AML: HMRC flexes enforcement muscle to the tune of £7.8 million
The Panamanian law firm Mossack Fonseca has dominated headlines over the last two days. It is alleged that the firm enabled its high net worth clients to launder money, avoid sanctions and evade tax. Although the firm insists that it has operated within international law, the allegations appear to be based on it creating complex corporate structures in order to conceal the identity of its clients, many of whom are household names.
It is therefore apt that one of the key changes introduced by the Small Business, Enterprise and Employment Act 2015 (the “Act”) is a requirement to maintain a register of Persons with Significant Control (“PSCs”), and that this comes into force this week.
The Act introduces a raft of changes affecting UK based organisations and individuals. Most notably, the Act will require unlisted UK companies and LLPs to maintain a register of PSCs.
The new regime will commence on 6 April 2016 and is designed to increase corporate transparency through the creation of a publicly available register of those who ultimately own and control companies. Organisations and individuals who fail to comply with the new rules will face heavy penalties including criminal sanctions. Similar initiatives will be introduced across the EU as part of the Fourth Money Laundering Directive (more on this below).
Who will the new rules affect?
The rules will apply to all UK companies, LLPs and UK registered Societas Europaea, but not those companies with existing disclosure requirements (e.g. main market or AIM listed companies and companies who have voting shares admitted to trading on a regulated market in an EEA state or certain other markets specified in the legislation).
Who is a PSC?
An individual or ‘relevant legal entity’ (“RLE”) will be a PSC if they either:
For LLPs, the “conditions” are similar but reflect the differences between LLPs and companies. For example, 25% of nominal share capital is replaced by a right over 25% of surplus assets on winding up. Also note, the fifth condition includes a reference to trusts and therefore settlors, protectors, enforcers and beneficiaries of trusts may be included on the PSC register.
What is an RLE?
An RLE is a legal entity (for example, a company) that is not an individual. RTEs may be recorded on the register if they are relevant and registrable.
An entity is relevant if it would have been classed as a PSC had it been an individual (according to the five conditions above) and is subject to its own disclosure requirements (e.g. it has to maintain its own PSC register). The entity is registrable if it is the first RLE in a company’s ownership chain.
What does ‘significant influence or control over the company’ mean?
The meaning of “significant influence or control” is not defined in the Act, but the Department for Business Innovation and Skills’ (“BIS”) statutory guidance includes examples and principles to assist with its interpretation.
A person will have significant influence or control if they have absolute decision rights over decisions related to the running of a business. Examples of this include absolute rights to adopt a company’s business plan, to make any additional borrowing from lenders or to remove a CEO. Additionally, the power to veto decisions related to the running of the company may also fall within conditions 4 or 5. This will not apply where the veto powers are held for the purpose of protecting minority interests.
For trusts, a person has the right to exercise significant influence or control if that person has the right “to direct or influence the running of the activities of the trust”. Examples of this include an absolute power to appoint or remove trustees, a right to direct the distribution of trust fund or a power to revoke the trust.
The guidance clarifies that professional advisers, parties to financial agreements (such as lenders) or suppliers and employees acting in the course of employment will not usually meet conditions 4 or 5.
What obligations does the Act create?
From 6 April 2016, companies and LLPs subject to the Act will be required to maintain a register of PSCs. The register must be kept at a known location and may be viewed by anyone upon request. Companies may elect to maintain their register at Companies House.
This means that companies must take reasonable steps to identify people they know or suspect to have significant control. Once identified, they must serve a statutory notice on them requiring confirmation of their position and any relevant information. This obligation to serve notice extends to persons who the company knows or believes are aware of the identity of a PSC or RLE.
From 30 June 2016, companies will also be required to file their PSC register at Companies House. The information will be used to create a searchable central public register. Companies House must be kept updated of any changes to the register through the company’s Confirmation Statement (which replaces the Annual Return) and for new companies, a declaration will need to be made upon incorporation. For those who elect to maintain their main register at Companies House, information must always be kept up to date.
The Act not only creates obligations for companies and LLPs, but also for any potential PSCs and RLEs. In addition to a duty to respond to any notice received from a company, PSCs have a proactive disclosure obligation. Where an individual knows or ought reasonably to know they are a registrable person, but has not received a notice from the company or LLP, the person has just one month to notify the entity. Further, PSCs and RLEs must notify the relevant organisation of certain changes to their circumstances.
Companies, their officers and other individuals who fail to comply with their obligations will face stiff penalties. These may include criminal sanctions or a loss of rights in the company associated with the interest.
What must go on the Register?
Companies and LLPs will be required to obtain, register and confirm information, including an individual’s name, date of birth, residential address, and confirm which of the 5 conditions on the register they satisfy. Similar requirements exist for RLEs. There will be safeguards to protect how this information is disclosed. A company’s PSC register must not be empty. In the event that a company does not have any PSCs or enquiries are on-going in relation to the provision of information, this must be stated on the register.
What should you do next?
Organisations should consider their corporate structures, ascertain who may be a PSC or RLE and create a register of PSCs. Once the register is created, appropriate arrangements should be put in place to ensure it is maintained.
Individuals with business interests or trust structures should also review their circumstances and determine whether they will be affected. The requirement for proactivity in disclosure makes waiting for a company or LLP to issue a notice a risky strategy.
Similar measures being introduced across the EU
The establishment of the register of PSCs is part of the UK government’s obligations under the Fourth Money Laundering Directive (the “Directive”) to improve transparency around beneficial ownership. Under the Directive, Member States are required to maintain central registers with details of the beneficial owners of corporate entities: the register of PSCs performs this role for the UK. The Directive came into force on the 26th June 2015 and will need to be implemented into national law by 26 June 2017.
HMRC are due to consult on whether changes to the UK Money Laundering Regulations are necessary to give effect to the provisions of the Directive. On the whole the Directive introduces a risk-based approach to anti-money laundering measures (a familiar approach to the UK already) and seeks to achieve consistency across all national systems. Other key measures include enhanced due diligence for Politically Exposed Persons (now included domestic as well as overseas).
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