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Compliance with a rule alone is not a touchstone for effective regulation.
This statement best describes Uganda’s recently passed legislation on Beneficial Ownership Information of legal persons.
Uganda passed the following laws; Companies (Amendment) Act 2022, Companies (Beneficial Ownership) Regulations 2022, and Partnerships (Beneficial Ownership) Regulations, 2023 among others that cover beneficial owners.
The aforementioned legislations were passed in response to a global call by the financial action task force (FATF) to address strategic deficiencies in legal frameworks on matters among others; access to accurate, basic, and beneficial ownership information by competent authorities with the aim of deterring significant misuse of corporate vehicles for illicit activities.
Uganda is a member of ESAAMLG by virtue of a memorandum of understanding by the Eastern and Southern Africa Anti-Money Laundering group with an objective among others to adopt and implement the 40 recommendations of FATF and modifications incidental thereto.
This is why Uganda responded to the amendment of Recommendation 24 of FATF Recommendations concerning beneficial ownership information by enacting the aforementioned legal framework.
READ MORE: “Law Is Law”: URSB Chief Defends New Beneficial Ownership Regulations
Whereas the above legislation was enacted with the objective of deterring misuse of corporate vehicles for illicit activities through the provision of adequate, accurate, and up-to-date basic, beneficial ownership information of legal persons to competent authorities, it falls far short of such objective due to the following reasons;
The definition of a beneficial owner is ambiguous; a beneficial owner is defined as a natural person who has final ownership or control of a company or a natural person on whose behalf a transaction is conducted in a company and includes a natural person who exercises ultimate control over a company.
It is discernable from the above definition that the only clear element of a beneficial owner is a natural person but what is not clear is the extent of ownership and control.
Ownership interests as an element of determining a beneficial owner are neither defined nor provided for under a generally recognized threshold in terms of a number or percentage of shareholding that can be used as a yardstick to identify who is or are the beneficial owners of a particular Legal person.
In all fairness, an attempt to elaborate the meaning of a beneficial owner in relation to ownership interests is specifically made under the Mining and Minerals Act, 2022 Section 35(2) (b) (iv); to mean a shareholder with a five percent or more shareholding and also under Section 2(a) of the Income Tax (Amendment) Act 2022; to mean a shareholder with a ten percent shareholding.
In as much as the above definitions are intended to enhance clarity, they, without doubt, exacerbate the already existing ambiguity in the definition due to the following reasons; the discrepancy in shareholding percentage creates confusion as to what standard percentage should be considered to determine a beneficial owner.
Secondly, the definitions are statute specific which means they only apply to legal persons recognized by the aforementioned statutes which makes it cumbersome to recognize beneficial owners under other legal persons that do not possess such threshold in their respective governing frameworks.
Furthermore, the law is silent on the difference between a legal owner and a beneficial owner of a legal person and makes no attempt to define a legal owner.
Although the two may overlap, the striking difference is that a legal owner may be a natural or a legal person while a beneficial owner is a natural person.
It is a common feature of corporate vehicles that persons with a controlling shareholding are prima facie legal owners of a legal person but it does not outrightly make them the beneficial owners of that entity.
READ MORE: URSB Wants To Know; Who Really Owns Your Company?
The beneficial owners may not be mentioned anywhere on the company register but transactions are made on their behalf through legal owners; the best example is that of nominee shareholders.
It’s predictable that accountable persons are more likely to disclose information about a legal owner than that of a beneficial owner and this only meets the regulatory compliance standard but not the desired effect of collecting adequate, accurate basic, and beneficial information to mitigate the misuse of corporate vehicles.
The same legal regime does not address what amounts to the ultimate control of a company as an element of a beneficial owner.
This results in unintended non compliance and inaccurate reporting, especially from companies without shareholders and those that do not exercise control through shareholding since beneficial ownership can only be determined through ultimate control for such corporate vehicles.
It is prudent for such corporate vehicles to have an array of factors to consider in determining the ultimate control of a legal person when reporting beneficial ownership information.
Ultimate control over a legal person can be determined by a number of factors such as;
Differential Voting rights were by shareholders of different classes of shares have varying voting rights, it is possible that a minority shareholder can take charge of strategic decision-making concerning the activities of a legal person.
The power to appoint most senior members of a legal person can be a determinant of who exercises ultimate control over a legal person.
Positions held in a legal entity by natural persons; if such a person is in a position to make a strategic decision that fundamentally affects the business practices and direction of a legal person, such person would qualify to be a beneficial owner.
Additionally, the legal regime falls far short of addressing data privacy concerns about the disclosure of beneficial ownership information to persons other than competent authorities.
This is likely to enhance the obscurity of accurate beneficial ownership information because of the need for confidentiality by corporations to protect their businesses.
This can be addressed by providing a standard position on how much information should be availed to persons other than competent authorities.
Lastly, the legal regime provides for willful rather than mandatory updates of beneficial ownership information particulars and worse still no time period for updating such information.
Thus without mandatory disclosure and time period, it becomes difficult for competent authorities that collect beneficial ownership information to ascertain when information is due for updating without willful disclosure by legal persons.
The discussion above raises a challenge of policy effectiveness and it is likely to enhance the obscurity of beneficial ownership information through ‘nil reporting’, unintentional noncompliance due to data privacy gaps and ambiguous definition of a beneficial owner; probably because the underlying problem was not understood well enough to identify the appropriate solution by policy makers.
In summary, regulatory compliance is important but the weaknesses portrayed by the existing legal regime imply that full compliance with regulation may be achieved but not the desired regulatory objectives.
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