Approach to determining indirect ownership control powers under the legal definition of a beneficial owner.

What approach to determining the indirect ownership control power under the legal definition of a beneficial owner (“UBO”) as set out in Article 3(6)(a)(i) of Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, as amended by Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing should be applied: (a) Determining the ‘share’ of indirect control of a UBO by multiplying the shares at each level of control and checking whether the result of this multiplication is more than 25% (multiplication test); (b) Examining the chain of control whenever a particular link in the ownership chain exceeds the 25% threshold which may, ultimately, lead to a natural person holding more than 25% of the shares or votes in a given indirect parent entity (rolling test); or (c) Verifying whether there is an entity or person who “controls” the entity having more than 25% of the shares or votes in an entity being evaluated, i.e. holds more than 50% of shares or votes in such entity (dominancy test)?

There are at least three approaches to determining the indirect ownership control powers of a UBO applied in the market: (a) Determining the ‘share’ of indirect control of a UBO by multiplying the shares at each level of control and checking whether the result of this multiplication is more than 25% (multiplication test); (b) Examining the chain of control whenever a particular link in the ownership chain exceeds the 25% threshold which may, ultimately, lead to a natural person holding more than 25% of the shares or votes in a given indirect parent entity (rolling test); or (c) Verifying whether there is an entity or person who “controls” the entity having more than 25% of the shares or votes in an entity being evaluated, i.e. holds more than 50% of shares or votes in such entity (dominancy test).   The first approach, the multiplication test, took shape under the previous AML/CFT regulations (in particular, under AMLD3). Some entities still use this approach to determine the UBO. However, this approach allows the very easy circumvention of the obligation to disclose the UBO even in three- or four-link ownership structures, e.g. a situation where there are 100%-100%-50%-50% stakes between companies in a vertical stream would not result in a UBO determination although, here, real control is obvious. Indirect control would come out at 25%. Moreover, it would not always be possible to apply this methodology, e.g. there would be some difficulties in the case of partnerships.   AML/CFT regulations now indicate precisely that the triggering threshold is 25%+. There are two separate provisions which refer to direct control (shareholding) and indirect control. Indirect control is described as an interest in relation to a particular parent company:   A shareholding of 25% plus one share or an ownership interest of more than 25% in the customer held by a natural person shall be an indication of direct ownership. This refers to direct control over a company; and   A shareholding of 25% plus one share or an ownership interest of more than 25% in the customer held by a corporate entity, which is under the control of a natural person(s), or by multiple corporate entities, which are under the control of the same natural person(s), shall be an indication of indirect ownership. This refers to indirect control and shows that the legislator is concerned with 25% in relation to a specific parent entity (e.g. X has more than 25% in Y, which has more than 25% in Z).   This regulation may be understood in yet another way and assumes that indirect ownership control of the UBO is when there is another company over the company at the bottom that has more than 25% but, to further establish the UBO, there is another company or person over this parent company that has not only more than 25%, but more than 50%, i.e. meets the general control threshold under the corporate law principle (i.e. entity X being evaluated -> entity Y has more than 25% -> a natural person has more than 50% in entity Y).   Therefore, the issue is debatable but it seems that approach (a) involves significantly more risk than approaches (b) and (c). In addition, it is important to ensure that the market has a uniform approach to determining the UBO.