The Glossary of Financial Action Task Force (FATF) Recommendations on Combating Money Laundering and the Financing of Terrorism (AML/CFT) defines a “beneficial owner” as natural persons who ultimately own, control, benefit or have effective control over a legal vehicle such as a company, partnership, a trust, foundation, etc. It is clear that the definition refers to both “ownership” and “control”, but in recent years, since the Financial Action Task Force issued its recommendations, a flawed implementation of this definition has led to the capture of beneficial ownership registries in many countries. This implementation distorts “ownership” or “control” into “controlling property.” An experienced employee of a bank, trade registry or business service provider may find something strange with a legal vehicle and inquire further. Inexperienced or reluctant public servants would not care unless required by law. The Chinese variable interest entity (VIE) obtains the same ownership and control effect, not by holding shares or votes, but through various business contracts. The antidote to this problem is very simple: apply some correct thoughts. No need to make things too complicated, and lengthy legal agreements are rarely appropriate. However, multinational corporations deserve a consistent structure that respects directors` legal and compliance obligations. And it is our collective duty to do the job competently. As a result, the focus today is more on beneficial ownership than legal ownership of intangible assets. If the legitimate owner of intangible assets wishes to retain the profits derived from the use of those intangible assets, he should also contribute to their value.
The OECD Transfer Pricing Guidelines are relevant to the interpretation of transfer pricing laws in Zimbabwe. Accordingly, companies that legally hold intangible assets should remember recent developments related to the DEMPE concept mentioned above. If an entity is the rightful owner of an intangible asset and its affiliate contributes to the value of that intangible asset, the entity is required to fully compensate that arm`s length associate. It is remunerated for the functions performed, the assets contributed and the risks assumed so that the company, as the rightful owner of the intangible asset, can retain all rights to the profits related to the use of the intangible assets. This means that retained earnings are based not only on legality but also on beneficial ownership. Beneficial ownership is determined by the person`s contributions to the DEMPE functions of intangible assets. The OCED noted in its BEPS final report: “While the determination of legal ownership and contractual arrangements is an important first step in the analysis, these provisions are separate and distinct from the issue of remuneration. The return ultimately retained or attributed to the rightful owner depends on the functions performed, the assets used by the owner and the risks assumed, as well as the contributions of other members of the MNE group in the course of their functions, the assets used and the risks assumed. It is therefore necessary to determine, through functional analysis, which members exercise and control development, improvement, maintenance, protection and operation functions, which members provide funds and other assets, and which members assume the various risks associated with the intangible asset. In early 2016, the International Consortium of Investigative Journalists published the Panama Papers. These documents come from the archives of the law firm Mossack Fonseca & Co. Show in detail the beneficial owners of several thousand offshore companies.
However, it is not enough to register those who have a power of attorney or those who manage bank accounts. There are more complex cases of control or influence by means other than ownership. These cases create loopholes that individuals use to avoid beneficial ownership registration. We will discuss these cases here so that the government can take steps to protect itself. If you are in this field and would like to arrange a free consultation with one of our lead lawyers to discuss TP`s legal implementation (or the specific issues you face), I`d love to hear from you. Just send us a message to info@lcnlegal.com and we will be happy to help you arrange a video call at a convenient time. High-net-worth individuals threatened by litigation or simply seeking to protect their assets and plan their estate typically use trusts to act as the rightful owner of their assets, often securities and money, while they and their families continue to be the beneficial owners. Again, this practice is legal, but highly regulated. For example, entity A`s beneficial ownership registry would disclose: rightful owners, chain of ownership, beneficial owners, directors, persons with authority, and any contract/transaction/agreement that affects control or ownership (e.g., sole supplier agreement, share exchange agreement between shareholder A and hedge fund B, which gives the hedge fund economic exposure as if it held the shares of shareholder A). Other strategies are much more complex and if you don`t have very good financial knowledge, you`ll need to read Hu and Black`s 99-page document and look for all the financial jargon (which is a lot!) to fully understand the strategies. As the authors themselves acknowledge, “the variety of decoupling strategies can be overwhelming.” They list a few. For example, “empty vote” strategies (more votes than beneficial owners) include “share-swap shareholding” or “option-backed shareholding.” In principle, voting rights are retained because the shares are held, but the economic benefits are transferred by giving someone else a right to the value of the share.
Another strategy, “insider hedging,” refers to founders or CEOs reducing their economic exposure without selling their shares (so as not to alarm anyone). They keep their shares and votes, but they reduce their economic risk by limiting losses and reducing potential profits. They do this by engaging in a “zero-cost necklace” where a put option (right to sell at a certain price) is purchased and a call option is sold at the same time (allowing the counterparty, the buyer, to buy the stock at a certain price). These strategies can also be reversed if a player has no votes (or shares) but is still exposed to the performance of stocks through financial instruments. This would have the same economic effect as holding these shares directly. The authors described that hedge funds participating in these strategies may, at their discretion, have de facto voting rights (by terminating the financial contract) at their discretion due to market conditions. They gave an example of a P hedge fund: “[P] had `convertible` voting rights – which could disappear if [P] wanted to hide their share, only to reappear when [P] wanted to vote.” (page 837) A beneficial owner is a person who enjoys the benefits of ownership even if ownership of a form of ownership is under a different name. One way to encourage the registration of such related contracts would be to give “constitutive effect” to the beneficial ownership registry. Unless a contract has been registered, it should not be performed.