Following the entry into force of the Fourth Anti-money Laundering (AML) Directive (2015/849) in 2015, Ireland, Greece, the Netherlands and Romania are still in the process of passing appropriate implementation measures into national law. As such, they have exceeded the 26 June 2017 transposition deadline by one year.
However, on 31 May 2018 the Romanian government approved draft legislation transposing the directive and introducing, among other things, important changes for private companies with regard to their reporting duties and transparency of ownership. Nonetheless, uncertainty lingers as to when such provisions will be enforced, as Parliament must still debate the bill before it can become a fully enforceable law.
Some of the new requirements for non-listed companies are of particular importance, as they will be key for combating money laundering and terrorism financing. Specifically, non-listed companies will have to:
- convert all existing bearer shares into registered shares; and
- keep a record of their economic beneficiaries (ie, beneficial owners) and disclose them to the reporting entities or government authorities.
The bill will also introduce stricter reporting duties and penalties for non-compliance.
Ban on bearer shares
Pursuant to the Companies Law (31/1990), joint stock companies may issue registered or bearer shares. In the case of registered shares, the shareholder's name appears:
- on the share certificate;
- in the company's records (ie, its share register and articles of incorporation); and
- in the Trade Registry.
In the case of bearer shares, no name appears on the actual share certificate and ownership of the shares can be transferred simply by handing over possession of such certificate without any other formality.
On the one hand, bearer shares are a way of protecting the anonymity of a company's investors. However, on the other, they make it harder to ascertain a company's exact ownership, which raises great concerns regarding money laundering and terrorism financing.
The Fourth AML Directive provides that EU member states must take appropriate measures only to prevent the misuse of bearer shares and bearer share warrants. While some states have complied with this requirement by setting up an immobilisation system for bearer shares, thus preserving them through the private custody of authorised custodians, Romania has taken a much stricter approach by banning bearer shares from the market. More precisely, within 18 months from the domestic AML legislation's entry into force, all companies that have issued bearer shares must convert them into registered shares and record such share ownership with the Trade Registry.
Failure to comply with this obligation within the required period and after receiving a written warning or fine will attract the severe penalty of winding up at the request of an interested party or the Trade Registry.
Uncovering all economic beneficiaries
Another key element of the new draft law is the introduction of a central register of all beneficial owners of private companies, other than those already listed on a regulated stock market (a so-called 'transparency register').
According to the draft legislation, a 'beneficial owner' can be any natural person who ultimately owns or controls, directly or indirectly, the customer or natural person on whose behalf a transaction or activity is being conducted. In the case of corporate entities, this includes any natural person who ultimately owns or controls a legal entity through direct or indirect ownership of a sufficient percentage of the shares or voting rights or an ownership interest, excluding entities listed on a regulated market that is subject to disclosure requirements consistent with EU law or subject to equivalent international standards which ensure adequate transparency of ownership information. In other words, beneficial owners are any natural persons who stand behind a company and economically profit from its business.
Since the legal definition of beneficial owner is broad, a legal presumption of ownership has been established for a shareholding of 25% plus one share or an ownership interest of more than 25% in the customer held by a natural person within a company.
Although the draft legislation has kept the 25% threshold initially provided for by the Fourth AML Directive, the amending proposal passed by the European Commission in 2016 aimed to lower such threshold to 10% for certain companies predisposed to tax evasion and money laundering, such as intermediary companies that have no commercial activity. Keeping in mind that such changes were a direct reaction to the Panama Papers scandal, this new threshold should not be disregarded, as the bill can still be amended before its entry into force.
Further, if – after having exhausted all possible means and provided that there are no grounds for suspicion – no person meeting the abovementioned criteria is identified or there is any doubt that the persons identified are beneficial owners, the natural persons who hold the position of senior managing officials will be presumed to be beneficial owners.
Thus, companies will have to disclose the identity of any shareholders or investors who qualify under the abovementioned criteria, and all such persons will have to be registered with the centralised shareholders' register.
Stricter reporting duties and penalties for non-compliance
Non-listed companies must:
- obtain and record the names of not only their owners, but also their economic beneficiaries, as defined above; and
- provide such information to the local government regulator, if requested, and the reporting entities (eg, credit and financial institutions, licensed accountants, lawyers, auditors and tax advisers) when fulfilling their know-your-client obligations.
Breaches of such due diligence and reporting duties may result in fines ranging from Lei25,000 to Lei150,000 (approximately €5,370 to €32,213) for natural persons. Legal entities and their management or other legal representatives will be subject to an increased fine of 10% of the company's annual revenue added to the abovementioned ranges.
All such information must be registered within a centralised Trade Registry register. A company's beneficial owners must be identified not only when it is incorporated, but also on a continuous basis following any shareholder changes. Disclosure of a company's economic beneficiaries must be made by filing a self-declaration form with the Trade Registry within 15 days from:
- the company's annual financial statements being approved; or
- the date on which a change in a beneficial owner's identification data occurs.
Such a disclosure must contain:
- each beneficial owner's full name, date of birth, personal identification number, national identification series and number, nationality and country of domicile or residence; and
- the means of control that each beneficial owner exercises within the company.
Even if such information is not made public and is generally accessible to specific entities expressly mentioned by law, there is also a provision which grants access to any other natural person or legal entity that can demonstrate a legitimate interest. Such persons or entities will have access to:
- each beneficial owner's name, month and year of birth, nationality and country of residence; and
- information on how each beneficial owner became such.
Failure to comply with the above legal obligations will result in a fine ranging from Lei5,000 to Lei10,000 (approximately €1,073 to €2,150) for the company. Further, the company must comply with the law within 30 days or risk being dissolved.
As it stands, private companies have 12 months from the date on which the draft legislation enters into force to disclose their beneficial owners by filling the self-declaration form with the Trade Registry.
New EU legislation, new enhancement of transparency
On 14 May 2018 the European Council adopted the Fifth AML Directive, which will enter into force on the 20th day following its publication in the Official Journal of the European Union. EU member states will have 18 months to transpose the directive into domestic law, which is expected to be by the end of 2019.
Some of the key changes introduced by the Fifth AML Directive are as follows:
Beneficial ownership registers will be made public to enhance public scrutiny.
The national beneficial ownership registers of all EU member states will be interconnected to facilitate the exchange of information.
Competent authorities, reporting entities (eg, banks and lawyers) and any other persons that can demonstrate a legitimate interest will be able to access data on the beneficial owner of trusts without restrictions.
In light of the recent government approval of the AML draft legislation, non-listed companies should start adapting quickly to the new regulatory parameters in which they must operate in order to avoid risks.
Although it is still uncertain when the bill will become law, all of the above changes are inevitable and private companies operating in Romania should start addressing them soon. Specifically, private companies must invest time in:
- verifying and identifying their beneficial owners;
- keeping track of any changes in ownership and means of control within the company; and
- converting any bearer shares into registered shares.
Further, as regards M&A transactions, confidentiality provisions should be reassessed in order for the parties to supply the information necessary for reporting entities to carry out their legal disclosure duties.
By Madalina Neagu, Partner, Iulia Caizer, Associate Schoenherr