Journal of Finance, Accounting and Management, 5(1), 1-15, Jan 2014 1
The Beneficiary Ownership and Joint Stock Companies
Roland SUBASHI
University of Tirana, Albania
[email protected]
Abstract
The purpose of the paper is to introduce the solution as regards gaps in anti-money
laundering ML legal framework faced by the Albanian second level banks. In the course
of preventing ML, the Identification of beneficial ownership for legal entities is taking
priority in the banking system nowadays. Banks in one hand try to achieve profit
maximization but on the other hand they must avoid offering services to suspicious clients
that may result in administrative and criminal offenses. Reputational risk is at stake for
not complying with ML requirements. In this regard financial institutions in Albania face
certain legal difficulties that need to be addressed by lawmakers. There is a gap between
the legal requirements of the organic law on Prevention of Money Laundering and other
legal and regulatory framework in Albania. Disturbing for bank’s compliance officers is the
identification of the beneficial owners for offshore and non-residents clients due to the
complicated shareholding structure and luck of obtaining the identification data from the
international registers. This paper emphasizes the importance of harmonizing the legal
framework in national level. There is also an urgent need for having international registers
in place, which should be accessible by all financial institutions and other subjects of the
law worldwide in order to facilitate their operational work smoothly.
Key words: Beneficiary owner, Money Laundering, Offshore centers.
Introduction
Legal and political environment is affecting more and more decision making worldwide. It may
have profound effect on the success of any organization. In various scientific works like Aaker
(2008): External environmental factors include customer analysis, competitor analysis, target
market analysis, as well as evaluation of any elements of the technological, economic, cultural or
political/legal environment likely to impact success.
As part of the political and legal environment, the phenomenon of money laundering directly
affects the operational decision of the financial institutions. Money laundering is considered by
some authors as “Capitalism’s Achilles Heel” (Baker, 2005). In the course of prevention of Money
Laundering, one of the most important issues financial institutions facing today is the client’s
identification and its source of income. In this regard it is very important the identification of
Journal of Finance, Accounting and Management, 5(1), 1-15, Jan 2014 2
Beneficiary Owner, which is part and parcel of client’s identification. There is a local legal gap
faced by financial institutions in Albania, particularly banks, in fulfilling their obligations
regarding the identification of beneficial ownership of their clients. The task becomes increasingly
difficult in cases of offshore and nonresident’s clients.
The research is focused in literature review and “in-depth interviews” using semi structured
questionnaires with the main stakeholders dealing with prevention of money laundering mainly
bank’s compliance officers and law enforcement officials.
The main hypotheses are:


There is a real need to harmonize the legal framework;
International company registers must be in place and accessible by banks worldwide.
This qualitative study is organized in two sections. The first section presents the concept
of beneficial ownership, which is part and parcel of due diligence measures applied by the bank
on its customers. The second section, which is the main part of the work, explores the legal
difficulties encountered by banks in identifying beneficial ownership such as the resistance to nondeclaration of beneficial ownership, legal gaps in legal and regulatory framework, difficulties in
identification of nonresident and offshore corporations, Politically Exposed Persons PEPs as well
as International efforts to improve the current situation. It also suggest the ways to intervene in the
local legal and regulatory framework in order to release the burden from the banks in order to
better prevent the phenomena of money laundering in Albania.
The Concept and Legal Liability
According to local legal framework which is in line with FATF1 recommendations, banks must
apply “Due diligence” when establishing business relationship with their clients. “Due diligence”
is the entirety of measures that the subject should apply in order to identify as well as fully and
accurately verify the customers, the ultimate beneficial owner, ownership and control structure of
legal persons or legal arrangements, nature and purpose of the transaction and the business
relationship as well as the ongoing monitoring of the business relationship and the continuous
consideration of the transactions, in order to ensure that they are in conformity with customer’s
business activity and risk profiles, including, where necessary, the source of funds.
In cases of politically exposed persons PEP an extended enhanced due diligence is required.
“Enhanced Due Diligence” is a deeper control process, beyond the “Know Your Customer”
procedures, that aims to create sufficient certainty to confirm and evaluate the customer’s identity,
to understand and test the customer’s profile, business, and the activity of its bank accounts;
1
The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and promotes
policies to protect the global financial system against money laundering and terrorist financing.
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The Financial Crimes Enforcement Network (FinCEN), along with the Board of Governors of the
Federal Reserve System, and some other important US state institutions concluded in their studies
that: Heightened risks can arise with respect to beneficial owners of accounts because nominal
account holders can enable individuals and business entities to conceal the identity of the true
owner of assets or property derived from or associated with criminal activity. Moreover, criminals,
money launderers, tax evaders, and terrorists may exploit the privacy and confidentiality
surrounding some business entities, including shell companies and other vehicles designed to
conceal the nature and purpose of illicit transactions and the identities of the persons associated
with them. Consequently, identifying the beneficial owner(s) of some legal entities may be
challenging, as the characteristics of these entities often effectively shield the legal identity of the
owner. However, such identification may be important in detecting suspicious activity and in
providing useful information to law enforcement (Guidance on Obtaining and Retaining Beneficial
Ownership Information 2010). From this statement we can see that identifications of beneficial
ownership from banks it’s a very important step prior to establishing business relations with legal
persons in particular with joint stock companies.
The Albanian Law no. 9917, dated 19.5.2008 "On prevention of money laundering and terrorist
financing", stipulates as follows:
"Beneficiary owner" means the physical person who owns or is the last to control a client and/or
the person for whose interest a transaction is executed. This also includes the persons executing
the last effective control on a legal person. Control is the relationship in which a person:
a) owns, through direct or indirect ownership, at least 25 percent of stocks or votes in
a legal person,
b) owns by himself at least 25 percent of votes in a legal persons, based in an
agreement with the other shareholders or partners,
c) de facto controls the decisions made by the legal person,
d) in any way controls the selection, appointment or release of the majority of
administrators of the legal person.
The article above is in line with the directive 2005/60/EC of the European Parliament and of the
council of October 26, 2005 on the prevention of the use of the financial system for the purpose
of money laundering and terrorist financing, which in article 3, paragraph 6, inter alia, states:
‘Beneficial owner’ means the natural person(s) who ultimately owns or controls the customer
and/or the natural person on whose behalf a transaction or activity is being conducted. The
beneficial owner shall at least include:
(a) in the case of corporate entities:
(i) the natural person(s) who ultimately owns or controls a legal entity through direct or indirect
ownership or control over a sufficient percentage of the shares or voting rights in that legal entity,
including through bearer share holdings, other than a company listed on a regulated market that
is subject to disclosure requirements consistent with Community legislation or subject to
equivalent international standards; a percentage of 25 % plus one share shall be deemed sufficient
to meet this criterion;
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The banks should identify and verify the identity of the ultimate beneficial owner (who should
always be a natural person), requesting additional documents, which ascertain the identity and
relation of the beneficial owner with the legal person and the one that carries out the transaction.
Instruction from the Albanian ministry of finance on the reporting methods, procedures and the
preventive measures taken by the subjects of prevention of money laundering law provides a
schematic view of a company with a multilayer ownership structure.
In the first level, the natural person 1 owns 30% of the shares in company A and therefore is the
beneficial owner. In the second level only the natural person 3 is the beneficial owner as he
ultimately owns 26% of the shares in company A (considering that he owns 50% of the shares of
Company C, which in turn owns 52% of the shares of Company A ). In the third level, the natural
person 4 is the beneficial owner, as he finally owns 33.6% of the shares in company A (considering
that he owns 18% of the shares in company A through companies B and X, as well as 15.6% of
the shares of company A through company C and Y).
In other words banks, before establishing business relations with its customers must be able to
verify through means of identification documents the identity of the natural person who owns at
least 25% of the shares of a company. The Foreign Account Tax Compliance Act (FATCA), where
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Albania may soon be part of Intergovernmental Agreement (“Model IGA”), requires foreign
financial institutions to identify American beneficial owners that hold at least 10% of the
companies’ ownership structure. FATCA is enacted in March 2010 as part of the HIRE Act and
imposes a new 30% withholding tax on payments made to non-compliant foreign financial
Institutions and account holders which fail to comply with certain disclosure requirements.
Eventually, if banks can not apply the enhanced due diligence obligation described above:
a) should not open an account, start a business relationship or execute the transaction;
b) must send a report of suspicious activity to the responsible authority.
Otherwise they may face administrative or criminal charges depending on case by case basis.
Legal Difficulties Encountered In Identifying Beneficial Ownership.
Resistance to non-declaration of beneficial ownership
There are many voices that are against the disclosure of beneficial ownership which ultimately
undermines the privacy and the reasons may be different.
In some countries it is simply dangerous to reveal the ownership and protection of privacy is
valued. Criminal groups, especially in third world countries, can target beneficiary owners and
their family members if they have accurate public information on the amount of assets that they
possess.
Personal data protection institutions in turn discourage the extraction of data to third parties.
Disclosure of the beneficial ownership it’s in conflict with the protection of personal data. In fact,
there are many opinions that privacy is a fundamental right of an individual. The Albanian Law
no. 9887, dated 10.3.2008 "On protection of personal data" stipulates that "Personal information"
is any information about a physical person, which is identified or identifiable. The Commissioner,
in its official webpage in relation to privacy quotes a saying from Mauro Paissan: Privacy is exactly
the right to maintain control over the information that belongs to us, we are aware that many of
our daily actions leave traces in ways that reveal the details of our personality, our internal belief
that not always would like to be known by others. From this analysis it seems that the identification
of beneficial owners falls to some extent in conflict with the protection of personal data
requirement.
Concealment of identity may have also fair commercial reason: if everyone knows that Exxon
Mobil, BP or another oil company is asking for a piece of land in Texas, the price will increase
immediately. Companies that buy the mineral rights also say that stock companies are an important
part of their strategy when entering into discussions with landowners. In some industries to publish
beneficial ownership it’s risky. There are legitimate concerns about security owners, such as
biotech firms, which are tracked by animal rights activists. (Corporate anonymity, The economist
Jan 21st 2012).
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On the other hand governments are trying to cut the rules of doing business and not complicate
them. Developing countries, eager for foreign direct investment, are inclined to tolerate in terms
of foreign firms documentation. Albanian government initiatives such as "one stop shop", and
“Albania 1 Euro” intend to facilitate doing business in Albania, but this would require reduction
of the registration procedures and documentation to foreign firms.
Despite the above arguments on non-public disclosure of beneficial ownership, in many other
cases, where offshore companies controlled by politically exposed persons, criminal organization
or individual offenders, a greater transparency in this area is on the side of democracy and freedom.
Legal gaps in legal and regulatory framework
Companies that conduct business relationships with financial institutions have different ownership
structures - some are a single layer and other are multilayers. Consequently, financial institutions
should establish effective systems to clearly identify the owners of companies before establishing
business relations with them as well as monitor and update continuously the changes that may
occur in the ownership structure after the establishment of this relationship. There is a possibility
that a high percentage of individuals hide beneficial ownership of corporations or use anonymous
instruments for the purposes of money laundering or tax evasion. According to a OECD report
(2001): Certain countries allow corporations incorporated or established in their jurisdiction to
use instruments that can obscure the beneficial ownership and control such as: bearer shares,
nominee shareholders and nominee directors without devising effective mechanism that would
enable authorities to the true owners and controllers when illicit activity is suspected or to fulfill
their regulatory/supervisory responsibilities. Some of those jurisdictions further protect anonymity
by enacting laws that prohibit company registers.
In case of Albania, it’s easier to identify the structure of ownership of a local company but the
situation is not the same for foreign companies or companies with "bear shares". Local companies,
given that Albanian market economy is in its early stages, do not have very complicated ownership
structure. Albania came from a hard core communist system and the free market economy was
established after 1990. Lack of operational stock exchange and complicated transactions with bear
shares make it easier to identify the full ownership structure and beneficial ownership data. Mostly
we find only companies with a single layer of beneficial ownership.
The origin of non-resident companies is from different jurisdictions and consequently the parent
state regulatory requirements are different. If we look at the legal framework in force, banks, in
cases where the customer is a legal person, should carry identification and verification of the
ultimate beneficiary owners and additional documents should be provided to prove connection of
ultimate beneficial owner with the legal person or with the one conducting the transaction.
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It may be that to achieve the ultimate beneficial owner a bank operator must identify many
companies who possess each other that are like "shallot grain". One way to determine the
ownership structure is by acquiring the document of Albanian National Registration Center NRC.
The data required for commercial companies laid down in Article 32 of the Albanian Law no.
9723, dated May 5, 2007 "On the National Registration Center" are not sufficient to identify the
beneficial owner of companies as required by the organic law of 9917 dated May 19, 2008 on the
Prevention of Money Laundering. Thus for initial registration of commercial companies, the
following information is required:
a) name;
b) form;
c) date of foundation;
d) the identification data of the founders;
d) legal seat;
f) the object, if it is determined;
e) length, if it is determined;
h) identification data of the persons responsible for the administration and
representation of the company in relation to third parties, powers of attorney, and the
terms of their appointment.
f) signature (signatures) specimen of persons representing the company before third
parties.
So we may identify the value and type of contributions of each partner of the first layer but we
cannot go any further if the ownership structure consists of many layers.
In case of joint stock companies the situation is even more complex and therefore it requires a
special approach in handling beneficiary ownership issues. The identification data of the founders
runs through the first layer of beneficial ownership but it is not binding to identify the last
beneficiary shareholders. Article 36 of Law no. 9723, dated 3.5.2007, on Albanian NRC not
necessarily emerges final effective control of a corporation. For initial registration of joint stock
company, except as provided in Article 32 of this Law, it is required also (amongst others) the
following information:
a) the value of the capital subscribed and paid share;
b) the number and type of shares subscribed;
c) the nominal value of each share;
d) the number of shares subscribed by each shareholder;
e) the amount and type of contribution of each shareholder, as well as the portion paid by
each;
k) identifying data for the Supervisory Board members and the statutory auditor, as well
as the term of their appointment;
i) procedures for the appointment of members of governing bodies, if different from legal
provisions. Joint stock public offering, prior to initial registration must register founders’
identification data, status and perform subsequent reports, according to the law.
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The above article provides for the identification of the number of shares subscribed by each
shareholder (letter h), but these shareholders may not exercise ultimate effective control of the
company in the case of a tier ownership structure especially when the first layer shareholders
consist of other legal entities. Letter i) requires procedures for the appointment of members of
governing bodies but does not ask for identification of physical person who controls the selection,
appointment or release of the majority of administrators of the legal person or controls the
decisions made by the legal person.
To better understand the problems encountered in the identification of beneficial ownership of
joint stock companies should be further analyzed Albanian regulatory framework where a very
important role plays Center of the Registration of Shares CRS that serves as a registers of
shareholders data.
SRC executives expressed their concerns related to the functioning of this institution and
identification of beneficial ownership of corporate joint stock companies in Albania.
Article 13 of Law no. 9879, "On securities" dated 21.2.2008 provides for Elements of Electronic
Records of Shares. Electronic records of shares in the securities registries shall contain the
following data:
1. Type of the shares;
2. Issuance date;
3. Name, head office and registration number of the issuer in the Company Register;
4. Shareholder:
a- for individuals: name, home address and birth certificate or passport number,
b- for legal entities: name, head office and Commercial Registry number;
5. Number of issued shares;
6. Nominal value of issued shares;
7. Date of entry of the shares in the share registration center.
Point 4 herein provides for necessary information for the identification of individuals and legal
entities shareholders such as name, head office and Commercial Registry number. Article 6 of Law
"On securities” provides for Securities Transfer and Registration” Securities shall be registered in
specialized centers for the registration of securities, which shall be organized in line with this Law
and licensed by the Authority to operate as securities registries. Securities shall be issued,
transferred and kept as electronic records at securities registries, in the way prescribed in this
Law and as per the rules adopted by the Authority.
The term "Securities" include inter alia the shares, according to Article 3 of the law "On
Securities". The term “Security” shall include, without limitation, shares, corporate and local
government bonds, treasury bills and Albanian government bonds, Securities issued by the Bank
of Albania, commercial papers, investment fund shares or stakes etc.
Article 126 of Law "On securities” with regard to Functions of the Registrar stipulates that
the Registrar shall provide the service of registering securities, by organizing the method of
keeping the register in such a way that it shall ensure at any time full data on the security ownership
and limitations to ownership rights over them. In order to perform its functions, the Registrar shall:
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organize the registration of transactions and relevant changes, so that it can identify at any time
the data on the last owner of rights and the conditions that lead to a limitation to the securities
ownership rights;
Currently there is only one specialized center for keeping records of titles in Albania. According
to the Decision of the Council of Ministers No. 112, dated 02.19.1996, "On the establishment of
the joint stock company” - the institution of CRS is owned by 75% the Ministry of Economy,
Trade and Energy. Article 123 of the law "on securities" provides that: The securities registrar is
the official legal document that shall be kept in a defined form, with data on security ownership,
transactions with securities and charges on them
So far every think looks in order. If the CRS functions properly the problems as regards beneficial
ownership identification would be solved once for all. In reality, although titles based on law must
be registered in CSR as a specialized center for recordkeeping of titles in Albania, the number
corporates registered in this institution is about 10% of total number registered in NRC. This
situation comes due to legal and regulatory handicaps that exist in the legal status and functioning
of the CSR.
First of all, article 6 of the Law "On Securities” stipulates that securities shall be registered in
specialized centers and does not provide for a single central depository that contains the beneficial
owners of joint stock companies. The law provides for the decentralization of the registration of
the shares in different registrar and do not foresee one specialized registrar only. CSR is the only
registrar in Albania so far but without a clear status, it does not provide for the application of
administrative sanctions for non-registration in this institution.
Secondly, in certain studies like Zacaj (Kotherja) there are legal gaps in the legal requirements of
law On Entrepreneurs and Companies in Albania as well. Article 119, paragraph 1 of the Law no
9901, Date 14.04.2008 “On Entrepreneurs and Companies” provides that: Joint Stock Companies
must keep a share registry in which the ownership of all shares is recorded. The data to be
registered for each share are the surnames, first names or legal denomination; the home addresses
or head office of the shareholder, the share’s par value, and the date of registration. In addition
paragraph 2 of article 117 stipulates that: No rights so acquired may be exercised against any
person or against the company until registration in the company’s share registry in accordance
with the first paragraph of Article 119 is complete.
But the above provisions do not oblige companies to record these identification data in a central
registry database. Article 43, paragraph 4, Law for NRC sets: Notwithstanding the foregoing, Joint
Stock Company is not obliged to notify any transfer of shares. The company, along with the annual
balance sheet and audit report, announces the full list of registered shareholders with their
identification data for nominative shares, and the total number of all shares. This means that the
NRC may not necessarily obtain the beneficial owners’ information of joint stock companies,
which own the last effective control over them. Eventually it becomes also difficult for CSR to
obtain the necessary information for the qualified shareholding package of a company.
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Thirdly, the lack of a the stock exchange market "Bursa" in the case of corporate public offering
complicates further the identification of beneficial owners. Although in Albania there is a legal
framework governing the establishment and operation of the exchange, so far it has a very limited
commercial activity and therefore the financial system is focused in banking sector. In the absence
of bursa, private commercial associations sell their shares in the informal market and therefore the
transaction does not appear in the CSR registry. Changes in the ownership of the shares performed
by the broker on the stock exchange will necessarily be registered within a specified period in the
CSR.
Finally the transaction comprising the transfer of share ownership are registered free of charge in
NRC, that’s the reason one may observe relatively a higher number of transaction mirrored in this
institution. While the transfer of shares ownership registered in the CRS is accompanied by
relevant charges and as a result the subjects do not take the trouble to record those changes in CSR
making it very difficult for the banks to perform the continuous monitoring of changes in beneficial
ownership.
In conclusion, regarding the beneficial owner, it seems that there is a not clear harmonization of
other laws and regulations with the organic law to prevent money laundering. Banks are unable to
identify the beneficial ownership through NRC or CSR in the cases of a company with many layers
of ownership shareholding structure.
Nonresident and offshore corporations
Identifying the client appear more complicated in cases of branches of a foreign company resident
in other countries and especially in "offshore" financial centers. This is due to the multi-tier
structure of ownership and lack of access to the international public registers. According to a major
study by James Henry, a former chief economist at the consultancy McKinsey, for the Tax Justice
Network: A global super-rich elite had at least $21 trillion hidden in secret tax havens by the end
of 2010. The figure is equivalent to the size of the US and Japanese economies combined. Mr
Henry said his $21tn is actually a conservative figure and the true scale could be $32tn. (Tax
havens: Super-rich 'hiding' at least $21 trillion, BBC 22 July, 2012). We may never know how
many of those people involved in those transactions committed money laundering or tax evasions
offences. But quite possibly large number of corrupt politically exposed persons and people
involved in other criminal offences may have benefited from the international legal vacuum.
Offshore jurisdictions have an excessive secrecy in relation to the beneficial ownership of offshore
companies, and in relation to offshore bank accounts. According to Lilley 2006: one other critical
and continuing facilitator of money laundering, and one that is increasingly being recognized as
such, is the extensive use of offshore business entities by criminals. As briefly referred to earlier
in this chapter, such companies and structures are – in simplistic terms – corporate entities that
have the facility to conceal the real directors, beneficial owners or true state of financial affairs
(in fact they usually do not have to show any financial reporting).
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So anyone regardless of his background may register a company in an offshore center and then
establish a business relation with a bank, which do not enforce the international AML/CFT
standards, i.e. hiding ultimate beneficial owner. Later on this company may conduct business
worldwide, exploiting the International banking infrastructure and launder significant sums of
money. Some offshore companies are already registered in the Albanian NRC recently and have
started their operation in the country.
For this reason AML legal framework in force list offshores companies in the categories of
transactions subject to enhanced due diligence. In addition the Albanian Central Bank regulation
on the approval of the regulation “on prevention of money laundering and terrorist financing”,
considers offshores in top list in the classification of customers according to the risk they reveal.
If an offshore company wants to maintain a relationship business with a local bank should ensure,
inter alia, the beneficial owner and the source of income in accordance with the requirements of
the AML law. Both of these basic requirements, banks find difficult to provide for a non-resident
company and especially from an offshore company.
Article 37 of law no. 9723, on the NRC, provides for the data on branches and representative
offices of foreign companies. For initial registration of branches and representative offices of
foreign companies are required the following information:
a) the information specified Article 32 of this law for foreign companies, including the
number and location registration;
b) the foreign capital;
c) the name of the branch or representative office, if different from that of the parent
company;
d) the length of the branch or representative office, if it is determined;
f) legal seat of a branch or representative office;
e) identification data of the persons responsible for the administration and representation
of the branch or representative office in relation to third parties, the powers of
representation and their terms of office;
Even the above article does not explicitly mention the identification of the ultimate beneficial
ownership for non-resident companies. Offshore corporation may use bearer shares as a form of
ownership. A bearer share refers to negotiable instruments that accord ownership in a legal person
to the person who possesses the bearer share certificate (FATF Definitions). These certificates give
the control of a company whoever may possess in his hands at a particular moment. Bearer shares
differ from other financial instruments recorded normally, in the fact no data are recorded on the
person who owns the underlying property, or on the transactions involving the transfer of
ownership. Whoever physically holds a Bearer shares certificate is assumed to be its owner. This
is useful for investors who wish to retain anonymity, but ownership is extremely difficult to recover
in case of loss or theft.
There are some jurisdictions that permit the issuance of Bearer shares. In many offshore
jurisdictions one can find egregious gaps in relation to this matter. Banks in Albania are facing
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serious difficulty to identify the beneficial owner if a foreign company which owns Bearer shares
wants to perform business relations with it. NRC requirement do not prevent from the beginning
the registration of anonymous offshore companies with bearer shares. Eventually the pressure on
the bank compliance officers increases even further.
Politically Exposed Persons PEPs
Politically exposed Persons PEPs are individuals who are or have been entrusted with prominent
public functions, for example Heads of State or of government, senior politicians, senior
government, judicial or military officials, senior executives of state owned corporations, important
political party officials etc. (FATF definition). Article three of the Directive 2005/60/E of the
European Parliament and of the Council of 26 October 2005 “On the prevention of the use of the
financial system for the purpose of money laundering and terrorist financing” quotes: ‘Politically
exposed persons’ means natural persons who are or have been entrusted with prominent public
functions and immediate family members, or persons known to be close associates, of such
persons.
Corruption is the most burning issue when talking about PEP-s. According to a survey by
Transparency International in 2010 where 91.500 people in 86 low, middle and high income
countries were interviewed, political parties and the high ranking politician were perceived as the
most corrupt ones. The table below shows the grievance of situation.
Global Corruption Barometer 2010
Sector/Institution
Rating
Political Parties
79%
Public Office / Civil Servants
62%
Parliament / Legislature
60%
Police
58%
Business Private Sector
51%
Religious Bodies
50%
Judiciary
43%
NGOs
30%
Military
30%
Source Transparency International 2010
Banks are required to take reasonable measures to determine whether a customer or beneficial
owner is a domestic PEP or a person who is or has been entrusted with a prominent function by an
international organization. In that case they must search information in the available resources
such as: the updated list of the national politically exposed persons, specific databases
(Worldcheck, Factiva, etc.) as well as the open sources of information for the foreign persons. In
fact investing in specific databases is very costly for the banks especially low and medium sizes;
Notwithstanding in cases of PEPs the regulatory requirements is extended to family members or
close associates. Designing and implementing effective systems of risk management to determine
whether an existing or potential customer or the beneficial owner is a politically exposed person,
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it’s very difficult for “Family Members” and “Close Associate”. In cases of family members, the
family certificates of registry may be considered sufficient but far more subjective remains the
situation regarding persons in close personal relationships, work or business with PEP-s. The
question is how to define this category of customers? In this case, financial institutions cannot rely
solely on self-declaration, but it is necessary to carry out investigations into bank movements and
beneficiaries of transactions. But this remains very subjective and it depends to interpretations.
Financial institutions might be prey of administrative penalties for not identifying close associates
of PEP-s. Eventually competent authorities must provide to the financial institutions complete
domestic and foreign PEPs list, which should include PEP’s family members and close associates.
International efforts
Harmonizing just local laws might not work unliterary. The identification beneficial and offshore
finance anonymity is a worldwide problem and such it needs to be regulated worldwide. New
FATF recommendations of February 2012 emphasize that countries should create corporate
registers with full identification data as regards beneficial owners. As per interpretive note to FATF
Recommendation 24 of February 2012 (Transparency and beneficial ownership of legal persons)
all companies created in a country should be registered in a company registry. The “Company
registry” refers to a register in the country of companies incorporated or licensed in that country
and normally maintained by or for the incorporating authority. In case of Albania the equivalent
is NCR or CRS. The minimum basic information to be obtained and recorded by a company should
be:
(a) company name, proof of incorporation, legal form and status, the address of the
registered office, basic regulating powers (e.g. memorandum & articles of association), a
list of directors; and
(b) a register of its shareholders or members, containing the names of the shareholders
and members and number of shares held by each shareholder (applicable to the nominal
owner of all registered shares) and categories of shares (including the nature of the
associated voting rights).
Beneficial ownership information for legal persons in this case refers to any persons owning more
than a certain percentage of the company (e.g. 25%). This recommendation emphasizes also the
importance of identification of bearer shares: Countries should take measures to prevent the misuse
of bearer shares and bearer share warrants, for example by applying one or more of the following
mechanisms: (a) prohibiting them; (b) converting them into registered shares or share warrants
(for example through dematerialization); (c) immobilizing them by requiring them to be held with
a regulated financial institution or professional intermediary; or (d) requiring shareholders with
a controlling interest to notify the company, and the company to record their identity.
FATF Recommendations on company registry should be mandatory for the member states and
non-member states. Then this register should be accessible by all member states and non-member
states financial institutions and other subjects of the law in order to facilitate their operational
work. Based on FATF recommendation, the fourth EU directive is currently under preparation and
Journal of Finance, Accounting and Management, 5(1), 1-15, Jan 2014 14
it will be very demanding. It remains to be seen how these recommendations and directives will
work in practice.
Conclusion
The identification of beneficial ownership is a big problem that banks are facing today. Sometimes
the pressure falls totally on them. On the one hand they have to meet the commercial objectives
on the other they may face legal consequences for not identifying beneficial owners of joint stock
companies. The main problem is that there are not complete local or international corporate
registers that provide full identification data in cases of joint stock companies with multilayer
structure of ownership. One can trace the owners of the first layers from the registers but no data
are found for the other layers in the chain of ownership. As far as legal and regulatory framework
is concern, the solution is clear; first of all the “National Registration Center” NRC should not
record any offshore company without fulfilling the condition of the beneficial owner’s
identification. The Center for Registration of Shares CRS status must be regulated and there should
be only one specialized center for recordkeeping of joint stock companies, in terms of identifying
the final holder of the shares. NCR and CRS either should stop from the beginning registering
offshore centers or the revealing of ultimate beneficial ownership must be mandatory. At same
time CSR electronic registry would show the details of all the transactions as regards shares’
ownership in chronological order. Bank financial institutions through online access on the NRC
and CRS should be able to fulfill the obligation of customer identification in real time. Thus
harmonizing the local legal framework, particularly the law “On the prevention of money
laundering and terrorism financing” with the laws on the NCR and CRS is indispensable.
In international level, countries should rapidly, constructively and effectively cooperate in
international level to exchange basic information about beneficial owner. This should include
facilitating access to the foreign competent authorities and financial institutions of the basic data
in other countries company registers in order to better exchange the information on the
shareholders. Corporate registers of foreign countries must show in details the ownership structure
of any joint stock companies including offshore corporations or bearer shares. At same time,
competent authorities should provide the banks with the complete local and foreign lists of
Politically Exposed Persons. All these measures would release the burden of beneficial ownership
identification on the bank and eventually help the competent authorities in combating money
laundering phenomena.
References
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Journal of Finance, Accounting and Management, 5(1), 1-15, Jan 2014 15
Directive 2005/60/EC of The European Parliament and of the Council of 26 October 2005 “on the
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