Designing sanctions and their enforcement for beneficial ownership disclosure
Types of sanctions in beneficial ownership disclosure regimes
This section provides an overview of different types of sanctions that could be applied to the different BO disclosure-related offences highlighted above, supported by country examples, and discusses their relative merits in achieving the aim of ensuring BOT. These sanctions could be contained either in the specific BO-related laws of a country (as in Albania, Austria, and Luxembourg) or in the penal codes outside the legislation on BO (as in Indonesia and Italy). In the UK, criminal sanctions are covered in primary legislation, whilst administrative sanctions are in secondary legislation. Whilst this will depend on a country’s legal system, sanctions should be set in primary legislation if possible, leaving levels of administrative fines in secondary legislation so they are easy to adjust as necessary.
It is important for countries to ensure that a combination of these types of sanctions should be available and applied by the relevant authorities to ensure their effectiveness. As an overarching principle, sanctions should include both financial and non-financial penalties to ensure they are not seen as merely the cost of doing business. This will make them more effective, dissuasive, and proportionate.
Financial sanctions
Financial sanctions are generally the fines, both administrative and criminal,[B] which are imposed by the relevant authorities for noncompliance with the BO disclosure requirements. The range of fines imposed for noncompliance with BOT requirements varies between countries:
Table 2. Examples of different levels of financial sanctions in different countries
| Country | Financial sanction |
|---|---|
| Malawi [25] | USD 0.35 |
| Kazakhstan [26] | USD 7.00 |
| Malaysia [27] | USD 12-USD 140 |
| Ghana [28] | USD 350 |
| Albania [29] | EUR 2,000-EUR 4,000 (approximately USD 2,200-USD 4,400) |
| Montenegro [30] | EUR 3,000-EUR 20,000 (approximately USD 3,300-USD 22,000) |
| France [31] | EUR 7,500 (approximately USD 8,200) for individuals and EUR 37,500 (approximately USD 41,100) for legal entities |
| Belgium [32] | Administrative fine of EUR 250-EUR 55,000 (approximately USD 275-USD 60,300) and a criminal fine of EUR 400-EUR 40,000 (USD 440-USD 44,000) |
| Slovenia | EUR 6,000-EUR 60,000 (approximately USD 6,600-USD 66,000) |
| Liberia [33] | USD 100,000 for an individual and USD 1,000,000 for a company |
| Austria | EUR 200,000 (approximately USD 220,000) |
| Ireland [34] | A fine of EUR 5,000 (approximately USD 5,500) on summary conviction and EUR 500,000 (approximately USD 550,000) on conviction on indictment [C] |
| Luxembourg [35] | EUR 1,250-EUR 1,250,000 (approximately USD 1,370-USD 1,370,000) |
| Germany [36] | Up to EUR 1,000,000 (approximately USD 1,100,000) or up to double the amount of the economic advantage created by the infringement |
A number of countries, such as Bulgaria, Croatia, Estonia, France, and Liberia, differentiate between individuals and legal entities when imposing financial sanctions, generally imposing higher fines on legal entities. Nonetheless, it has often been argued that financial sanctions, even if they are in the high-end range, may be considered an acceptable added cost by those engaging in illegal activities.[37] Therefore, it is often recommended that countries also include non-financial and criminal sanctions within their regime.[38]
Non-financial sanctions
Countries should impose non-financial sanctions on both individual and legal persons for breach of the BO disclosure requirements to ensure their effectiveness. Some non-financial sanctions to be considered by countries that are aiming to enhance compliance with their BO disclosure regime include the following:
Constitutive effect
Constitutive effect means that registration or disclosure itself creates rights.[39] Whilst it is not a punishment in the same way as other sanctions discussed in this briefing, it is an important provision and will have a similar impact. Namely, it imposes restrictions on exercising certain rights in a company if the BO information has not been disclosed or updated.
To encourage the registration and updating of BO data on the established BO register within the country, a few countries (such as Austria and Uruguay)[D] have provided for the registration to have a constitutive effect, meaning rights within the company exist only upon registration of BO information. BO itself does not have constitutive effect: a person is a beneficial owner of a company irrespective of whether or not that status has been disclosed. However, accurate and up-to-date disclosure can be given constitutive effect with respect to certain benefits associated with company ownership. For example, an unregistered beneficial owner or shareholder could be prevented from voting or receiving dividends. In Uruguay, for instance, bans are imposed on profit distribution in cases where corporations fail to disclose their beneficial owners.[40] External enforcement of these provisions may, however, be challenging.
A director appearing in the register may be held liable for BO disclosure-related offences, even if they have resigned, unless the information on the register has been updated. Any decision taken by the new directors should be considered void unless their information is on the register. Such an administrative sanction would create an incentive for all parties to ensure that their information is registered and updated.
Non-financial sanctions against companies
These include: preventing companies from incorporating; denying companies the issuance or renewal of particular licences (Malawi);[41] preventing financial institutions (FIs) and designated non-financial businesses and professions (DNFBPs) from forming business relationships or executing transactions with an entity that has failed to register or update information on the central BO register (North Macedonia); suspension of the annual certificate of validity (Uruguay and the Philippines); and revocation or termination of licence or concession (Cameroon, Colombia, Indonesia, Kazakhstan, Kyrgyz Republic, and the Philippines).
If a company is not properly registered, the legal vehicle should not be considered to legally exist, or as able to hold assets or engage in business.[42] In Slovakia, for instance, if a company has been removed from the Register of Public Sector Partners by the Registration Court due to breaches relating to BO disclosure requirements, its existing government contracts can be cancelled, and the company cannot undertake contracts with the government.[43]
The sanction imposed by North Macedonia prevents FIs and DNFBPs from establishing or continuing a business relationship with an entity that has not provided or updated its BO information on the centralised BO register. This sanction is an important one in turning registers into relevant databases that need to be checked in real time, rather than using them as repositories to store information or documents. If implementers also have discrepancy reporting requirements in place, it is important to consider how these two requirements interact.
Compulsory dissolution or striking off
Some countries take the approach of dissolving or deactivating companies if they fail to comply with BO disclosure requirements. In Denmark, for instance, it is possible for the Danish Business Authority to enforce a compulsory dissolution or the winding up of a Danish company if there is no, or inadequate, BO information registered. Partnerships and limited partnerships that are required to be registered in Denmark can also be struck off from the Central Business Register (CVR) due to providing inadequate BO information or not registering BO information.[44] Such a provision will have a constitutive effect, as the striking off from the register dissolves the company, and it no longer exists as a legal person. In Latvia, for example, 400 companies have been struck off from the Enterprise Registry in 2019 for failing to submit their BO information.[45] A similar provision can also be found in the Belgian legislation where entities that do not fulfil their BO registration obligations can be made subject to judicial liquidation proceedings in the court by the registrar.[46]
Giving such sanctioning powers to the relevant authority to strike off legal entities from the register if they do not comply with their BO disclosure requirements is not only important to drive up compliance but also to clean up the data, which bolsters verification efforts. In Indonesia, as of 28 November 2021, the government noted that only 24.5% of companies had disclosed BO information.[47] Reportedly, a substantial proportion of companies are expected to be dormant, but the registrar does not have the powers to strike off all types of companies. To deal with such situations, the registrar should be given the necessary powers to warn and then strike off the company to ensure the availability of up-to-date and accurate BO data.
Nevertheless, registrars should be cautious with exercising this power for new reporting requirements. In Kenya, for instance, low compliance (30-35%) with the BO register is suspected in part to be because many companies are dormant or inactive.[48] However, reportedly some companies that were set up a long time ago do not have the required historical records, and active companies are struggling to migrate to the e-register platform, as they need high-quality, historical information about their companies – and the company's changing BO over time – in order to do so.[49]
Any legal entity that has failed to submit or confirm its BO information by the due date should be sent warning notices. Failing a legitimate reason, the company should automatically be considered as dormant or inactive and removed from the list of active entities. Such a sanctioning provision would incentivise the companies to keep their BO records up to date. FIs and DNFBPs should also be required to constantly check the list of active entities on the register to ensure that their client entities are still active, and they are thus allowed to operate (e.g., that they can open a bank account, transfer money, sign a contract, etc.) with these entities.[50] FIs and DNFBPs should not be allowed to establish or continue business relationships with an entity whilst it remains inactive on the register. This could be enforced as part of supervisory inspections by the relevant authorities, in the same manner as the enforcement of the requirement on FIs and DNFBPs to conduct customer due diligence (CDD) checks before establishing business relationships and as part of ongoing monitoring of business relationships.
Sanctions against individuals holding management positions in companies
These include, for instance: criminal proceedings; banning individuals from forming companies or holding management positions if their company has breached BO obligations (Spain and France); disqualification from the practice of business activities (France); or “partial privation from national and civil rights” (France).[51] In Spain, if a company breaches its BO disclosure obligations, the company director(s) can be banned from holding such positions in any company for a maximum of five years.[52] Sanctions should also be imposed against professional enablers (such as lawyers, accountants, or trust and company service providers, etc.) if they assist a legal entity in concealing their identity; these can include criminal proceedings and the loss of their professional or business licence. In the latter case, the self-regulatory bodies of different professions (such as lawyers, notaries, and accountants) can play a significant role in imposing these sanctions as a part of disciplinary proceedings, provided they have sufficient capacity and resources. These sanctions would be specifically relevant for countries where the BO disclosure regime relies on intermediaries. In these countries, attention should be given to aspects of the legal framework governing intermediaries which may impede compliance and enforcement, such as professional privilege.
An important consideration when incorporating non-financial sanctions in the legal and regulatory framework is ensuring that non-financial sanctions are in line with the BOT policy aims in order to be as dissuasive as possible. For example, in the case of a procurement register, natural and legal persons who have failed to comply with the BO disclosure requirements could be prevented from being considered for government contracts. Such a provision has been adopted by Slovakia; this bars companies from public contracts for up to three years, and imposes a fine of up to EUR 1 million if they fail to comply with the requirements of the law relating to the Register of Public Sector Interests. A similar approach is also under consideration in the UK for its public procurement register, which is considering non-disclosure of BO information as mandatory grounds for exclusion, and adding entities to a debarment list.[53]
Criminal sanctions
In addition to financial and non-financial administrative sanctions, countries should also impose criminal sanctions against natural persons and legal entities (depending upon the legal system of a country in the latter case, as discussed in more detail below) for the violation of various BOT requirements. Criminal sanctions are recommended to be imposed for more flagrant or repeated violations of the BO disclosure requirements, which involve criminal knowledge and intent rather than accidental errors or omissions. Criminal sanctions include the imprisonment of natural persons for the violation of the BOT regime requirements, and may range from an imprisonment sentence of a few months to a few years. In Cameroon, for instance, a person who violates the BO disclosure regime could be imprisoned for up to three months; in France and the Netherlands, imprisonment could be for a maximum term of six months; in the UK, it could be up to two years; in Zambia, it could be up to five years; and in Poland, it could be up to eight years.
Criminal sanctions are often argued to be more effective than financial sanctions in ensuring compliance with BO disclosure requirements.[54] Nonetheless, due to the difficulty in proving the knowledge and intent of the concerned person to impose criminal sanctions, countries often do not incorporate criminal sanctions into their regime or limit them to criminal fines. Even in countries where criminal sanctions have been incorporated, there is currently a lack of sufficient data on prosecutions and their implementation. As previously mentioned, there are very few cases of successful prosecution for deliberate submission of false information.
In the US, a proposed approach is to provide a safe harbour and not impose sanctions if a report that contains inaccurate information on BO has been voluntarily corrected within 90 days.[55] This is conditioned on the inaccurate report not having been submitted to evade the reporting requirements or with actual knowledge of its inaccuracy, which provides a similar challenge in demonstrating knowledge and intent. It appears that this approach has been proposed to protect innocent parties in case of accidental disclosures of incorrect or incomplete BO information. Nonetheless, such an approach should be adopted very cautiously by jurisdictions, as it may result in a loophole which could be exploited to gain extra time. It might also prove difficult for the responsible authority to determine the intent behind inaccurate BO information disclosed initially – whether accidental, reckless, or intentional.
Foot notes
[B] An administrative fine is a financial penalty which is imposed by the relevant authority as restitution for wrongdoing, which is typically defined in the legislation, regulations, or both, and constitutes an administrative offence. Administrative fines are different from criminal fines, for the former is primarily used to compensate the state for the harm done to it rather than to punish the wrongful conduct.
[C] In Ireland and some of the other jurisdictions, including the UK, a summary conviction offence is an offence which can only be dealt with by a judge in the lower court without a jury, and an indictable offence is one which can or must be tried before a judge and jury. The summary offence is a less serious offence when compared to an indictable offence, and it is punishable by a different set of rules, regulations, and lower sentencing guidelines.
[D] Georgia has also adopted and is implementing this sanction to ensure that the basic (not BO) information on their commercial register is accurate and up to date. Changes to basic information will only take place after their registration in Georgia’s National Agency of Public Registry. Non-registered changes do not have a legal force. For further details, see: Anti-Money Laundering and Counter-Terrorist Financing Measures: Georgia – Fifth Round Mutual Evaluation Report (Strasbourg: MONEYVAL Secratariat, September 2020), https://www.fatf-gafi.org/media/fatf/documents/reports/mer-fsrb/MONEYVAL-Mutual-Evaluation-Georgia-2020.pdf.
End notes
[25] “Legal approaches to beneficial ownership transparency in EITI countries”, EITI, June 2019, 15, https://eiti.org/documents/legal-approaches-beneficial-ownership-transparency-eiti-countries.
[26] “Legal approaches to beneficial ownership transparency”, EITI.
[27] Ibid.
[28] Ibid.
[29] Article 13.2(a) and (b), Law No. 112/2020, https://qbz.gov.al/eli/fz/2020/149/4a837817-b94a-4218-a611-893fc37cec4e.
[30] Article 99.1.34b, Law on the Prevention of Money Laundering and Terrorist Financing, 2019, https://www.legislationline.org/download/id/6035/file/Montenegro_law_on_the_prevention_of_money_laundering_2014_en.pdf.
[31] “Legal approaches to beneficial ownership transparency in EITI countries”, EITI, 15.
[32] “The UBO Register: Update 2019”, PWC.
[33] “Legal approaches to beneficial ownership transparency in EITI countries”, EITI, 15.
[34] “The UBO Register: Update 2019”, PWC.
[35] Ibid.
[36] Ibid.
[37] Moran Harari, Andres Knobel, Markus Meinzer, and Miroslav Palanský, Ownership registration of different types of legal structures from an international comparative perspective: State of Play of Beneficial Ownership – Update 2020, Tax Justice Network, 1 June 2020, 14, https://www.taxjustice.net/wp-content/uploads/2020/06/State-of-play-of-beneficial-ownership-Update-2020-Tax-Justice-Network.pdf.
[38] Andres Knobel, Beneficial ownership verification: ensuring the truthfulness and accuracy of registered ownership information, Tax Justice Network, 22 January 2019, 34, https://taxjustice.net/wp-content/uploads/2020/11/Beneficial-ownership-verification_Tax-Justice-Network_Jan-2019.pdf.
[39] Ibid.
[40] Maria Eugenia Marano, Juan Argibay, and Adrián Falco, Beneficial Ownership Registration: A transversal demand (San Martín: Fundación SES, December 2020), 131, http://www.conferenciabf.org/wp-content/uploads/2021/03/Beneficial-Ownership-Registration-web-2-1.pdf.
[41] “Legal approaches to beneficial ownership transparency in EITI countries”, EITI, 15.
[42] Harari et al., Ownership Registration of Different Types of Legal Structures from an International Comparative Perspective: State of Play of Beneficial Ownership – Update 2020, 15.
[43] Tymon Kiepe, Victor Ponsford, and Louise Russell-Prywata, “Early Impacts of Public Registers of Beneficial Ownership: Slovakia”, Open Ownership, September 2020, 3, https://openownershiporgprod-1b54.kxcdn.com/media/documents/oo-impact-story-slovakia-2020-09.pdf
[44] Best Practices on Beneficial Ownership for Legal Persons, FATF, 67.
[45] Latvia’s report to MONEYVAL assessors, unpublished, 2020.
[46] Sébastien Guillaume and Alexandre Taymans, “Looking Back, and the Road Ahead: A Prospective Analysis of the Belgian UBO Register”, Belgium Treasury, February 2021, 16, https://finances.belgium.be/sites/default/files/thesaurie/20210208_LookingBackAndTheRoadAhead_Final.pdf.
[47] “Corruption Prevention Action: Utilization of Beneficial Ownership Data for Criminal Case Handling, Licensing, and Public Procurement”, Komisi Pemberantasan Korupsi.
[48] Citizen TV Kenya (@citizentvkenya), “Joyce Koech – Registrar of companies: Only 33% of companies have disclosed their true beneficial owners. Companies have to transition to the e-platform to submit their beneficial ownership information #MondayReport @TrevorOmbija”, Twitter, 31 January 2022, 7:37 p.m., https://twitter.com/citizentvkenya/status/1488235107462823937.
[49] Citizen TV Kenya, “MONDAY REPORT | GoK looking to establish true owners of Companies to avoid graft”, YouTube, 31 January 2022, https://www.youtube.com/watch?v=nHuftmDCIdY.
[50] Knobel, Beneficial ownership verification: ensuring the truthfulness and accuracy of registered ownership information, 34.
[51] Best Practices on Beneficial Ownership for Legal Persons, FATF, 43.
[52] UBO disclosure requirements within the EU, KPMG International, April 2019, 52, https://assets.kpmg/content/dam/kpmg/xx/pdf/2018/07/gls-transparency-register-web.pdf.
[53] “Transforming Public Procurement – Government response to consultation”, UK Cabinet Office, 6 December 2021, https://www.gov.uk/government/consultations/green-paper-transforming-public-procurement/outcome/transforming-public-procurement-government-response-to-consultation.
[54] See: Harari et al., Ownership registration of different types of legal structures from an international comparative perspective: State of Play of Beneficial Ownership – Update 2020, 14; Knobel, Beneficial ownership verification: ensuring the truthfulness and accuracy of registered ownership information, 34.
[55] Betty Santangelo, Joseph P. Vitale, Melissa G.R. Goldstein, and Kyle B. Hendrix, “FinCEN Commences Rulemaking Process for Implementation of Corporate Transparency Act Requiring Disclosure of Beneficial Ownership Information”, Schulte Roth & Zabel, 26 April 2021, https://www.srz.com/images/content/1/7/v2/178971/042621-SRZ-Alert-FinCEN-Commences-Process-For-Corporate-Transpar.pdf.