28 July 2015
Dmytro Marchukov contributes to OffshoreAlert Fraud and Asset Recovery Blog “Penultimate” beneficial owners in Ukrainian companies”

“Penultimate” beneficial owners in Ukrainian companies

14 October last year Ukrainian parliament passes an updated – FATF-oriented – law with an overly optimistic and catchy title “On Preventing and Combatting Legalization (Laundering) of the Criminally Acquired Income, Financing of Terrorism and Financing of Proliferation of Weapons of Mass Destruction” (a.k.a. Anti-Laundering Law) and its satellite “On Amending Certain Legislative Acts of Ukraine on Defining Ultimate Beneficiaries and Public Persons” (a.k.a. UBOs Law). Both laws are passed to implement Ukraine’s Anticorruption Strategy (adopted on the very same day) and, inter alia, with the view to make business activities and property relations more transparent. Reaction of the Ukrainian political elite is likewise optimistic and catchy: “Dear members of the Parliament! Dear President! Dear Chair! I would like to congratulate everyone. Offshore age has come to an end in Ukraine! From now on every official will be under microscope: all accounts, all property, all companies shall be disclosed and illegitimate owners shall be punished. My congrats to everyone,” – Ukrainian PM promises.

The UBOs Law entered into force on 25 November 2014 and – save for the narrowly defined exceptions – obliged all the existing Ukrainian legal entities to report their UBOs within 6 months, i.e. by 25 May this year.  

However, it never looked like the declared aims would be efficiently achieved. First of all, it is not required to support report about UBOs with any evidence. That is why, as before, literally any strawman can be registered as a UBO in a Ukrainian company. No meaningful sanction is envisaged for reporting a false UBO and Ukrainian authorities are not inclined to investigate into the reported information about UBOs. That is why examples like this one can now be found in a Ukrainian company registry: a Ukrainian LLC has a Seychelles company as a registered 100% direct shareholder and a Cypriot man as a reported UBO. It is hard to believe that this man is, indeed, a genuine UBO in the relevant case.  

Also, the positive – albeit imperfect – initiative with UBOs fell a victim to a “Slavic tradition” of doing everything in the very last moment. Despite the aforementioned rather generous 6-month deadline to report UBOs until 25 May 2015, overwhelming majority did not bother to stir until May. In this regard one should be aware that in Ukraine – like in many other former USSR republics – first two weeks of May are a holiday period that is comparable only to the New Year and Christmas break. Thus, everybody started to wake up only some 10 days before the deadline. This made the corporate registrar offices as squashed as bomb shelters. The working hours were prolonged. The working days were extended to Saturdays and even Sundays to fit everyone within the deadline. Many corporate registrar officers did nothing else but registered the UBOs (frequently strawmen).  

Still, it became evident that use of all imaginable intensifications and extensifications in the final days of the deadline would not allow completing the task by the cutoff date. Therefore, on 21 May the Ukrainian parliament passed certain amendments extending the deadline for 4 more months (until late September). As a token of respect to the aforementioned Slavic tradition, such amendments entered into force in the very last moment, i.e. on 26 May. The amendments have also introduced additional carve-outs allowing not to report the UBOs including, notably, when a legal entity is directly owned by natural persons. In this respect, it is unlikely that any meaningful number of Ukrainian companies would openly confess that their direct individual shareholders are not UBOs. Amendments also allow registration of “no UBO” in the company registry. An option that is likely to be commonly abused. 

Thus, what has initially been conceived with very good aims in mind falls short of what really needs to be achieved. It is not likely that requirements on disclosure of UBOs – in their current form – will indeed help a lot in asset tracing and fraud investigation. A tighter regulatory framework has to be introduced. In the very least, no new deadlines to report UBOs!