What should companies do about the UBO regulations?
What is a UBO?
In simple words, an ultimate beneficial owner (UBO) is an individual who is the ultimate beneficiary of a company. For example, an individual named A owns significant shares in company B and company B in turn owns significant shares in company C. The individual named A will be considered UBO of company C as they own company C through an indirect arrangement. However, in practice, it is not that simple to determine a UBO considering there may be multiple layers of ownership or complex arrangements in place.
Legislation
The Cabinet Resolution No. 58/2020 on the Regulation of Procedures Related to Real Beneficiaries (the UBO Regulations) apply in relation to UBOs.
The UBO Regulations applies to: Mainland (or onshore) companies (the Mainland Companies) and companies incorporated in non-financial free zones such as Dubai Multi Commodities Centre, Jebel Ali Free Zone, Ajman Free Zone, etc. (the Non-Financial Free Zone Companies).
The financial free zones of Abu Dhabi Global Markets (ADGM) and Dubai International Financial Centre (DIFC) have their own set of legal frameworks on UBOs. Thus, companies incorporated in ADGM and DIFC are not affected by the UBO Regulations. However, such companies are required to comply with the separate UBO requirements that are in place in ADGM and DIFC.
Why legislation on UBOs was introduced?
In the last two decades the fight against money laundering and terrorist financing has gained momentum, with introduction of strict regulations to ensure financial transparency around business ownership.
Some businesses make use of complex corporate arrangements to commit financial fraud, launder money, finance terrorism, dodge taxes or conceal their ill-gotten income or wealth. Such corporate arrangements involve sophisticated ownership structures to hide the real identity of politically exposed persons (or PEPs), sanctioned entities, terrorist outfits and other criminals. These practices came to the fore following Panama Papers and Paradise Papers, a combined giant leak of around 25 million confidential financial and legal records that exposed a system which enabled crime, corruption and wrongdoing, hidden by secretive offshore companies.
Such illegal and dishonest practices gave rise to the need for UBO legislation across the globe. The UAE followed the suit by issuing the UBO Regulations, which will mitigate the threat of financial fraud by having companies identify the individual that will ultimately benefit from the actions of such companies.
Obligations of companies under UBO Regulations
Under the UBO Regulations, a company must maintain the following:
- Register of UBOs: Article five of UBO Regulations provides a waterfall mechanism to determine a UBO: UBOs are individuals who ultimately own or control or have the right to vote with minimum 25 percent shareholding of the company, whether through direct or indirect means of ownership or who have the right to appoint or dismiss the majority of the directors/managers; if no individual satisfies the condition in (a) above, then any individual who exercises control over the company through other means shall be deemed as the UBO; if no individual satisfies the conditions in (a) and (b) above, then an individual who is responsible for the senior management of the company shall be deemed as the UBO.
- Register of nominee directors/managers: this register must include details of such directors/managers nominated by and acting on the instructions of a third party; and
- Register of shareholders: this register must include the number of ownership interests held by each shareholder in a company and the voting rights attached to such ownership interests along with the date of acquisition of such interests. This is not a new requirement as companies are obligated under the Commercial Companies Law to prepare and maintain such registers.
Penalties
Article 17 of UBO Regulations states that administrative penalties will be imposed upon such Mainland Companies and Non-Financial Free Zone Companies who are in breach of the UBO Regulations/do not submit their UBO information to corporate regulators. The Ministry of Economy will be imposing fines of up to AED100,000 from July 2021 on those companies who do not submit their UBO information by June 30, 2021.
The UBO Regulations provide a comprehensive framework on reporting and registering beneficial interests (including identities of UBOs) and nominee directors. The UBO Regulations will aim to promote transparency, prevent financial fraud and tax evasion, and improve corporate governance in the UAE. It is advisable for the UAE companies to contact their legal and professional advisors to ensure compliance with the UBO Regulations.
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