Although the obligation to disclose information on beneficial owner (BO) came into force in Latvia on 1 December 2017, and legal entities had to file their notification about the BO with the Company Register (CR) by 1 March 2018, on 1 July 2019 significant amendments to the Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing (AML Law) came into force, reinforcing the applicable regulations and widening the rights of the CR. We would like to highlight the most significant aspects of the new additions to the AML Law, as well as remind you about the existing disclosure requirements.
Who is the BO and who are the subjects of the disclosure obligation?
The AML Law states that a legal entity’s BO is a natural person who is the owner of the legal entity or who controls the legal entity, or on whose behalf, for whose benefit or in whose interests a business relationship is established or an individual transaction is executed, and who is at least a natural person, who:
- owns more than 25% of the shares or voting stock in a legal entity through a direct or indirect shareholding, or who
- directly or indirectly controls it.
These two points mean that even a person who owns less than 25% of the company’s share capital but controls it in some other manner would be considered a BO and must disclose the information. In the context of indirect ownership, the law addresses control (voting rights). In light of the control chain, it must also be taken into account if there are any agreements giving rise to the control rights, or if the chain of control is structured only through the shareholding.
In accordance with the original wording of the AML Law, BO disclosure applied to all legal entities registered with the CR, including private limited and public limited companies, as well as Societas Europaea, and other subjects, plus associations, foundations, cooperatives and others. This excluded subjects that are registered with the CR, but do not have legal entity status (such as branches of foreign entities). However, the recent amendments to the AML law expand this obligation to more subjects, meaning that as of 1 July 2020 foreign entities too will have to disclose information on their BOs – to the CR (in the case of branches and representative offices of foreign entities) or to the State Revenue Service (if a permanent establishment is registered solely with the taxpayer’s register).
Who must report on BOs and determine who the BO is?
The obligation goes both ways – a natural person who believes they have become a BO must immediately notify the legal entity accordingly, while a legal entity must use its own resources and initiative to determine and identify its BO, if the data filed about the BO raises doubt or if data is missing.
A BO must submit (and the legal entity must store) the following information:
- name, surname;
- identity code (if any) and date of birth;
- number and date of issue of personal identification document, country and institution that issued the document;
- nationality;
- country of permanent residence;
- how control over the legal entity is exercised, indicating data about the subject(s) serving as intermediary(-ies) for control, as well as documents proving control.
The AML Law requires BO data to be registered at the CR by a separate application or together with the registration of other changes to the legal entity; likewise, the CR must be informed if the BO remains the same in the case of changes to shareholders or board members. The application to the CR must indicate the BO data outlined above. If the legal entity has exhausted all possible means of identification and has concluded that it is impossible to identify any natural person – BO – and has ruled out any doubt that the legal entity has a BO, this shall also be acknowledged in the application to the CR, stating the reasons.
In the event the BO is a shareholder of a public company and control of the legal entity stems only from the shareholder’s status, it is not necessary to provide the CR with information on the BO, but the application should still be submitted, containing this statement. However, according to the current interpretation the CR only permits this exemption if the company itself is listed on the stock exchange or its direct shareholder is a listed company.
Also, it must be noted that if a legal entity acting as an agent for BO control over the legal entity loses its status in the legal entity, the legal entity must apply to the CR to change the BO or confirm that the BO has not changed, and indicate the shareholder through whom the BO exercises control.
The original wording of the AML Law provided that documents proving BO control need not be filed with the CR, but just kept by the legal entity. However, the amendments have granted the CR rights in the event of doubt to request the submission of the relevant supporting documents (e.g. extracts from the foreign commercial registers and population registers, notarised passport copies, etc.), for their review prior to registration of the information provided.
Although the amendments entered into force recently, experience in various cases shows that the CR is actively using its newly granted rights and requesting the submission of supporting documentation, especially in cases when the application states that it is not possible to determine the BO or that the BO is a shareholder of a public company. Therefore, when planning transactions leading to corporate changes legal entities should take into account that the registration process at the CR might take more time than before, and be prepared to submit the relevant documentation.
Consequences of failure to observe the disclosure obligation
Legal entities that fail to observe the disclosure obligation (i.e. do not register their BOs): if the obligation is not fulfilled after receipt of a reminder from the CR, the CR will perform a simplified liquidation procedure in accordance with the Commercial Law.
Also, sanctions included in the Latvian Administrative Violations Code on failure to submit data or documents to the CR can be applied for failure to disclose, ranging from a warning or penalty of EUR 70 to EUR 700. Likewise, sanctions under the Criminal Law apply for the intentional provision of false data or failure to provide data to a state institution, for which imprisonment for up to two years, community service or a fine can be imposed.
Finally, in the case of companies, the management board may be held liable for losses caused to the company due to non-compliance with disclosure obligations, unless the management board proves that it acted with due diligence.
Contact
Zane Paeglīte
Senior Associate
Tel: +371 26 480 823
Email: zane.paeglite@sorainen.com
Alīna kalviša
Associate
Tel: +371 67 365 000
Email: alina.kalvisa@sorainen.com
Sorainen
Kr Valdemara iela 21
1010 Riga
Latvia
