1. LEGAL PROVISIONS ON BENEFICIAL OWNERSHIP TRANSPARENCY IN EXTRACTIVE SECTOR LEGISLATION

2. Outline: Legal and regulatory provisions
0. General principles
Definitions
Scope of application
Level of detail
Public access
Verification
Sanctions

3. General principles
It is advisable that BO provisions in legislation are:
Based on international practices but consider local context, and include references to existing laws where applicable. Failure to consider the local context diminishes the enforceability of laws.
Easy to enforce, i.e. not contradictory with other existing laws,; identify enforcing agency and give it clear mandate to enforce the law and impose sanctions.
Clear and leave no room for discretionary interpretation. Specifically for BO definitions, eliminating the exercise of discretion will minimize the risk of circumvention, especially for PEPs and their close associates.

4. 1. Definitions
Company ownership or control can be exercised in many different ways. The definition will determine whether the natural person(s) who ultimately calls the shots on company decision making, or profits from the companies activities, is identified.
The definition is critical for companies to be able to identify who their beneficial owners are. The definition is likely to affect company response rate, and the usefulness of the BO data collected .
Key terms that the law should define include “beneficial owner” and “politically exposed person”.

5. Definition of beneficial ownership
At a minimum, the definition of beneficial ownership should recognize that a beneficial owner:
is a natural person(s): a human being who owns or controls the company. Never a company, other legal entity, or a nominee/proxy. Often not a director or manager.
holds ownership and/or control of the company: means of owning or controlling a company, e.g. shares, voting rights, other decision/veto rights, right to profit, contractual associations, joint ownership arrangements, or control though other means.
may exercise this ownership/control directly or indirectly, for example direct shareholder, or indirect shareholder through intermediary companies.

6. Definition of beneficial ownership
The law could contain the following:
A ‘beneficial owner’ in respect of a company means the natural person(s) who directly or indirectly ultimately owns or controls the corporate entity. [A politically exposed person is considered a beneficial owner regardless of the level and extent of ownership or control.]

7. Definition of ownership and control
Further details on what constitutes ownership and control will need to be defined, either in law or in implementing regulations. For example:
‘ownership and control’ means the individual person(s) who ultimately directly or indirectly:
owns or controls a percentage [ x %] of shares or voting rights in the legal entity.
has control of the company through ownership of priority shares, preference shares and / or shares with dual or multiple voting rights.
derives a substantial economic benefit from the company.
holds the right to appoint or remove a majority of the directors.
holds the right to exercise influence and control over the management and operations of the company through other means.

8. Definition of politically exposed person
The law could contain the following:
[For the purpose of applying this law] ‘politically exposed person’ means an individual who are, or have been, entrusted with prominent public functions, and their family members and close associates.
The term ‘prominent public function’ can be further defined in law or implementing regulations.

9. Definitions - Further safeguards?
Consider whether further safeguards are needed as part of the definitions, for example:
Defining who is not a beneficial owner:
Agents, nominees and other intermediaries cannot be considered ultimate beneficial owners.
“Default clauses”:
If, after having exhausted all possible means, no natural person is identified to hold ownership/control, then the identity of the natural person(s) who holds the position of senior managing official(s) should be disclosed, and records of the actions taken in order to identify who owns and controls the company should be disclosed.

10. 2. Who should the law apply to?
Applicants for licenses and contracts:
An application for the grant of [an exploration/a production] [license/contract] shall contain the identity of the beneficial owner of each legal entity party to the application.

11. Scope of application cont.
Existing license/contract holders:
Each legal entity party to [an exploration/a production] [license/contract] shall [annually] submit to the Competent Authority a declaration of the identity of its beneficial owner(s).
A legal entity party to [an exploration/a production] [license/contract] shall promptly notify the Competent Authority of any transfer or changes in beneficial ownership information, and shall submit an updated declaration of the identity of its beneficial owner(s) with respect to such transfer or changes within [x] days of the transfer or change.

12. 3. What details about the identify of the beneficial owners should the law require?
At a minimum, name, nationality, country of residence, level of ownership and how ownership is exercised.
The declaration of the identity of the beneficial owner shall include, for each beneficial owner: the present full name [and any former name], nationality [and national identity number], country of residence, [the date and place of birth], level of beneficial ownership, and details of how ownership and control is exerted. [Where a politically exposed person is identified as a beneficial owner, the declaration shall include the position and dates of office.]

13. 4. Verification By the legal entity submitting the declaration:
The declaration of the identity of the beneficial owner shall include certification by a duly authorized officer of the legal entity that all representations, statements and information contained in the application are based on reasonable inquiry and are true, accurate and complete.
Consider setting out mandatory supporting documentation to be attached to the declaration such as passport copy of the beneficial owner, powers of attorney, copies of shareholder or voting registers, confirmation letters etc.

14. Verification cont. By the government:
The Competent Authority shall take reasonable measures to verify the information contained in the declaration of the identity of beneficial ownership.
Consider whether to require disclosure of deviations revealed through the verification process, or “triggers” enabling automatic further investigations.

15. 5. Public access
The law should enable public access to the beneficial ownership data, and ensure that any confidentiality clauses pertaining to the contract/license, do not prevent public access.
Examples:
The Competent Authority compiles a detailed list of data for each license, including the licensee's name, geographical coordinates of the license area, the date of application for a license, the date of issuing the license, the validity period and type of license, beneficial ownership information, and the type of mineral. The list is published on the Internet site of the Competent Authority and is updated within 10 days from the date of issue of the new license or modification of the current license. (Art.41, Kyrgyz Law on Subsoil).
A company's PSC register must be open to the inspection of any person without charge (Art. 790O, UK Companies Act)

16. Public access cont. Addressing concerns about public access: Example:
Member States may provide for an exemption to the access (…) to all or part of the information on the beneficial ownership on a case-by-case basis in exceptional circumstances, where such access would expose the beneficial owner to the risk of fraud, kidnapping, blackmail, violence or intimidation, or where the beneficial owner is a minor or otherwise incapable (Art. 30(9), 4th EU AMLD)

17. Public access cont.
Protection of certain information from public disclosure
Example:
(1) The provisions of sections 240 to 244 (directors’ residential addresses: protection from disclosure) apply to information within subsection (2) as to protected information within the meaning of those sections.
(2)The information within this subsection is—
(a)information as to the usual residential address of a person with significant control over a company, and
(b)the information that such a person's service address is his or her usual residential address.
UK Companies Act, Section 790ZF

18. Public access cont. Thus, the law could contain the following:
The [Competent Authority] shall make available to the public [on the authority website/through an online register]  [on an ongoing basis]  the beneficial ownership information referred to in [Article X].
The [Competent Authority] may provide for an exemption to the public access to all or part of the information on the beneficial ownership on a case-by-case basis in exceptional circumstances, where such access would expose the beneficial owner to the risk of fraud, kidnapping, blackmail, violence or intimidation, or where the beneficial owner is a minor or otherwise incapable.  

19. 5. Sanctions
The law should provide for penalties applicable to infringements of any breaches of license/contractual obligations related to beneficial ownership declarations, such as failure to declare, or providing false information. The penalties provided for should be effective, proportionate and dissuasive
Suspension or Termination of the license/contract
Kyrgyzstan - Grounds for termination of subsoil use right: failure to provide, or declaration of inaccurate information of beneficial ownership.
Financial penalties/fines
Ukraine – administrative offence, head of legal entity subject to fines.
Criminal sanctions
UK – criminal offence. Both company and BO risk up to two years imprisonment.

20. Check-list Does the legal framework define key terms, such as:
Beneficial owner
Politically exposed person
Ownership/Control
Is the scope of application clear? Does the legal framework apply to both applicants and entities with participating interest in a license?
Does the legal framework specify the details to be reported about the identity of the beneficial owner?
Does the legal framework specify how verifications will happen/who is responsible?
Does the law include appropriate and dissuasive sanctions for non- reporting/false reporting?
Does the law enable public access?

21. Author: Dyveke Rogan
Date: 03 May 2018
Occasion: Mini BO-workshop
- Telephone:
Address: EITI International Secretariat, Skippergata 22, 0154 Oslo, Norway