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Monday 09.12.2019 | Name days: Sarmīte, Tabita

Beneficial owner status in a company does not always involve receiving material benefits

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RU

If a person is declared as a company’s beneficial owner, it does not always mean it is a person who is at the end of the chain and receives material benefits from companies.

Because it is a common assumption among members of society that the moment a person is registered in the Enterprise Register as an beneficial owner, this means he or she owns everything, BNN has decided to dive into requirements of Latvia’s legislation in regards to registration of actual beneficiaries and explain what this status actually means and how this term is misunderstood by society.

In Latvia there is no separation between beneficial owner and a person who has actual control over a legal entity and manager.

The Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing state that a beneficial owner is

a natural person who is the owner of the customer – legal person – or who controls the customer, or on whose behalf, for whose benefit or in whose interests business relationship is being established or an individual transaction is being executed, and it is at least:

regarding legal persons – a natural person who owns, in the form of direct or indirect shareholding, more than 25 per cent of the capital shares or voting stock of the legal person or who directly or indirectly controls it.

This law is based on European Union’s developed directive on declaration of beneficial owners. It is based on this legal framework that every country develops a law to govern registration and identification of beneficial owners in every country.

The confusion with requirements for declaration of beneficial owners lies in the fact that in Latvia a beneficial owner is someone often considered the direct or indirect owner of more than 25% of shares in a company, or a person who does not own anything but still exacts control over the company.

For example, in a situation when a single person has the rights to receive more than 25% of material benefits from a company and another person has the rights to use another shareholder’s voting rights in a company without receiving material benefits and still managing a company this way – both these persons in the eyes of Latvian law are considered beneficial owners. This is true even though one gains benefits thanks to being a shareholder, whereas the other does by controlling a company’s activities even though he or she is not a shareholder in it.

This is why, considering the line for registration as a beneficial owner is having more than 25% of shares in a company, the following situation is entirely possible: a company has four members – one owns 40% and the other three own 20% each. The three of them vote as they like, but their share amount, although considerable, does not exceed 25%. This is why they are not registered as beneficial owners. At the same time, the one who owns 40% may as well be in the minority when compared to other shareholders put together, because the shareholder’s 40% are not enough on their own to secure interests, and yet in the eyes of the law only this shareholder is registered as a beneficial owner.

Meanwhile, looking at the definition of a beneficial owner in Netherlands it becomes clear just how wide the definition is and how it should be interpreted. Dutch laws have two different definitions:

beneficial owner and pseudo beneficial owner.

This means this country has it set that it is primarily necessary to declare beneficial owners in the company they own shares in. If it is not possible to determine beneficial owners or there aren’t any, it is usually considered there are so-called pseudo beneficial owners, often the management of a company, but it is immediately clear that these pseudo persons are revealed to society as people who control the company, not ones who have a major interest in the company (shares).

Pseudo beneficial owners are managers, company boards involved in some company’s operations. These are employees with influence and control over some structure, but they do not have any participation interests. The structure is formed in such a way that a person has de jure control and, at the same time, the person does not receive material benefits.

Such structures are used in cases when a company owner passes a company to someone else as inheritance. To prevent heirs from «running everything into the ground», the initial owner hands the company to a professional management structure. Heirs remain inheritors of material benefits but do not have any control over the company. They are unable to make important managing decisions: dissolve the company’s board, make decisions that could potentially ruin the company, etc. Respectively the structure is formed in a way that a person retains material benefit reception rights but does not have control over the company. Such a structure is outlined in legislation in Netherlands. This means it is primarily important to declare economic beneficial owners. If a company has such owners it is not necessary to declare managers.

There would be less confusion in Latvia if the country’s laws also had a clear distinction between beneficial owners and pseudo beneficial owners, calling the first actual recipients of material benefits and the others – actual controllers or pseudo recipients of material benefits.

Theory in practice

To illustrate the theory detailed above, BNN decided to look into one of the most debated topics in relation to beneficial owners. There are many unclear aspects as to why Swiss lawyer Rudolf Meroni is declared in Latvia’s Enterprise Register as beneficial owner in companies in which Aivars Lembergs owns shares, which is why it is worth studying how the law functions in this specific case.

Lembergs’ rights as beneficial owner are currently under arrest. He is not able to give any instructions to Meroni, who is the holder of arrested property, as to what he should and should not do with the company. Under normal conditions Lembergs would have the rights to attempt to influence the holding’s structure, but he is not allowed to under the current circumstances.

As for the holder of arrested property Rudolf Meroni, for example in Ventbuners’s declaration submitted to the Enterprises Register it is stated that he is neither directly or indirectly a shareholder in Ventbinkers. However, he exacts control over the majority of Ventbunkers shareholder structure. This means in the eyes of Latvia’s law he meets the definition of a beneficial owner. He can be considered a beneficial owner based on the holding’s structure, its corporate posts and decisions made in relation to the arrest. Respectively, Meroni can be considered a beneficial owner of Ventbunkers, Kālija parks, Ventspils Commercial Port because he is in charge of these companies even though he is neither a direct or indirect shareholder.

Any beneficial owner status in a company does not automatically mean status of a co-owner in a company. In the eyes of Latvia’s law, a beneficial owner can be someone who is not the owner of a company but is only in control of it.

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