contract and by the general principles of law applicable to contracts and obligations.”</> under article L. 251-4 of the French Commercial Code,
3° Commercial companies whose head office is located outside a French department and which have an establishment in one of these departments, 5° Other legal entities whose registration is required by law or regulation. On reading these provisions, it is easy to see that they apply to any company registered under private law and having its registered office or place of business in France. These include commercial companies (partnerships, joint-stock companies, special-status companies), civil companies (real-estate companies, special-status companies), as well as economic interest groupings with legal personality (whether for civil or commercial purposes). Alongside these French companies, there are foreign commercial legal entities with an establishment in France, it should be pointed out that it was the ordinance of December1, 2016 that went further than the Fourth Directive, as the latter made no mention of them. But even if the range of entities subject to the obligation to identify beneficiaries is broad, there are companies that do not fall into this category. 2) Excluded entities Companies admitted to regulated markets are not subject to this obligation. The exclusion of these categories of entities is logically justified by the fact that, in order to be admitted, they must provide a certain number of documents that not only identify the beneficial owners, but also analyze the company’s solvency for precautionary measures. This information can effectively prevent the possibility of money laundering or terrorist financing. In addition to this information, these entities are monitored by regulators (Euronext, AMF and ACPR, etc.). As the aim of the Fourth Directive is to prevent money laundering or the financing of terrorism by identifying the ultimate beneficiary of all transactions, its objective is achieved when companies admitted to the financial markets are prevented from engaging in such practices. So who is the beneficial owner, and how can he or she be identified? B) Characteristics of beneficial owners When a legal entity falls into the above category, it is obliged to identify its beneficial owners to the commercial court in the place of its registered office or place of business. The beneficial owner must always be a natural person (1), even in the case of indirect ownership (2). 1) The beneficial owner is always an individual Article R561-1 of the French Monetary and Financial Code specifies that the beneficiary must be a natural person who directly or indirectly holds more than 25% of the company’s capital or voting rights, or who otherwise exercises control over the company’s management, administrative or executive bodies, or over the general meeting of shareholders.{[(|fnote_stt|)]}Article R561-1 of the Monetary and Financial Code |
| ↑6 | Sophie Schiller, Didier Martin, Guide des pactes d’actionnaires et d’associés, Lexis Nexis edition January 2018 |
| ↑7 | Joint position of the ACPR and the AMF through |
| ↑8 | R.561-56 of the Monetary and Financial Code |
| ↑9 | Tribunal de commerce de Bobigny T. com. Bobigny, May 18, 2018, Bull. Joly Sociétés 2018 |
| ↑10 | Articles 131-37 and 131-38 of the penal code |
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