On19th of June 2024, the new Anti-Money Laundering package was published in the Official Journal of the European Union. Most of the so-called single rulebook regulation will, within the union, apply from 10th of July 2027. When the package will apply in Norway and other EEC countries is still in the blue, but hopefully not too long after the package take effect in the EU. One of the gains of the new package is, after all, harmonization across countries.
In this blog post, we will have a closer look at the new definition of Beneficial Owner.
In our opinion, there are some positive aspects with the new legislation, even though there are room for improvements.
The single rulebook makes a clear distinction between ownership and control. This is a point that T-rank has been advocating in national and international public consultations for years. Control and ownership are two totally different aspects, and must be measured in different ways.
Integrated ownership as method for measuring ownership has finally made its way also into the EU legislation! Article 52 clearly states that this is the method to use. So far so good, but the good thinking is then messed up by formulating that “The indirect ownership shall be calculated by multiplying the shares or voting rights or other ownership interests held by the intermediate…”.
Firstly, voting rights have nothing to do with ownership, it has to do with control.
Secondly, mixing integrated ownership with voting rights does not make any sense at all. Lets look at an example. Say that you have 100% of the voting rights in HoldCo, which have 30% of the voting rights in Customer. You can clearly instruct HoldCo on how to vote on a General meeting in Customer. Thus, you have the power associated with the 30% share of voting rights. If we turn around and say that you have 30% of the voting rights in HoldCo, which holds 100% of the voting rights in Customer, and at the same time assume that the remaining 70% of the voting rights in HoldCo is held by a single shareholder, you have no influence whatsoever. The integrated ownership in the two examples are the same – 30%.
Lastly, the statement is ambiguous. If person A owns 70%, but has only 30% of the voting rights in HoldCo, and Holdco has 60% of the voting rights in Customer, but only 10% of the ownership, what is the ownership interest? 42% or 18%? Given that 42% is the correct answer, it is easy to construct examples with circular ownership where the integrated ownership to a random number of ultimate owners become infinite.
In our opinion, voting rights should have been kept out of Article 52.
Beneficial ownership through control is defined in article 53. EU has taken a traditional approach to control here, stating that a majority stake is needed (alternatively, rights to appoint board members or other relevant rights, agreements, related parties, nominee arrangements etc).
Article 54 then combines control and ownership. First it is stated that entities owned by entities controlled by a person have the person as a beneficial owner. Since “owned” in this context means at least 25% of the shares or the voting rights, this criteria is the same as the old minimum definition of beneficial ownership in AMLD4. Secondly, it is stated that an entity that is controlled by an entity hit by the ownership criteria above, inherits the beneficial owners. This criteria is new, and corrects an inconsistency T-rank has pointed out many times in the past: If you use control of voting rights as a Beneficial ownership criteria, beneficial owners should be inherited by daughter companies, since the person having control over voting rights in a mother company has the exact same influence in the daughter companies. It could be argued that EU has generalized the inconsistency fix a bit too far. Owning 25.1% of a HoldCo that control Customer is neither proof of significant cash rights nor influence. Again, the lack of a framework for proper measurement of control/influence leads to an inaccurate criteria.
Sadly, the beneficial ownership criteria tied to control in the single rulebook is just as bad as previous definitions. As we have pointed out many times in the past, control of voting rights is not a good measure of influence. If you control 25.1% and another person 74.9%, you have next to no formal influence in the company. If you control 25.1%, while the rest of the shares are equally spread among 75 other shareholders, you are close to having (or even could be said to have) control in the company.
The last thing we are going to mention in this blog post, is that, according to Article 55, when an entity is owned by a foundation, trust or similar, and that arrangement has an ownership that would have made the arrangement a beneficial owner if it had been a natural person, then the beneficial owners of the arrangement becomes beneficial owner of the entity we are looking at as well. This is identical to how we in T-rank has treated these situations for many years.
Interested to read more about T-rank’s views on beneficial ownership? Have a look at our white paper. In a recent FATF consultation response, we introduced an alternative approach to defining levels of control.
Written by Svein Parnas – svein (at) trank (dot) no