26 Aug, 2020

The Register of ultimate beneficial owners – a step closer to money flows in Western Balkans

Money laundering – a crime that is not victimless

In a globalized world where modern technology allows the rapid flow of funds, fighting money laundering has never been a more important and urgent need.  Trillions of dollars are laundered each year and these funds fuel serious organized crime activities such as drug trade, sexual exploitation, human trafficking, terrorism, etc.  Money laundering is far from a victimless crime, and, moreover, it harms society in a more perfidious manner than other crimes.

The Financial Action Task Force (“FATF”) is the leading global money laundering and terrorist financing “watchdog”.  As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.  With more than 200 countries and jurisdictions committed to implementing them, the FATF has developed the FATF Standards which are the basis for FATF Recommendations to ensure a coordinated global response in preventing organized crime, corruption, and terrorism.  Consequently, the FATF monitors countries to ensure they implement the FATF Standards fully and effectively; reviews money laundering and terrorist financing techniques, as well as corresponding counter-measures; continuously strengthens its standards to address new risks; promotes adoption and implementation of the FATF Recommendations globally; makes a list of states i.e. jurisdictions that do not harmonize their legislation with international standards.

Preventive measures – determining ultimate beneficial owners

International standards in this area recognize several basic and now traditional measures in terms of prevention of money laundering.  One of these measures stands out: identification and verification of the client’s identity.  However, determining a client’s identity i.e. the identification of a company’s ownership structure often does not offer an answer to the question of which natural person actually benefits from or bears the economic and legal consequences of the business activities of that company.  In other words, if it is not known who stands behind legal or even natural persons and makes actual decisions in their name, we cannot talk about the effective prevention of money laundering. 

Governments around the world approached the struggle against money laundering in various ways regarding the identification and registration of the ultimate beneficial owners of legal entities.  Gecić Law office thus decided to provide a comparative legislative overview for the following countries: Serbia, Montenegro, North Macedonia, and Bosnia and Herzegovina.

Separate act adopted in Serbia

In accordance with stated powers, the FATF included Serbia on the so-called “gray list” of jurisdictions in February 2018.  Since being out on the list, Serbia demonstrated high-level political commitment to implement the FATF Action Plan, and that task has been fully completed. Consequently, it resulted in Serbia being removed from the “grey list” in June 2019, which means that the country is no longer under the FATF monitoring regime in further alignment with standards in the field of money laundering prevention.

One of the most significant legislative activities was the adoption of the Act on Central Records of Ultimate Beneficial Owners(“Act”) which came into force on June 8, 2018.  The Act was adopted in an urgent procedure on the recommendation of the MONEYVAL Committee of the Council of Europe, in accordance with EU Directive 2015/849. Thereby, it created a public, integrated, central, electronic database maintained by the Serbian Business Registers Agency, which contains information on natural persons who are ultimate beneficial owners of the legal entities (“Central Records”). 

Who does the Act influence?

The Act applies to the following legal entities registered in the Republic of Serbia:

  • companies, other than public joint-stock companies;
  • cooperatives;
  • branch offices of foreign companies;
  • business associations and associations other than political parties, trade unions, sports organizations and associations, churches and religious communities;
  • foundations and endowments;
  • institutions;
  • representative offices of foreign companies, associations, foundations, and endowments.

The Act is not applicable to companies and establishments in which the Republic of Serbia, an autonomous province or a local self-government unit is the only shareholder or founder.

Who is the ultimate beneficial owner of the company?

Pursuant to the Act, the ultimate beneficial owner of the company is (always) a natural person who:

  1. has direct or indirect ownership of 25% or more of the shares, stocks, voting rights or other rights, under which a natural person participates in the company’s management or in the company’s capital with 25% or more share;
  2. has indirect or direct prevailing influence over the conduct of business and decision-making;
  3. indirectly provided or provides funds to the company, on the basis of which the natural person has a significant influence on the company’s management bodies, in relation to decisions regarding financing and business operations;
  4. is a founder, trustee, protector, beneficiary – if determined, or a person with a dominant position in managing a trust, or in other foreign law entity; and,
  5. is a registered representative of cooperatives, associations, foundations, endowments and establishments, if the person authorized representative has not registered other natural person as the ultimate beneficial owner.

In exceptional cases, if none of these criteria is applicable (excluding the item 5)), the ultimate beneficial owner is the company’s registered representative i.e. the person that is registered as member of the company’s body.

The content of the Central Records

Central Records contains the following information about the ultimate beneficial owner:

  • for Serbian citizens: personal name, personal number, and country of residence;
  • for foreign nationals: personal name, passport number and issuing country and/or their personal number and/or number of the identity card number and issuing country, time and place of birth, country of residence and citizenship;
  • the ground for acquiring the capacity of the ultimate beneficial owner.

Montenegro and North Macedonia– separate provisions within the existing act

Montenegro’s Act on Prevention of Money Laundering and Terrorism Financing, according to amendments which entered into force on July 6, 2018, contains (only) three articles (21a – 21c) regarding the records of ultimate beneficial owners. These articles regulate:

  • the register of ultimate beneficial owners (article 21a);
  • submission of data to the register (article 21b);
  • access to registry data (21c).

According to the specified amendments, the bylaws should be adopted within six months of the date when the act enters into force, while the register of ultimate beneficial owners should be established within one year from the date of the entry into force of these bylaws.  The Tax administration has been entrusted to create and manage this register.

It should be pointed out that the registration of business entities in Montenegro is carried out in the Central Register of Business Entities, which contains records on the ownership structures of companies based on the founding acts and other registration documentation.  Accordingly, there was no obligation in Montenegro to identify the ultimate beneficial owners. Precisely for this very reason, but also in order to comply with the international (AML/CFT and FATF) standards, there was a need to establish a special register in which data on the ultimate beneficial ownership structure will be kept.

Similarly, and practically at the same time in North Macedonia, the Act on Prevention of Money Laundering and Terrorism Financing, which entered into force on July 7, 2018, introduced a register of ultimate beneficial owners. This Act stipulates that the Central Registry (mac. Централен регистар) is in charge of establishing, maintaining, maintaining, and managing this registry. The register also contains provisions relating to persons authorized to submit data on ultimate beneficial owners, the contents of the register, access to data from the register, as well as their verification.

Bosnia and Herzegovina – still without the register

The Draft Act on Prevention of Money Laundering and Financing Terrorist Activities has not yet seen the light of day. The adoption of this act would lead to harmonization with a number of EU documents in this area, including the takeover of regulations related to the establishment of a register of ultimate beneficial owners of legal entities.  These developments mean that Bosnia and Herzegovina (BiH) could again find themselves on some international list due to the non-fulfillment of international commitments.  The key to these obligations is the adoption of the present act.  As a reminder, BiH was removed from the FATF list in February 2018, and in 2015  from the MONEYVAL list. Due to the negative consequences of being included in one of these lists, the continuation of the legislative procedure and the final adoption of the law are expected in the coming period.

Conclusion

In order to effectively establish a register of ultimate beneficial owners, the question that arises is which data is best to be used as inputs for the database.  Although at first glance it seems possible to make a connection between the real and fictive owner, i.e. between the real owner and the legal entity, when it comes to the field of law, the situation is different.  Namely, if there is no document that connects a natural person with a legal entity, it is very difficult to act in the legal field.

The situation can be even more convoluted in practice.  Take for example the countries of the Western Balkans.  If we look at the history and the unfortunate “disintegration” of the former Yugoslavia, there is a large number of people who legally hold multiple citizenships living in the newly-formed countries.  The problem is that one person can establish a company using different (legally possessed) citizenships.  Thus in order to successfully supervise the flow of funds, this is one practical problem, and it would be necessary to introduce some kind of a unique ID so that individuals could be recognized throughout the entire system in Serbia, Montenegro and, BiH, etc.  and thus facilitate linking funds and entities to real people.

Authors: Ognjen Colić and Žarko Popović