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Beneficial ownership

Beneficial ownership. EITI International Secretariat April 2016. Agenda. What is beneficial ownership? Why is it important? Beneficial ownership and the EITI Developing a roadmap for beneficial ownership disclosure Next steps. Who is a beneficial owner?.

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Beneficial ownership

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  1. Beneficial ownership EITI International Secretariat April 2016

  2. Agenda What is beneficial ownership? Why is it important? Beneficial ownership and the EITI Developing a roadmap for beneficial ownership disclosure Next steps

  3. Who is a beneficial owner? “A beneficial owner in respect of a company means the natural person(s) who directly or indirectly ultimately owns or controls the corporate entity”

  4. Why is beneficial ownership transparency important? Source: International Consortium of Investigative Journalists https://panamapapers.investigativecenters.org/#stories

  5. Source: International Consortium of Investigative Journalists https://panamapapers.investigativecenters.org/uganda/

  6. Democratic Republic of Congo: “Taking the five deals together we estimate the losses from the five deals at US$ 1.36 bn. Assets were sold on average at 1/6 of their commercial value. Expressed differently, offshore trading companies were able to secure a return of US$ 1.63 bn on assets purchased for US$ 275.5 m – an average margin of 512 %”. Source: Africa Progress Panel http://africaprogresspanel.org/publications/policy-papers/africa-progress-report-2013/

  7. Benefits of beneficial ownership transparency “Beneficial ownership information enables Nigerians to expose corruption and nepotism in the acquisition process. Besides asking companies to voluntarily disclose information on their ownership structure, including any politically exposed persons, going forward NEITI has also put into effect a mechanism that would enable it to capture ownership of divested wells, license holders, lease holders and companies bidding for extractive industry contracts. In short, beneficial ownership in the extractives sector in Nigeria begins to scratch where it itches. ” Nigeria EITI Secretariat • Improve investment climate • Reduce reputational and other risks • Prevent corruption and illicit financial flows • Improve rule of law • Increase trust and accountability • Enhance revenue collection

  8. EITI and beneficial ownership May 2013: EITI Standard recommends establishment of beneficial ownership register. October 2013: 11 EITI countries sign up to EITI’s beneficial ownership pilot. January 2016: 29 EITI countries are working on beneficial ownership; 9 countries have EITI Reports that disclose the beneficial owners of one or more companies. February 2016: EITI requires that countries must disclose their beneficial owners no later than 1 January 2020.

  9. What the EITI Standard says Summary of EITI Requirement 2.5: • EITI Reports must document the government’s policy and MSG’s discussion on disclosure of beneficial ownership (#2.5.b.i). • By 1 January 2017, the multi-stakeholder group must publish a roadmap for disclosing beneficial ownership information (#2.5.b.ii). • By 1 January 2020, it is required that implementing countries request, and companies disclose, beneficial ownership information for inclusion in the EITI report or a public register (#2.5.c-f). • The EITI Report should also disclose the legal owners and share of ownership (#2.5.g).

  10. Developing a roadmap: Issues to consider • Links between BO and national reform priorities • The institutional framework for BO disclosure • Beneficial ownership definition • Reporting obligations for Politically Exposed Persons • Level of detail to be disclosed • Data collection • Assuring the accuracy of the data • Data timeliness • Data accessibility • Capacity building needs • Technical and financial assistance • Deadlines and responsibilities for roadmap activities

  11. Roadmap recommendation 1: Consider links between BO and national priorities

  12. Roadmap recommendation 1: Consider links between BO and national priorities

  13. Roadmap recommendation 1: Consider links between BO and national priorities Ukraine Reanimation package of reforms: http://rpr.org.ua/en/groups-rpr/anti-corruption-reform/

  14. Roadmap recommendation 1: Consider links between BO and national priorities “This is the critical moment to get our own houses in order. I am looking to all the overseas territories and crown dependencies to continue to work in partnership with the UK in taking the lead on two critical issues: tax information exchange and beneficial ownership.“ David Cameron, 2013

  15. Roadmap recommendation 2: Consider institutional framework • Issues to consider: • MSGs are encouraged to mainstream beneficial ownership disclosures in government and company systems. • Wide consultations can help identify the agencies best suited to oversee, a collection and maintain BO data, as well as identify any existing corporate filing processes that BO could be embedded in. • MSGs might wish to consider any relevant legal/regulatory reforms that are ongoing or in the pipeline, and discuss opportunities for embedding beneficial ownership in such reforms.

  16. Roadmap recommendation 2: Consider institutional framework Kyrgyz Republic Law on subsoil use (2014): Art. 30(§10): Requirement for issuing licenses to use mineral resources. Information and documents disclosing the natural persons who are the ultimate owners and beneficiaries of the legal entity applying for the license. Article 27 (§3): Grounds for terminating the rights of subsoil users. (6) evidence that when obtaining a license to use mineral resources a subsoil user submitted unreliable information about the ultimate owners of the company or about financial means.

  17. Roadmap recommendation 2: Consider institutional framework

  18. Roadmap recommendation 3: Consider a BO definition “A beneficial owner in respect of a company means the natural person(s) who directly or indirectly ultimately owns or controls the corporate entity” (#2.5.f.i). “The multi-stakeholder group should agree an appropriate definition of the term beneficial owner. The definition should be aligned with (f)(i) above and take international norms and relevant national laws into account, and should include ownership threshold(s). The definition should also specify reporting obligations for politically exposed persons”(#2.5.f.ii).

  19. Roadmap recommendation 3: Consider a BO definition • Common ways of controlling a company: • Through ownership arrangements: • Ownership of shares, e.g. X % of shares. • Ownership of voting rights, e.g. X % of voting rights. • Other ownership arrangements, e.g. nominees, joint ownership arrangements, etc. • Through other means: • The right to appoint/ remove the majority of directors in the company (or equivalent management body) • Personal connections or contractual associations with individuals in management or Board positions • Right to otherwise exert significant influence on the company’s activities, e.g. decision rights, veto rights, right to profit, etc.

  20. Roadmap recommendation 3: Consider a BO definition Ownership can be direct or indirect: Example 1: Direct Example 2: Indirect Example 3: Direct and indirect

  21. Roadmap recommendation 3: Consider a BO definition

  22. Roadmap recommendation 3: Consider a BO definition • Lessons learnt from BO pilot • Lack of BO definitions was a key challenge in obtaining useful BO data. • No country had an existing BO definition that was considered appropriate by the MSG. • Many MSGs agreed a minimum threshold of ownership/control necessary to be considered a BO, ranging from 5-25% of shares, voting rights, or other means. • Many MSGs used the definition in the 4th EU Anti-Money Laundering Directive.

  23. Roadmap recommendation 3: Consider a BO definition • Further guidance • Definitions and thresholds used by pilot counties: https://eiti.org/files/BP/board_paper_30-4-b_beneficial_ownership_pilot_-_evaluation_report.pdf • Financial Action task force definition: http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf • 4th EU Anti Money Laundering Directive definition:http://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:32015L0849&from=EN

  24. Roadmap recommendation 4: Consider Politically Exposed Persons “Individuals who are, or have been, entrusted with prominent public functions, and their family members and close associates.” United Nation Convention Against Corruption (Article Art.52).

  25. Roadmap recommendation 4: Consider Politically Exposed Persons

  26. Roadmap recommendation 4: Consider Politically Exposed Persons • Further guidance: • PEP definitions in pilot counties: https://eiti.org/files/BP/board_paper_30-4-b_beneficial_ownership_pilot_-_evaluation_report.pdf • Financial Action task force PEP definition and guidance: http://www.fatf-gafi.org/documents/documents/peps-r12-r22.html • 4th EU Anti Money Laundering Directive definition:http://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:32015L0849&from=EN • United Nation Convention Against Corruption definition: https://www.unodc.org/documents/brussels/UN_Convention_Against_Corruption.pdf

  27. Roadmap recommendation 4: Consider Politically Exposed Persons • Lessons learnt from BO pilot: • Most countries had an existing PEP definitionand requirements that PEPs report any assets. • Reporting obligations not always enforced, and rarely publicly disclosed. • Where PEPs are beneficial owners of extractive companies, disclosures could include details such as the position and role of the PEP, and the date when the PEP acquired its beneficial interest in the extractive asset.

  28. Roadmap recommendation 5: Consider the level of detail to be disclosed The EITI Standard (# 2.5.c) states that the beneficial ownership disclosures “…should include the identity(ies) of their beneficial owner(s)…”. And “the level of ownership, and details about how ownership or control is exerted”.

  29. Roadmap recommendation 5: Consider the level of detail to be disclosed “Information about the identity of the beneficial owner should include the name of the beneficial owner, the nationality, and the country of residence…” (# 2.5.d). “It is also recommended that the national identity number, date of birth, residential or service address, and means of contactare disclosed” (# 2.5.d). Example: Zambia’s beneficial ownership report Country of residence ? Name Nationality

  30. Roadmap recommendation 5: Consider the level of detail to be disclosed Example: Data from DRC’s 2013 EITI Report Name Year of birth Nationality Identity # Identity # Residential address

  31. Roadmap recommendation 5: Consider the level of detail to be disclosed The EITI Standard (# 2.5.c) also states that the beneficial ownership disclosures should include “the level of ownership, and details about how ownership or control is exerted”.

  32. Roadmap recommendation 5: Consider the level of detail to be disclosed • Lessons learnt from BO pilot: • It is necessary to consult widely with government, companies and the wider public on how much details about the beneficial owner should be disclosed. • It is important to disclose an explanation of how ownership is exercised. • It is necessary to provide companies with sufficient guidance to help identify who the beneficial owners are, and how to input these details in the BO declaration form. • Legal ownership is useful to understand the corporate structure of companies operating in the country, but should not be confused with beneficial ownership.

  33. Roadmap recommendation 5: Consider the level of detail to be disclosed • Further guidance: • UK consultation documents: https://www.gov.uk/government/consultations/company-ownership-transparency-and-trust-discussion-paper • UK disclosure guidance: https://www.gov.uk/government/publications/guidance-to-the-people-with-significant-control-requirements-for-companies-and-limited-liability-partnerships • Financial Action Task Force guidance:http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf

  34. Roadmap recommendation 6: Consider data collection procedures

  35. Roadmap recommendation 6: Consider data collection procedures “As of 1 January 2020, it is required that implementing countries request, and companies disclose, beneficial ownership information for inclusion in the EITI report. This applies to corporate entity(ies) that bid for, operate or invest in extractive assets …”(#2.5.c). “… Where possible, beneficial ownership information should be incorporated in existing filings by companies to corporate regulators, stock exchanges or agencies regulating extractive industry licensing…” (#2.5.c).

  36. Roadmap recommendation 6: Consider data collection procedures • The requirement to disclose beneficial ownership is applicable to companies beyond those typically covered in the EITI Report. • It extends to all license holders (regardless of type of license), all companies that bid for a license, and all companies that invest in extractive projects. • EITI Report only one tool to collect information. • Consider embedding BO disclosure requirements in license allocation procedures, and in company incorporation requirements. • Make use of EITI model BO declaration form: http://eiti.org/files/Template%20beneficial%20ownership%20declaration%20form.doc. • Need for cross-ministerial consultation to identify companies and most appropriate methods of collecting BO data from companies.

  37. Roadmap recommendation 7: Consider data assurance

  38. Roadmap recommendation 7: Consider data assurance “The MSG should agree an approach for participating companies assuring the accuracy of the beneficial ownership information they provide… (#2.5.e). • Possible approaches: • Require the company to certify the declaration form. • Require the company to attach supporting documentation to the declaration form, e.g. articles of association, powers of attorney, or copies of shareholder registers. • Require that the company requests and provides a written confirmation from the beneficial owner. • Cross-check information against any data filed elsewhere, e.g. corporate register. • Conduct spot check audits of the data provided.

  39. Roadmap recommendation 7: Consider data assurance

  40. Roadmap recommendation 7: Consider data assurance

  41. Roadmap recommendation 7: Consider data assurance • Lessons learnt from BO pilot: • The MSG should agree the assurance procedure prior to data collection. • Where company attestation is used, the MSG could consider requiring disclosure of the name and position of the person attesting the attestation declaration. • It is important that attestation process is explained alongside the BO disclosures so that the user of the BO data can assess the level of data reliability. This could includeindicating which companies provided what types of assurances.

  42. Roadmap recommendation 8: Consider data timeliness The EITI Standard states that (#4.8) “Implementing countries must disclose data no older than the second to last complete accounting period”. • Issues for consideration: • Ownership may change several times during a financial year. • When should beneficial ownership data be collected? • Should beneficial ownership data be collected at a specific point in time, e.g. at the time of data collection for the EITI Report? As of 31 Dec each year? As part of other reporting obligations? • Should data collection happen annually ? • Should companies be obliged to continuously disclose any changes in beneficial ownership ?

  43. Roadmap recommendation 8: Consider data timeliness Mutanda Mining (MUMI) ownership as of 31 Dec 2012 Mutanda Mining (MUMI) ownership as of 31 Dec 2013

  44. Roadmap recommendation 9: Consider data accessibility

  45. Roadmap recommendation 9: Consider data accessibility The EITI Standard states that“It is recommended that implementing countries maintain a publicly available register of the beneficial owners…”(#2.5.a). It also requires the multi-stakeholder group to “make the EITI Report available in an open data format (xlsx or csv) online and publicise its availability” (# 7.1.c).

  46. Roadmap recommendation 9: Consider data accessibility • Lessons learnt from BO pilot: • MSGs should consider which government agency could potentially be the appropriate agency to maintain a beneficial ownership register. • MSGs should consider whether there are possibilities for integrating beneficial ownership data in existing corporate registers or license registers. • Establishing a register may take time. Other disclosure mechanisms, e.g. EITI Report, can be used in the meantime.

  47. Roadmap recommendation 10: Consider capacity building needs EITI beneficial ownership workshop in London, 16 March 2015 https://eiti.org/news/scratching-where-it-itches

  48. Roadmap recommendation 11: Consider technical and financial assistance needs

  49. Roadmap recommendation 12: Consider deadlines and responsibilities for roadmap activities

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