Improving beneficial ownership transparency in Ukraine: Review and recommendations

Findings

Overall we were impressed by Ukraine’s progress so far in collecting and publishing beneficial ownership information, and the broad access to that information granted by the Ministry of Justice. There is still room for improvement, and we have identified several areas where the usability and quality of the data could be enhanced. We also discuss and analyse a key problem: the incompleteness of the dataset due to low compliance.

Existing technology and functionality of the companies register

Structures for technical project management in place

The Ministry of Justice is the holder of the Unified State Register (USR), which contains information about companies. The information held on this register is shared with other public authorities, including the State Tax Service of Ukraine, the State Statistics Service of Ukraine, the Pension Fund of Ukraine, and other registers. NAIS is the Technical Administrator of the USR, ensuring the smooth operation of the registries and taking steps to create, refine and maintain the registry software. NAIS is responsible for providing broad technical and technological support including on data storage and protection. It translates directives from the Ministry of Justice into technical specifications, which are developed further in conversation with users and passed on to external developers, who are managed by NAIS.

Sophisticated technology and open access with some limitations

The Ukrainian companies register [20] boasts sophisticated technology at the front and back ends. NAIS informed us that user testing has been carried out and users have been considered in the design of the register and related interface. A 0.05 Hryvnia fee is levied for searches on the USR. Beneficial ownership data is also available as a bulk download via the e-gov portal. Both datasets are available only in Ukrainian, with portals and fields also in Ukrainian. This is a high level of access for Ukrainian users, but limits the usability for those who aren’t familiar with the language.

Users can view historical data by requesting extracts of data that were “true” on a certain date for limited liability companies but not joint stock companies (the Ukrainian equivalent of companies limited by shares). They are also able to view information about dissolved companies. Access to historical data is useful from a due diligence perspective, so that corporate entities can ascertain if they are going into business with someone whose previous company was closed due to fraud or bankruptcy, or are doing business with a company that has employed corrupt or criminal owners in the past. The European Court of Justice recently recognised this when it decided that there is no “right to be forgotten” in company registers.[21]

Data quality

As with all databases of significant size, the USR is facing challenges with data quality and completeness.[22] We have identified specific areas where changes will result in an improved data set. Overall, our analysis is that while some of the challenges are technical, the majority are articulated by the legislative and regulatory framework.

Data is not available in machine-readable format

Data provided by the USR is not collected in a structured format. It is inputted by registrars as free-text within a single field (“Founders”) of an existing company registration form. As a result, the data is not available to users in machine-readable format, nor can the Ministry conduct verification and data cleaning in bulk. Thus, data quality suffers, and the number of uses is severely limited.

There is a stipulation in the relevant legislation that “the software of the Unified State Register should ensure, inter alia, the search for interconnections between legal entities and their founders (shareholders), ultimate beneficiary owners (controllers), including the ultimate beneficiary owners (controllers) of the founder, chief executives of legal entities, as well as visualisation of all direct and indirect connections.” However, this requirement has not been implemented. This is a consequence of the unstructured nature of the data, which does not allow records to be linked.

NAIS informed us that the use of the free-text field within the existing form was a consequence of the quick push toward implementation after the revision of the initial law requiring beneficial ownership disclosure. The Ministry has agreed that there is a need to structure information about beneficial owners. They are intending to collect and publish the information as structured data as part of the modernisation of the companies register slated for later this year.

Incomplete database

Only 16 percent of Ukrainian companies currently submit any information on their beneficial owners. As of August 2017 (the date of the most recent release of Ukrainian companies data), approximately 1.5 million companies were registered. The Open Ownership Register was able to extract beneficial ownership data for approximately 253,000 of them, though according to the Ministry of Justice this number should be closer to 281,000 companies.

Though beneficial ownership data is collected by default at the moment of company registration, it is not clear to us that there was a directive from the Ministry to existing companies that they must submit their beneficial ownership by a certain deadline. There is also no annual requirement to update or confirm the data and the Ministry has indicated that such a requirement would be impractical. Though there is a requirement that companies update their beneficial ownership data upon any changes, this is difficult to enforce without knowledge of a baseline. We analyse this further in the section on sanctions and incentives.

No reliable means of disambiguation for individuals or companies

Users of beneficial ownership data must be provided with enough information to allow them to tell companies or people apart. Both company names and personal names are notoriously unreliable means of disambiguation [23], particularly in a context where transliteration of these names can result in multiple spelling variations (e.g. Olesia vs. Olesya). In collecting company information, the Ministry of Justice collects company owners’ tax IDs and passport numbers, but does not make them publicly available because of data protection issues. We requested that they provide Open Ownership with one-way hashes of the tax IDs, which would retain their distinctiveness but make it impossible to determine the actual number. This request was denied for the same reason. This means that the open dataset lacks a reliable way to disambiguate between individuals.

In addition, the identification codes of some discontinued companies are re-used for new companies. NAIS has informed us that there are only a few instances where this has occurred. However, if this practice continues, it seriously undermines the reliability of company numbers for disambiguation.

Timeliness of data not recorded

Data on beneficial ownership is submitted when a person registers a company, and updates are required for certain events – for example, when there is a change of owner, director, or address. There is no deadline to submit the information after the change, no annual requirement to confirm company information, nor is there a currently a field to record the date when the information was reported. This means that it is impossible for users to judge whether the information is up to date and accurate, or whether the company has lapsed in its reporting requirements.

Unclear beneficial ownership test

Ukraine’s definition of beneficial ownership is inclusive, capturing both material benefit and control, as well as multiple means of control including nominee shareholders:

However, we believe that the definition as written leaves a lot of room for interpretation. The conditions under which an individual qualifies as a beneficial owner must be as clear and unambiguous as possible. Potential for misinterpretation of the guidance becomes yet another loophole to exploit.

Data lacks granularity

Beneficial ownership data should be granular, or detailed, in order to provide users with many pieces of information that they can link and compare with other data to surface red fags. Useful beneficial ownership data provides as many data points about beneficial owners and their means of ownership as possible. Another primary benefit of high granularity is to close loopholes that individuals attempting to avoid reporting their involvement with a company to a register can use.

One strength of the legislation is that it stipulates that companies that cannot find beneficial owners must provide this information and a reason why (which should then be made available in the companies register). However, companies are not currently required by the legislation to report to the registrar the beneficial owners’ means of control. This is an important data point to capture - for instance, it may be a red fag if a beneficial owner has reported different means of control to the companies register than it is reporting to a bank.

It is also our judgment that the 25% ownership threshold is too high, creating a significant loophole for individuals attempting to hide their identity.

There is widespread agreement throughout international civil society about the danger of high shareholder thresholds.[25]

No data on the chain of ownership

It is well known that companies can own other companies, often in long corporate chains. Beneficial ownership data, therefore, must be able to represent everything between a target company and the natural person beneficial owner(s). We call the full set of entities, from target company to beneficial owner and all the companies in between, the beneficial ownership chain.

The data model (and data collection process) must be able to capture, as closely as possible, the full beneficial ownership chain. Pending legislation that has been approved by the Cabinet of Ministers but not yet passed by Ukraine’s parliament will require beneficial owners to stipulate the means of control, and to report the full “ownership structure” (i.e. the chain of ownership).

Business process

The term “business process” refers to all of the functions and practices that result in high-quality, highly used beneficial ownership data – the “production” stage of the diagram in Background.

In Ukraine, the process from data submission to publishing in the companies register broadly works like this: the company must produce a draft charter of the LLC, hold a meeting of the company founders, and draft an application for the registration of the LLC. These documents, along with identification documents, are checked and then filed with the Companies Registrar, who enter the data manually and issue electronic confirmation of the formation of the LLC.[26]

Parts of this process and the related technology have implications for data quality, as discussed below. We also discuss the lack of clear sanctions and incentives around timely reporting of beneficial ownership data, which we link to the problem of database completeness we have already described.

Lack of in-line validation and an efficient verification process

As discussed above, beneficial ownership data is inputted into the Ukrainian companies register as free-text within a single field. Currently, if the registrar spots a mistake, they rely on a copy of the registrant’s identification documents to correct it. Otherwise, the registrant can request a change via a registrar who then corrects the information.

In general, this record-by-record approach is far less efficient and effective than technical solutions to ensure high-quality data. The lack of in-line validation of this data degrades the quality and usefulness of the data by allowing for spelling and factual errors.[27] Technical solutions such as bulk data cleaning and comparing structured data against other government datasets could improve the accuracy of the data (e.g. correct name spellings). In the UK, Companies House has been known to analyse and clean the data in the companies register as a result of problems identified by the wider community, including civil society.[28]

The Ministry of Justice is able to request reviews of the bulk data from individual state registers. There is no ability to do a review of the USR as a whole. We expect that this administrative barrier makes it less efficient to do bulk data cleaning.

Unclear or unenforced sanctions and incentives

Our assessment is that a lack of clarity around, and enforcement of, sanctions for noncompliance and incentives for compliance, is the direct cause of the incompleteness of the dataset we covered at the start of this section.

An administrative penalty of 300-500 units of the minimum non-taxable income of citizens (roughly equivalent to 17-29 Ukrainian Hryvnias or $US 0.65- 1.09) can be levied against either a beneficial owner of a company or a person authorised on their behalf (e.g. directors) should that company fail to report its beneficial ownership. In order to levy these penalties, the Ministry of Justice must draft an “administrative protocol” proving that the information has not been reported and forward to the relevant court for its decision. It is not clear what happens if the fine is paid but not followed by a disclosure.

Reporting incorrect information about beneficial ownership carries criminal liability: 500 to 1000 units of the minimum non-taxable income of citizens ($US 1.09-2.22), or arrest for three to six months, or imprisonment for up to two years. These sanctions can be levied against the beneficial owner or a person authorised to act on their behalf (e.g. directors). These offenses are flagged and investigated by a law enforcement agency outside of the Ministry of Justice.

It is our judgment that these sanctions are not strong enough. By way of comparison, in the UK, there are multiple sanctions against both companies and beneficial owners. Companies can be sanctioned for failure to request information from potential beneficial owners or failure to provide information on its beneficial owners to the central register. Beneficial owners can be sanctioned for failure to respond to requests for information from companies about their beneficial owners, or for knowingly or recklessly making a false statement, as well as for failure to notify a company that they are a beneficial owner, even if they haven’t been contacted by the company. For all of these offences, where they are committed by a company, both the company and every officer of the company that has failed to comply are considered to have committed the offence. The penalties are imprisonment for up to 12 months, a fine, or both. In addition, Companies House has the ability to strike off any companies that default on their obligations to report to the register.[29]

The draft legislation discussed previously strengthens the current sanctions regime. It will require banks to conduct due diligence checks using data from the register, and to reject applications for accounts coming from companies that have not fully reported their beneficial ownership. It will also increase the administrative penalties for non-reporting tenfold.

A spokesperson for the Ministry indicated these sanctions have never been applied to their knowledge, raising questions about enforcement. Our desk research suggests that the Ministry has not taken advantage of public communications or softer methods of enforcement either: we could not find an indication that the Ministry of Justice has communicated with company owners regarding deadlines for disclosing beneficial ownership information to the Ukrainian companies register, as was done in the UK. The initial version of the 2014 law had terminology that some found confusing; this led to legislative amendments which seems to have impacted the initial deadline for disclosure of 25 May 2015, possibly causing further confusion. We also could not find an indication that the Ministry or its technical implementers were engaged in a process to identify those companies that hadn’t complied and follow up with them directly to remind them of their obligation to report.

Because timeliness data is not recorded, it is difficult to confirm the level of compliance with requirements to update the register. But we can extrapolate from our assessment of low levels of compliance with the first order requirement to report beneficial ownership to the register that a similar issue is being faced regarding updating information. There do not appear to be any regulatory or legislative sanctions for failing to update information in the Ukrainian companies register.

Incentives come from having the data open to many users, who will rely on the information in the register to help them make decisions related to due diligence. A company that repeatedly loses out on contracts or business deals because the information they have submitted to the register isn’t timely is likely to want to give potential business partners more confidence by updating their information. This is a concrete example of the way greater engagement of users can lead to higher-quality data.

Summary and discussion

Overall, we have found that Ukraine has taken many important steps toward having a comprehensive company register that is an authoritative source of beneficial ownership information, and is eager to continue on this path. Ukraine is well placed to continue to be a trailblazer on beneficial ownership transparency.

When the companies register is assessed from a user-centered perspective, as we have done, key areas of improvement surfaced. These are:

• A lack of access to structured data, which greatly limits usability;
• Incomplete data due to non-compliance and unclear sanctions;
• Unreliable means of disambiguating people and companies;
• A beneficial ownership test that leaves too much room for interpretation;
• Not enough granularity in the data, including on the data’s timeliness and chains of ownership;
• No in-line validation at data entry stage or bulk data verification, leading to low quality and errors.

A register that is managed with user needs at its heart will have higher quality data. Not only is this a user need in itself, but also user engagement will drive data quality through feedback and the raising of red fags. In the recommendations section to follow, we address these issues under three broad categories: enforcement and compliance, access to useful data, and management of the register.

Footnotes

[20] The portal is available at https://Usr.minjust.gov.ua

[21] Court of Justice of the European Union, “Press Release No 27/17.” 2017.

[22] DAMA UK working group, “The six primary dimensions for data quality assessment.” Oct 2013.

[23] “...without additional information such as date of birth or ID details it is very difficult to distinguish between two shareholders in case of homonymy.” Taken from Project BOWNET, “The identification of beneficial owners in the fight against money laundering”, Ed. Michele Riccardi, 2013, p53.

[24] As cited in https://eiti.org/sites/default/fles/documents/ukraine_bo_roadmap_in_english.pdf

[25] Global Witness, “A register of beneficial owners of overseas companies and other legal entities: Submission from Global Witness,” 15 May 2017.

[26] https://www.contactukraine.com/company-law/register-company-in-ukraine

[27] This was a problem in the UK, where over 500 ways of describing UK nationality were discovered i.e “English”, “British”, “United Kingdom”, “UK”, or even misspelled entries such as “Brittish”. See Palmer, Rob “What does the UK Beneficial Ownership Data Show us?” Global Witness. 22 Nov 2016.

[28] An example of a productive civil society/government partnership is this data dive by Global Witness into Companies House data. The results were passed on to Companies House for further investigation. Another example of an entity doing data quality work is these regular reports produced by the G20-founded Global Legal Entity Identifer System.

[29] Companies House, “Guidance. Strike of, dissolution and restoration,” October 2017.

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