Circular 19/732 on UBO identification

The Circular provides a practical overview of already established laws and circulars, adding guidance and examples of identification of Ultimate Beneficial Owners in particular for legal arrangements. Guidance is provided on the conditions to apply the exemption to shares of companies listed on an EU or third-country regulated market, on aspects of concert ownership and presumed control. 

Transfer agents should ensure their internal UBO identification procedures are aligned with the requirements of the Circular

The Circular provides a practical overview of already established laws and circulars adding guidance and examples of identification of Ultimate Beneficial Owner(s) (“UBO”) in particular for legal arrangements. Life insurance policies are explicitly not regarded as similar legal arrangements and guidance is provided on the conditions to apply the exemption to shares of companies listed on an EU or third-country regulated market. The Circular also provides further guidance on aspects of concert ownership and presumed control.

Practical considerations

Transfer agents should ensure their internal UBO identification procedures are aligned with the requirements of the Circular. Additional controls/actions may be necessary to ensure their existing records contain up-to-date know you customer (“KYC”) and UBO files which are proportionate to the ML/FT risk associated with the customers and result in the identification of natural person(s) as UBOs.

Where appropriate, professionals should implement measures to verify that the markets outside of the EEA have disclosure obligations equivalent to EU transparency rules and that they record formally the outcome of their assessment before they make use of the exemption to identify UBO(s) for issuers of shares admitted to trading on regulated markets. In cases where effective control is difficult to establish, professionals should have procedures in place to control who is/are the natural person(s) who actually use(s), enjoy(s) or benefit(s) from the asset(s) owned by a legal person or a legal arrangement.

Since delegation does not affect liability of the governing body of the investment company and/or the external investment fund manager, such bodies should obtain evidence that UBOs have been identified for all investors in the funds they manage and that necessary remedial measures are undertaken where appropriate.

Key Points

General Considerations

The Circular makes a clear distinction between legal and beneficial owner. The Financial Action Task Force (“FATF”) expands the Luxembourg legal definition of the UBO by stating that a UBO a natural person who ultimately owns or who exercises ultimate effective control over the customer, in particular over a legal arrangement, or on whose behalf a transaction or activity is being conducted. It is to be distinguished conceptually of the beneficiary of a contract or a transaction, notably in the context of insurance contracts or trusts.

The extent and depth of the measures needed to ascertain beneficial ownership should be commensurate with the complexity and location of the customer. In particular, professionals should understand the purpose of a complex legal structure and should be satisfied that it has a legitimate rationale. Due consideration should also be given to the dynamic nature of UBO(s) who can change over time.

Professionals are required to make use of different means to identify the UBO(s) and to cross-check information collected to ensure that all customer due diligence obligations contained in Article 3(2) (a), (b), (c) and (d) of the Law of 12 November 2004 as amended (the “AML/CFT Law”) are fulfilled:

• Collection of a proof of registration or an excerpt of publicly available records such as the national registers on beneficial ownership
• Request to the customer for relevant data or the source of data
• Collection of evidence of the beneficial owner’s identity by other means

Legal Arrangements

Legal arrangements are defined broadly and include express trusts[1], fiducies, treuhand and fideicomiso which are not necessarily foreseen in the Luxembourg law. The settlor, the trustee, the protector, the beneficiaries and any natural person exercising ultimate control or influence over a trust by means of ownership or by other means should be all identified as UBOs. However, in case the beneficiaries have not been determined yet, the class of persons in whose main interest the arrangement operates is to be identified. Here, control means the power to take certain actions on a standalone or collegial basis. These actions include dealing with trust property, terminating or varying a trust, adding or removing beneficiaries, appointing or removing trustees. Where a legal person is entirely or partially owned by a trust, the rules applicable to trust and legal entities apply simultaneously.

            Exemptions

The Circular provides exemptions for life insurance policies and issuers of shares admitted to trading on regulated markets located in the European Union, the European Economic Area or a third-country jurisdiction applying disclosure obligations for major shareholders subject to equivalent international standards. It is important to note that issuers of debt instruments admitted to trading on regulated markets do not qualify for any exemption. Evidence of admission to trading and, where applicable, measures to ascertain the equivalence should be recorded. Markets such as multilateral trading facilities which are not subject to the necessary transparency obligations do not qualify as regulated markets and the UBO should therefore be identified.

          Threefold procedure to determine the UBO

UBO determination must follow a threefold procedure of cascading measures. Each step must be completed and formalized before the application of the next step:

1. Identify the natural person(s) holding or controlling at least 25%+1 share of the shares, interests or voting rights; the threshold can be lowered where the professional identifies higher ML/FT risk
2. Identify the natural person(s) controlling the entity by other means
3. Identify any person holding the position of senior managing official (“SMO”) where no UBO could be identified through (i) and (ii) or in case of any doubt that the person(s) identified is/are the beneficial owner(s).

1. In a multiple-layer structure, ownership must be determined by looking through legal persons/arrangements. Shares or voting rights should be cumulated where appropriate.

Where persons act or have an arrangement to acquire or transfer voting rights in a company or exercise such rights in the same way (“acting in concert”), each person should be treated as owning the sum of shares/voting rights of all persons acting in concert. However, this is only applicable when such arrangement is known by the professional. Illustrative examples can be found in the Circular.

2. The professional should acquire a good understanding of the management and governance structure of the customer to identify natural persons exercising dominant influence or effective control over a legal entity or legal arrangement. Various examples of "control by other means" are provided and to be considered on a case by case basis inter alia personal or family relationships, former participation in the company capital or management, or ownership of assets central to the running of the customer. Cases where effective control over decisions of the legal entity is achieved by control over the decisions made by another beneficial owner must be considered. The Circular also envisages situations where the control is presumed and never actually exercised, for example where a natural person uses, enjoys or benefits from the property owned by the legal person.

In case a natural person controls de facto a legal person exceeding the threshold through a majority holding of shares of that legal person, this natural person should be considered as the UBO even if his own indirect participation in the customer does not exceed the threshold. Absolute decision rights or veto rights of a shareholder also trigger UBO status where the percentage of shares/voting rights does not.

3. This step should be understood as an express fallback or default option. In principle 1 SMO (natural person) is to be retained, in case of a collegial or jointly responsible body more than one can be designated. The SMO is to be determined and documented on the basis of the responsibilities and tasks performed and not job titles. The SMO can be the executive official or the member of the board of directors to whom the daily management has been delegated, and if no such delegation has taken place, the members of the board of directors.  In case no beneficial owner is identified during the first two steps and there are grounds for suspicion, the business relationship cannot be established or should be terminated. In such situation, consideration should be given to filing a report for Money Laundering / Financing Terrorism in accordance with Article 3(4) of the AML/CFT Law.

The Circular also provides the rules applicable to the identification of the UBO for Non-Profit Organizations (“NPO”), emphasizing the need to understand the governance structure of the NPO enabling mitigation of the risk of misuse of such entities. Extra vigilance is also expected for bearer shares of foreign companies that are not subject to disclosure regulations equivalent to Luxembourg; in such situations, professionals should adopt procedures to identify holders and transfers of shareholder and/or UBO.

Where a Pension Fund is an employee scheme providing retirement benefits funded via employers’ contributions by way of deduction from the employees’ salaries with non-assignable interests, the SMO of the vehicle can be identified as the UBO if the risks are considered as low. In any other case, the threefold procedure must be applied.

Guidance is also provided for the identification of UBO of Public Authorities.

Documentation and verification

The Circular sets out the information to be collected for beneficial owners and legal persons or arrangements in between the customer and the UBO, the verifications which are required and the conditions applicable in determining if controls needs to be re-performed.

Professionals should take into account the ML/FT risk associated with the business relationship to determine the extent of information needed and whether it is appropriate to:

• make use of records of UBOs in the public domain
• ask their customer for relevant data
• require evidence of the UBO’s identity based on documentation or information from a reliable source independent of the customer
• obtain the information by other means

Information provided by the customer is deemed sufficient in low risk situations as long as the declaration whether they act on their own behalf has been signed. In other cases, further evidence needs to be collected, for example certified copies of share registers, share transfer agreements, etc. All appropriate information should be formalized to enable professionals to demonstrate that they know all their customers and their respective UBOs.

UBO information should be updated when appropriate. Collection of new information can be based on periodic or risk-based customer due diligence review cycles, as well as on trigger events such as changes in the legal structure, mergers and acquisitions or adverse media reports.

The Circular also includes indicators of concealed beneficial ownership identified by the FATF Egmont Report Group.