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IoM passes Beneficial Ownership Act and issues guidance

Chris Hamblin, Editor, London, 6 July 2017

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It is a habit of modern British governments to leave it up to officials to decide the date on which a piece of legislation becomes effective and the Isle of Man has acquired this habit also.

The Act gives Isle of Man Treasury officials much more discretion than this, however. It allows them to decide, by order, whether and how to change the meaning of various terms in the Act, namely “beneficial ownership information sharing agreement”; “external intelligence or law enforcement agency”; “permitted purpose”; and “registrable beneficial owner,” including the percentage of a company the person has to own to come into the ambit of the Act. In other words, the Treasury has the discretion to change more or less everything of consequence as regards the Act's reach, subject to an 'on the nod' vote in the Tynwald. Indeed, if the process resembles that in the UK, any amendment need only be displayed on the legislature's notice board for 45 or 90 days and pass automatically if no legislator objects.

Likewise, section 4(4) allows the local regulator, the Isle of Man Financial Services Authority, to issue guidance about the meaning of “beneficial ownership,” “ownership,” “control,” “legal ownership” and “registrable beneficial ownership.” Section 4(5) instructs courts to “have regard” to the JFSA's guidelilnes when interpreting those words. Section 4(6), rather irrelevantly, allows the JFSA to update its guidelines. The IOMFSA guidelines, however, have to be laid before the Tynwald, the isle's legislature.

The law of the Philippines, with or without the approval of the Financial Action Task Force, now obliges companies to report every holder of 2% of their stock to the Government - it is possible that the Isle of Man will one day subject all company shareholders to this surveillance regime at little more than the stroke of a pen.

The Act applies to companies, including protected cell companies and LLCs, foundations and limited liability partnerships that are subject to the Companies Acts, the Limited Liability Companies Act 1996, the Limited Partnerships Act 1909, the Protected Cell Companies Act 2004 and the Foundations Act 2011. It does not apply to any legal entity formed, incorporated or established outside the island.

Section 4 and the current meaning of 'beneficial owner'

In the Act, at the moment and in the absence of further action by the Treasury, “beneficial owner” means a natural person who ultimately owns or controls a legal entity to which this Act applies, in whole or in part, through direct or indirect ownership or control of shares or voting rights or other ownership interest in that entity, or who exercises control via other means, and “beneficial ownership” is to be construed accordingly. If two or more natural persons each own or control an interest in a legal entity to which the Act applies, each of them is treated as owning or controlling that interest. If two people jointly own or control a 30% interest in a legal entity, they are each treated as owning that 30% and each is a registrable beneficial owner.

It is the duty of the legal owner(s) of the company to identify the beneficial owner(s) by any means at their disposal and tell their nominated officer (see below).

The beneficial owner(s) and and, if there are any, intermediate owner(s) must help the legal owner(s) to ascertain the beneficial owner(s) of the interest of the legal owner(s) in the legal entity and to notify the legal owner of any changes to the beneficial ownership of that interest. An intermediate owner is neither a beneficial owner nor a legal one. He/it might be a nominee or a bare trustee.

In a company where legal owner L holds shares for X, and X is the nominee/bare trustee for Y, and Y is the nominee/bare trustee for beneficial owner B, X and Y are the intermediate owners. They (and B) are obliged to help L provide the authorities with information about B.

Nominated officers of companies

Every relevant entity (unless absolved from the task either singly or en bloc by the Treasury) must nominate an officer who lives on the island and holds a licence issued under the Financial Services Act 2008 to be the custodian of information about its beneficial owners. It must tell the Department of Economic Development about this appointment. The "nominated officer" of an incorporated cell company is also the nominated officer of each of its incorporated cells. A body corporate - perhaps a law firm or a consultancy - can be a nominated officer. If that officer receives a "disclosure notice" (a demand for data) from the financial intelligence unit, the attorney general, the Assessor of Income Tax, the IOMFSA, the Chief Constable or the Collector of Customs and Excise, he must hand the information over in accordance with section 15. He faces two years in gaol or a £5,000 fine if he says anything misleading to the department.

A 'tipping off' offence (of the same kind that has always applied to information that might prejudice an investigation in long-established British and Manx law) applies to the unauthorised disclosure of information about one of these notices being issued. The tipster, who might be any passing stranger (perhaps a seven-year-old schoolboy) according to section 18, which refers to him merely as 'a person,' faces two years in gaol or a fine of £5,000. The habit of legislatures in the Crown Dependencies inculpating random members of the general public who are not employed in finance in their anti-money-laundering laws dates back to the time when Tony Blair was prime minister of the UK and was imposing 'retrospection' (the imperative for every financial institution to check the bona fides of all its customers, even if these went back hundreds of years in the cases of some corporations) on its colonies without imposing it on its own banks. Professional legal advice is exempted from this. There must be a statement of compliance in the company's annual returns.

IOMFSA guidance

The regulator's guidance on the subject is mainly to do with types of structure that are eligible for reporting. As with the countries of the European Union, to which the Isle of Man does not belong, the registrable apportioned amount of a company's shares is 25% or higher.

The guidelines mention a structure in which a company has a man who holds the shares as nominee for another man. In this situation, the man who holds the shares holds them on trust for the 'underlying' man.

One example arises of a company that has four shareholders, three of whom hold theh shares for themselves, while the fourth holds shares for someone else. All the shareholders are legal owners, but the three who hold the shares for themselves are also beneficial owners, as is the individual for whom the nominee shareholder holds shares.

Trusts

Things become more complex when trusts are part of the ownership structure in question. The Act does not apply to trusts, but the involvement of one does not dilute the legal owner's duty to 'look through' the structure to ascertain beneficial ownership and/or control.

If the trustees of an express trust own some shares in the company on trust for the beneficiaries of that trust, no matter whether the trustees are human or corporate, the trustees are the company's legal owners and will (if they are humans) also be beneficial owners.

As the law says that the trustees of a trust are joint legal owners of the trust's assets, they will (if they are humans) be registrable beneficial owners of the company. In the case of a corporate trustee, the beneficial owners will be its shareholders. If the trust in question is a fixed trust and its beneficiaries have a fixed entitlement to the trust property, those beneficiaries will be beneficial owners of a company and, depending on whether that entitlement adds up to 25% of the company or not, may also be registrable beneficial owners.

If the trust is a discretionary trust, its beneficiaries cannot be beneficial owners because they do not have an absolute right to any of the trust property; they only have a right to be considered and any benefit they receive is at the discretion of the trustees.

PCCs

Each cell of a protected cell company has its own share of the PCC's overall share capital, allowing a shareholder to be the sole owner of one cell while having a small interest in the PCC as a whole. This appears to be something of a minefield because every human who holds core shares or cell shares (perhaps through nominees or trusts, perhaps not) will be the beneficial owners of the PCC - as long as their shareholding, whether core or cellular, amounts to more than 25% of the total issued share capital of the PCC as a whole.

Control

Unless the degree of control a human can exercise over a legal entity can be quantified at more than 25%, he cannot be a registrable beneficial owner by way of control. This is rather different from the concept of "significant influence or control" found in the UK.

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