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Information on beneficial owners: disclose it and do not make any errors

Source "Securities Market" Magazine

Ilya Shengeliya, Project manager Southern directorate

In August 2017, the Russian government published the rules on how legal entities need to present information about their beneficial owners to government agencies.

The new rules will permit checking how companies identify, update, and store information on the people that control their actions. To ensure that relevant responsibilities are adequately fulfilled, it is necessary to gain a detailed understanding of these new provisions, since in practice they might not be interpreted in a clear-cut manner.

Getting down to the core

Starting in December 2016, legal entities have needed to identify, update, and store information on their beneficial owners. These responsibilities are set forth in Article 6.1 in Federal Law No. 115-FZ, dated August 7th, 2001, called “On fighting the legalization (laundering) of income received through criminal methods and the financing of terrorism” (hereinafter Law No. 115-FZ). In addition, the document spells out the obligation for companies to provide the information that they have about these issues to government agencies upon request. The Russian government ratified the rules for complying with these requests by Resolution No. 913, dated July 31st, 2017 (hereinafter Set of Rules No. 913)[1]. By February 2018, they are supposed to pass regulatory acts at the level of ministerial level geared toward the implementation of this resolution, after which the mechanism will start working full force.   

The Federal Tax Service, the Federal Financial Monitoring Service, and the regional departments of both those agencies have the right to request this kind of information (Clause 1 in Set of Rules 913).

Almost all legal entities must disclose this information upon request. The law in this case does not establish any exceptions for anyone, but its rules stipulate that not every person should have information about the entity’s beneficial owners (Section 2 in Article 6.1 in Law 115-FZ). The list of people these requirements do not apply to is given in Paragraphs 2-5 of Subclause 2 in Clause 1 of Article 7 in Law 115-FZ. If a company is not obligated to have this information then compelling it to provide it is not possible. The Russian Financial Monitoring Service supports this position: according to explanations given by this regulatory authority, legal entities that are not obligated to identify, store, and update this information are not obligated to provide it[2].

The above legal grounds are sufficient to demand information from an organization about its beneficial owners. There is no need to get a deeper understanding of the actual circumstances that caused the government agency to request the information. Legislation does not require that the government agency give an explanation for its actions, so no matter what the motivation is the request needs to be fulfilled.

According to Article 14.25.1 in the Russian Federation Code of Administrative Offenses (hereinafter the RF CAO), a company that does not comply with the request, as well as its obligations to identify, update, and store information, faces a fine ranging from 100,000 to 500,000 rubles.

Recognizing beneficial owners

The primary task for a company is to draw up an exhaustive list of its beneficial owners – everyone that possesses the attributes established by law. If even one person like this is ignored, then the authorities have a reason to take action.

A beneficial owner is not only someone that ultimately owns the company. Besides that, other people might have the attributes of a beneficial owner, including those who do not have any corporate rights to participate in the company’s activities. The number of these kinds of people has no restrictions set on it, and the company must have the information required by law for each one of them. The regulatory authorities also hold the same opinion[3]. However, the attributes that the law categorizes as belonging to beneficial owners may, in practice, be interpreted in various ways. These attributes are given in Section 8 in Article 6.1 in Law No. 115-FZ.

The first one does not cause any misunderstandings. It directly concerns corporate ownership: beneficial owners are categorized as natural person who either directly or through third parties enjoy dominant participation (more than 25%) of the capital in a legal entity.

The second attribute is not sufficiently precise: a beneficial owner is also a natural person that ultimately has the ability to control actions taken by the organization. Along with that, the formulation “the ability to control” is not given any additional clarification.  

The Federal Financial Monitoring Service takes this kind of control to mean the ability for a natural person, on the basis of an agreement with a controlling legal entity, to exert substantial influence on some of its decisions[4]. But this is not the only factor that, in the regulatory authority’s opinion, needs to be taken into consideration. Other factors proposed that organizations establish other factors on their own that need to qualify a natural person as a beneficial owner.

These explanations can clarify the vector of motion, but cannot be used to a full extent to oblige companies to disclose their beneficial owners. The position taken by the Federal Financial Monitoring Service was published before the legislative innovations under review, and affected associated regulations – the interpretation of the term “beneficial owner” that some organizations should use to identify their clients. These are just the organizations, in the opinion of the regulatory authority, that need to establish the criteria on their own that will determine that a natural person controls their client. Granting the same independence to legal entities to identify their own beneficial owners may be unreasonable. In this case, there will be no clear and uniform criteria for all that a regulatory authority could use to assess the legality of the actions taken by a legal entity and the existence of grounds for liability.

If a company has difficulties identifying the relevant attributes that need to be used to determine its beneficial owners, it is worthwhile asking the regulatory authorities for any relevant explanations.

Gather complete information

The law mandates identifying, updating, and storing the information that is spelled out in Paragraph 2б of Subclause 1 in Article 7 in Law No. 115-FZ.

The way the information is composed should not cause any complications, but only if the document that provides the identity of the beneficial owner is a universally accepted one like a Russian Federation passport. Otherwise, additional explanations might be requested by the authorized agencies. This is because the legislative authorities have not specified exactly which documents are permissible to submit for review to identify beneficial owners.

The Federal Financial Monitoring Service, and the Bank of Russia, have already delivered explanations about this in their acts, but only as they apply to identifying clients for some types of organizations[5]. Since these acts regulate specific legal relations, applying rules to identify beneficial owners that they themselves establish would not be entirely appropriate.

Despite the fact that the law mandates possession of only the information itself on the beneficial owners, it is worthwhile for companies to also get documents that confirm that this information is accurate. The necessity of doing this stems from the fact that only information that can be verified through documentation should be submitted by legal entities to authorized agencies upon request (Section 6, Article 6.1 in Law No. 115-FZ).

Companies will also need full copies of documents that provide the identity of the beneficial owners because the law does not specify exactly what details (data) these documents should contain on the company.

Adopt all possible measures

To clarify information on a company’s beneficial owners it is feasible to adopt the maximum number of available measures until a positive result is attained.

The Federal Financial Monitoring Service  explained[6] that a legal entity that fails to identify its beneficial owners can confirm information on the measures taken for this purpose by submitting the relevant requests to founders (or other controlling persons) and the responses to these requests. However, the regulatory authorities did not specify whether such documents would be sufficient to justify that the company acted in good faith. In addition, an opinion held by Federal Financial Monitoring Service alone may not be enough to justify its validity, since besides the Federal Financial Monitoring Service both the Bank of Russia and the Federal Tax Service also has the right to file charges for administrative offenses in this area, and the cases are also reviewed by judges.

If the company does not take all the measures that depend on it, its inaction could be qualified as guilt on the part of its legal entity, as set forth in Section 2 in Article 2.1 in the Russian Federation Code of Administrative Offenses. Article 6.1 in Law No. 115-FZ specifically focuses on the fact that a legal entity must "take reasonable and available measures under the circumstances that have arisen" to establish the information on beneficial owners required by law.

The right of the company mentioned in Law No. 115-FZ to request the necessary information from its founders or participants is only an example of available measures, one of the possible options. But this mechanism does not guarantee results 100 percent. If the request remains unfulfilled and the company does not take other measures to find out the necessary information, the regulatory authorities will be able to file corresponding claims against it

Be on time

The deadline for fulfilling a request made by an authorized agency is 5 work days from the date the request is received. Amendments to information provided previously must be made 3 work days from the date any incompleteness, inaccuracies, or errors are found. Both these terms are set forth in Paragraph 4 in Set of Rules No. 913.

Legislation does not specify the period of time by which a company must have gathered information on its beneficial owners. The legislation also does not specify the period of time during which the organization should take measures to identify information about the natural persons who control it. Therefore, both these responsibilities should be fulfilled simultaneously - on December 21st, 2016, when the changes in the legislation that stipulated these responsibilities came into effect (for newly-created companies, it is on the day they were created).

Companies should also pay attention to the date when measures to identify beneficiary owners will bring results, since adopting these measures may take some time. In this case, the date when the company becomes known to its beneficial owner, and the date when it receives the necessary information about it, will differ. Both these dates should be taken into account in order to calculate the time to fulfill associated responsibilities: keeping information on beneficial owners and measures taken to identify the required information with them for at least five years, and updating and documenting this information at least once a year.

A legal entity should not be slow about updating any information it receives, as well as the documents that confirm this information.  This is because requests from authorized agencies about beneficial owners should be fulfilled, and information presented, about the conditions as of the date indicated in the request (Clause 4 in the Set of Rules No. 913).

This provision bears testimony to the fact that a company should not rest once it has achieved a result, even if it did not manage to get the necessary information during the first try. Legislation does not directly mandate making repeat attempts, but it is in the realm of possibility that we could see a rendering that says doing so to fulfill responsibilities related to updating information is worthwhile. A lack of information, and the reasons why it is absent, is also information.  

Quite tangible risks for companies are created by the position taken by the regulatory authorities concerning the issues under examination, since it is difficult to predict. That is why an attentive attitude to fulfilling these responsibilities can permit avoiding having unjustified charges from being filed. 

[1] See Russian Federation government resolution No. 913 dated July 31st, 2017, “On ratifying the Rules for legal entities to provide information on their beneficial owners, and the measures adopted to identify information on beneficial owners called for in the Federal Law ‘On the legalization (laundering) of income earned through criminal methods, and financing terrorism,’ upon request from authorized government authorities.”

[2] See the informational message from the Russian Financial Monitoring Service on the website

[3] See Clause 4 in the informational message from the Federal Financial Monitoring Service on the website, and Letter No. 14-T from the Bank of Russia dated January 28th, 2014.

[4] See Clause 2 in the informational message from the Federal Financial Monitoring Service on the website

[5] See informational message No. 2 from the Federal Financial Monitoring Service dated March 18th, 2009, Directive No. 59 from the Federal Financial Monitoring Service dated February 17th, 2011, and Provisions No. 444-P from the Bank of Russia dated October 15th, 2015.

[6] See the informational message from the Federal Financial Monitoring Service on the website

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