A new attempt to remove the corporate veil

The Federal Financial Monitoring Service of Russia prepared and submitted to the government of the Russian Federation a law requiring entities to provide information about their beneficial ownership at the request of the executive power. The government commission on legislative activities approved the document, even though the Russian Ministry of Economic Development sharply criticized it.

The purpose of the bill is to implement the National Action Plan, from 30 April 2014, which aims to combat tax evasion and the concealment of beneficial owners of companies. The adoption of the law is to increase the transparency of legal entities, in order to reduce the risk of their involvement in illegal activities, including money laundering.

The bill proposes to amend the Federal Law On counteraction to legalization (laundering) of proceeds from crime and terrorist financing, No. 115-FZ, dated 7 August 2001, and to complement Article 14.25.1 of the Code of Administrative Offences, regarding liability for noncompliance with disclosure requirements regarding beneficiaries.

The draft of Article 6.1 of the federal law requires that an entity reveal their beneficial owners and take reasonable measures to collect information about its beneficiaries. Section 7 of the proposed rule establishes that information on the beneficial ownership of a legal entity “shall be disclosed in the accounting (financial) statements, in accordance with accounting legislation.” The Ministry of Economic Development criticized this provision, maintaining that it is redundant, since Paragraph 14 of the regulations on accounting, titled “Information on related parties” (order of the Russian Finance Ministry, no 48n, of 29 April 2008), requires that information about individuals who control or have significant influence on a legal entity be included, in a separate section, as an explanatory note to the balance sheet and financial results. Thus, the provision duplicates an existing rule.

In addition, the draft proposes to grant rights to legal entities to request from founders and participants–both individuals and legal entities–the information necessary to establish the identity of any beneficial owners.

Based on the text of the bill, the state authorities have the right to get, from the legal entity, information on beneficiaries. The document does not identify the competent authorities by name, and it only indicates that the government of the Russian Federation can identify them.

For violations of the law, a legal entity will be obliged to pay a fine of RUB 300,000-500,000. The head of the offending legal entity will be fined RUB 30,000-40,000. As a result, Article 14.25.1, “Violation of the duty, by legal entities, to establish responsibilities and provide information about their beneficial owners,” will supplement the Administrative Code. Also, the draft of this provision provides that a person who took all reasonable and available measures, under the circumstances, to establish their beneficial owners is exempt from administrative liability. However, the developers did not indicate what the contents of the phrase “reasonable and available measures, under the circumstances” includes.

The Ministry of Economic Development of Russia gave a negative evaluation of the bill, pointing out several deficiencies: (1) the lack of criteria for evaluating the validity and accessibility of measures aimed at obtaining information about the beneficiaries; (2) the absence of provisions which determine an order and timing of the legal entities’ responsibilities to collect information about the beneficial owners; (3) the draft act, requiring that entities determine and reveal to the authorities their beneficial owners, must apply only to entities whose ownership structure is exclusively within the Russian Federation; (4) the act will introduce of excessive administrative obligations and other restrictions for the subjects of entrepreneurial activity that contributes to unreasonable costs for business entities and budgets at all levels of the Russian Federation.

If the bill becomes law, its requirements are likely to generate considerable difficulties. If the beneficiary is concealed through a number of companies registered in different jurisdictions, the Russian legal entity will have difficulties obtaining information about the owners because of possible restrictions stipulated in the legislation of foreign states. State authorities will face similar difficulties because they will need to make inquiries to the appropriate foreign authorities and verify the information they receive, which may become problematical. In addition, there is no guarantee that a foreign country will provide such information.

If the executive authorities conduct an investigation, fines of up to RUB 500,000 do not compensate their costs. Besides, a fine of that amount will not force a large company to carry out the law. For the same reason, penalties for executives of companies, in the amount of RUB 30,000-40,000 will be ineffective. The Federal Financial Monitoring Service of Russia does not give an economic justification for the introduction of fines in the specified amount.

Since the bill is under consideration in the government of the Russian Federation, taking into account the negative assessment of the Ministry of Economic Development of Russia, the text of the document may face substantial modifications, in order to address the identified deficiencies. The criticism of the ministry is quite justified because, in its current version, the bill does not take into account the numerous economic and legal risks, and for the most part, it will be unenforceable.

The draft of the bill can be found here.