The Ministry of Finance of Ukraine buried deep in its website a draft regulation loosely based on the form and substance of ownership structure. Why it is not the opening of draft regulation for public consultation and a bunch of other issues with regard to the long-awaited form and substance of ownership structure—is what this item about.
Why is that so important
We set aside the issue whether submitting the ownership structure is something we need at all. Suppose, it really is.
No matter what, we need the issue of the form and substance of ownership structure to be legally certain, and the approach thereto to be well balanced. Because we need to waste the less possible resources while the business compose and submit the structure and the state registrars accept it. And all the possible misunderstandings and barriers are to be excluded while the state registration procedures are carried out.
Promulgating the form and substance of ownership structure is to be aimed at making it simple for the business to compose and submit while simplifying its acceptance by the state registrars.
The legal grounds
The law requires that the state registration of legal entity, amending its official information, et cetera include submission of the ownership structure having the form and substance of the latter officially implemented.
The same law requires that the form and substance of ownership structure is put into effect by the Ministry of Finance being approved by the Ministry of Justice.
Following the law in focus, legal entities are to submit the ownership structure to the state registrars not later than three months starting from the date when the regulation promulgating the form and substance of ownership structure comes into effect.
What was going on around the form and substance of ownership structure
On 6 December 2019 was adopted the law.
On 28 December 2019 the law was published in the official way.
On 24 April 2020, in the News Section at its website, the Ministry of Justice informed that the form and substance of ownership structure had not been put into effect by the Ministry of Finance yet.
On 28 April 2020 the law came into effect.
On 21 May 2020, in the News and Announcements Section at its website, the Ministry of Finance stressed that it has time until 28 July 2020 and informed that developing the draft regulation on putting into effect the form and substance of ownership structure is underway together with instructions on completing that.
On 27 July 2020, in the News and Announcements Section at its website, the Ministry of Finance informed that developing the draft regulation on putting into effect the form and substance of ownership structure is close to its end, and that the draft regulation will be unveiled soon, after the draft’s final version is agreed with state authorities and international experts.
On 28 September 2020 the Ministry of Finance released public information noting that the draft regulation on putting into effect the procedure for the form and substance of ownership structure is still under development. However, the Ministry of Finance left unanswered the questions raised in the request for public information about agreeing the draft’s final version with state authorities and international experts and about unveiling the draft regulation.
On 1 February 2021, in the Regulatory acts draft for discussion 2021 Subsection of the Draft Regulatory Acts Discussion Section at the Ministry of Finance’s website, came into view a set of files that appeared to be items of the draft regulation on putting into effect the procedure for the form and substance of ownership structure.
Although explanations to the document were missing, despite the fact that those are the must under the requirements of this particular subsection at the Ministry of Finance’s website.
Although no notification about that was released in the News and Announcements Section at the Ministry of Finance’s website.
Although the Ministry of Justice and the State Financial Monitoring Service went silent about that while those were extremely active about the ownership structure issues and were unveiled the Ministry of Finance’s draft regulations for public discussion before.
Now for the issues
It was adopting the law on 6 December 2019 and its official publication on 28 December 2019 that made the issue of putting into effect the form and substance of ownership structure inevitable.
What was the reason then that it was impossible to complete the development of the draft regulation on the form and substance of ownership structure for more than a year?
Just after 27 July 2020 the Ministry of Finance mystically dropped communicating the issue of putting into effect the form and substance of ownership structure.
While the notification about unveiling the draft regulation was placed inside the package for public consultation.
What exactly made the level of publicity to change in such a radical way? Why was the draft regulation covering so important issue unveiled missing notification about opening it for public consultation?
Having established complete silence, the Ministry of Finance changed its approach from putting into effect ‘the form and substance of ownership structure’ to putting into effect ‘the procedure for the form and substance of ownership structure’.
Please note that even when the Ministry of Finance mentioned instructions on completing the form and substance of ownership structure before those were regarded as a supporting item having exactly the form and substance to put into effect of primary nature.
What was the reason that the attitude changed so radically?
The draft regulation covers the procedure for the form and substance of ownership structure but the form itself remained uncovered.
The notification for unveiling the draft regulation reads that it proposes to put into effect the form of ownership structure but that is not true.
The Ministry of Finance is the central governmental body responsible for establishing and implementation of public policy in the sphere of prevention and counteracting money laundering while having enough material and intellectual resources.
Yet the Ministry of Finance has failed to come up with the form of ownership structure as a document.
So, if the Ministry of Finance with such resources at its disposal is unable to do that, what makes it possible for others? Why is that redirected to the business? Does that ensure the relevant conditions for the for composing and submitting the ownership structure by the business and its acceptance by the state registrars without unreasonable complications?
The draft regulation reads that the samples of how the schematic representation of ownership structure is to be composed are unveiled at the official website of the Ministry of Finance.
For more than a year the Ministry of Finance was unable to create the samples of how the schematic representation of ownership structure is to be composed.
Why should we expect that the samples will appear after the draft regulation is put into effect? What time will it take after the regulation comes into effect for them to appear? What should the business and the state registrars do in the period of time after the regulation comes into effect but the samples are still missing?
The draft regulation provides that foreign elements, trusts, or other similar establishment present in the ownership structure trigger additional submitting together with the schematic representation the documents supporting the fact that the corporate rights ‘in this legal entity’ belong to them.
The draft regulation also provides that an ultimate beneficial owner present in the ownership structure triggers additional submitting together with the schematic representation the documents supporting the fact that it is possible to carry out decisive influence on management or business activity.
Yet the law does not provide that any documents are to be submitted together with the ownership structure. Moreover, it creates legal uncertainty as to what exactly the legal entity is in focus when belonging of the corporate rights is mentioned. And there is nothing about what are those documents that cover making it possible to carry out decisive influence.
Do these additional requirement to submit the documents to the ownership structure meet the requirement of the law? Does that ensure the relevant conditions for the for composing and submitting the ownership structure by the business and its acceptance by the state registrars without unreasonable complications?
The draft regulation provides that the schematic representation is to contain the rate of trusts’ or other similar establishments’ participation in other trusts or other similar establishments.
The draft regulation also provides that the schematic representation is to contain full name, country of establishment, address the office is registered at for trusts or other similar establishments.
Is that possible at all to define percentage for participation in a trust of other similar establishment? Are all the trusts or other similar establishments have full name, country of establishment, address the office is registered at? What should be done where some trust or other similar establishment does not have one?
The draft regulation provides that the schematic representation is to contain description for carrying out decisive influence for every ultimate beneficial owner.
The anti-money laundering law provides that in case of trust or other similar establishments the ultimate beneficial owners are the trustor, trustee, protector and beneficiary.
Except maybe the trustee, what exactly decisive influence can have the trustor, protector, beneficiary of a trust or other similar establishment? What should be the description then for carrying out the decisive influence on the schematic representation?
Following the regulatory impact analysis for the draft regulation, the justification for the latter is the problem that the state registrars do not audit information about ultimate beneficial owners because of the declarative principle for state registration promulgated in the law.
But that particular principle for state registration is still in the law remaining unchanged. And a state registrar is obliged to check information about ultimate beneficial owners only with data of the citizens vital status registry, the demographic registry, the registry of individuals that are tax payers, and the information system that covers missing individuals and missing documents being wanted.
In other words, there is no any changes for the situation when the state registrars have no legal grounds for auditing information about the decisive influence ultimate beneficial owners have over legal entities following the documents submitted.
How then this particular problem can be solved with the regulation while the state registrars still have no legal grounds for auditing the ownership structure related information and the documents added thereto?
Following the regulatory impact analysis for the draft regulation, there is no other alternative for the ownership structure issue to be solved. The analysis then goes over the top, up to the absurd point, while describing how exactly there is no other alternative.
It is clear enough that having the law provided that the ownership structure is to be submitted, and that the Ministry of Finance is to put into effect the form and substance of ownership structure, the situation where the latter is missing is not an undisputed alternative.
But the real alternative ways here would be including in the regulation the exact form of ownership structure (something that the Ministry of Finance did not do) and having the regulation containing just general requirements to content of ownership structure (exactly what the Ministry of Finance did). These are exactly ones what should be evaluated and compared.
Why did the Ministry of Finance make no efforts to compare regulatory impacts where the exact from of ownership structure is promulgated and where it is not?
Following the regulatory impact analysis for the draft regulation, the Ministry of Finance’s suggestion is that one business entity will spend just 6 hryvnas 13 kopecks in order to complete the ownership structure.
It appears that that is just that simple. Since the business entities spend negligent time for completing the ownership structure. It takes 10 minutes on average. And since the minimum wage is 6’000 hryvnas monthly—36 hryvnas 11 kopecks hourly—it results in 6 hryvnas 13 kopecks. While there is no any other expenditures.
Is it somehow real that an employee having exactly the qualification that the minimum wage allows spends just 10 minutes in order to have the ownership structure properly? While the expenditures to support the ownership structure with the documents amount to 0 hryvnas 00 kopecks.
The most important question, however, with regard to this whole story covering the form and substance of ownership structure is who’s the ultimate beneficiary of such a situation.
