August 2024

In the current dynamically expansive and risk-abundant business environment, a comprehensive new legislation package emerged at the EU level. This includes the Regulation (EU) 2024/1624 of the European Parliament and of the Council of 31 May 2024 on preventing the use of the financial system for the purposes of money laundering or terrorist financing. It is crucial for corporations to prepare the compliance structure, with a key aspect being the identification and supervision of beneficial owners.

To assist companies digest the context and concepts, as well as the nuances introduced by this new piece of legislative that will go into force in 2027 and is directly applicable in all Member States, Romania included, Adela Nuta discussed with Alexandru Boiciuc, editor-in-chief at avocatnet.ro, some key elements that need to take the spotlight on the executives’ agendas for the coming period.

What are the main changes the new Regulation brings in terms of identifying the beneficial owners (compared to the legislation currently in force in Romania)?

The new European Regulation (Regulation 1624/May-31-2024 regarding the prevention of the use of the financial system for money laundering or terrorist financing) introduces several notable changes compared to the legislation currently in force in Romania. These changes aim, inter alia, to improve transparency, effectiveness, and harmonization of procedures for the identification and supervision of beneficial owners.

The first relevant change is represented by the notable broadening of the definition of beneficial owner, which is now provided by Regulation 1624/2024.

The Regulation, therefore, clarifies that the concept of beneficial owner is based on two main components: ownership and control. These components are assessed together to precisely identify all the beneficial owners of a legal entity, the requirement being imposed also for non-EU entities carrying out activities in the EU or acquiring real estate in the EU.

While ownership refers to the holding of a significant part of the share capital or voting rights of a legal entity (the standard threshold set by the Regulation for identifying a beneficial owner is similar to that in national law, i.e. 25% of the share capital or voting rights), control includes any type of control, direct or indirect, that an individual exercises over a legal entity, which may be achieved through various means, such as shareholder agreements, veto rights, appointment of management board members, profit distribution decisions or other mechanisms that allow influencing the major decisions of the entity.

In addition, Regulation 1624/2024 introduces special provisions for situations where corporate entities are owned through multi-level ownership structures. Beneficial owners are identified as individuals who, directly or indirectly, exercise control through equity interests or other means over the legal entities that hold a direct equity interest in the corporate entity. These beneficiaries may exercise control either individually or cumulatively. Natural persons who, individually or cumulatively, directly or indirectly, own equity interests in the corporate entity and exercise control over it through equity or other means are also included. This detailed approach ensures increased transparency and more rigorous control over complex ownership structures, thereby better preventing money laundering and terrorist financing.

The abovementioned legal provisions aim to prevent the hiding of beneficial owners behind multiple levels of corporate ownership, an aspect that was not explicitly addressed in the national legislation (Law 129/2019 and its implementing acts), ensuring enhanced transparency and clarity in their identification and contributing to reducing the risks associated with money laundering and terrorist financing.

Another innovative element is the introduction by the Regulation of precise details on the calculation of indirect ownership rights, including the method of multiplying the shares or voting rights held by intermediate entities and adding up the results of these ownership chains. The European Commission may also reduce the threshold to 15% for entities exposed to high risks, providing greater flexibility in risk assessment compared to the fixed threshold of 25% stipulated in Law 129/2019, thereby highlighting the European Union’s commitment to enhancing supervision in vulnerable sectors.

Also, from the perspective of the subjects to which the beneficial ownership identification obligations apply, Regulation 1624/2024 establishes a broader range of legal entities by including non-EU entities that conduct activities or acquire real estate within the European Union in the category of reporting entities. This is a major point of differentiation from Law 129/2019, which focuses on entities registered in Romania and those operating directly within its jurisdiction, without extending the reporting and beneficial owner identification obligations to legal entities outside the European Union.

Therefore, the Regulation clarifies that the obligations of identifying beneficial owners apply not only to legal entities established in the European Union but also to non-EU legal entities that conduct economic activities within it. This means that any legal entity that has relevant economic activities in the EU, regardless of its place of establishment, must comply with these stringent rules of transparency and identification of beneficial owners.

Additionally, the Regulation introduces the obligation for Member States to notify the European Commission about the types of reporting legal entities and their characteristics.

By October 10, 2027, each Member State of the European Union must notify the European Commission with a list of the types of legal entities existing under national law, whose beneficial owners are identified in accordance with the requirements of the Regulation. The notification must include specific categories of entities, a description of their characteristics, the national legal basis, and information on the application of the mechanism that provides for additional measures for legal entities with complex structures, along with a detailed justification. The Commission will forward these notifications to the other Member States to ensure transparency and compliance with the Regulation, as part of the efforts to combat money laundering and terrorist financing.

Therefore, the updates introduced by Regulation 1624/2024 reflect a more integrated and coordinated approach at the EU level, designed to ensure more accurate identification and more effective supervision of beneficial owners, thereby reducing the risks associated with money laundering and terrorist financing. The Regulation harmonizes and clarifies the rules, ensuring the transparent identification of beneficial owners and preventing their concealment behind complex ownership structures.

What are the main novelties brought by the new European Regulation regarding the declaration of beneficial owners to the authorities (compared to the legislation currently in force in Romania)?

The new Regulation 1624/2024 also introduces major and detailed modifications to the identification and declaration of beneficial owners compared to Law 129/2019.

As previously mentioned, the Regulation extends and clarifies the definitions and modalities of identifying the beneficial owners; it introduces lower thresholds for high-risk entities; it details the modalities of exercising control and improves the rules concerning data protection and record keeping. Moreover, the Regulation also extends its applicability to non-EU entities carrying out economic activities in the EU, thus ensuring more effective transparency and supervision.

We consider it important to reiterate that, while national legislation defines beneficial owners and sets the 25% threshold for equity interests, the European Regulation significantly elaborates and clarifies these concepts.

Thus, Article 51 of the Regulation introduces a comprehensive definition of beneficial owners, encompassing not only direct or indirect ownership of equities but also the exercising of control by other means, whether independently of or in parallel with equity interests. This approach covers a wider range of scenarios and control typologies, providing enhanced transparency on the ownership and influence structure.

Article 52 of the same Regulation completes this definition with precise details on the calculation of indirect equities, an aspect that is not explicitly addressed in Law 129/2019.

Furthermore, the Regulation introduces the possibility of adjusting the thresholds for high-risk entities based on national and European risk assessments, allowing for greater adaptability to the specific context of each entity. This measure contributes to more effective and proportionate supervision of entities exposed to higher risks of money laundering and terrorist financing.

The Regulation also establishes clear obligations for legal entities to provide adequate, accurate, and up-to-date information about beneficial owners, introducing strict requirements for updating and reporting this information to central registers within 28 calendar days of any change. This requirement ensures that information remains current and accessible to competent authorities, contributing to better monitoring and risk management. In comparison, Law 129/2019 does not specify these deadlines and updating processes as rigorously.

Moreover, while both legislations recognize the importance of the protection of personal data, Regulation 1624/2024 implies stricter measures to ensure the confidentiality of such data. The access to information about beneficial owners is limited to competent authorities and reporting entities in the context of applying know-your-customer measures. The general public does not have access to detailed personal data, which reduces the risks of misuse of this information. Law 129/2019 allows the general public access to certain data on beneficial owners, raising risks in terms of confidentiality and protection of personal data.

It is noteworthy that the Regulation also extends the reporting obligations to persons holding trustee or equivalent positions in similar legal arrangements, requiring these entities to obtain and maintain adequate, accurate and up-to-date information about beneficial owners. This information must be reported to the central register within 28 days of the establishment of the trust or similar legal arrangement and promptly updated in the event of any changes.

Last but not least, we should also mention that the Regulation stipulates that if no beneficial owner is identified after exhausting all means of identification, legal entities must provide a statement explaining why it was not possible to establish the beneficial owner and indicating the aspects where there is uncertainty. Law 129/2019 does not include such a specific provision, which makes the procedure clearer and more transparent under the Regulation.

In conclusion, European Regulation 1624/2024 introduces a series of significant improvements in the process of declaring beneficial owners compared to the legislation in this field in Romania. These improvements include strict deadlines for reporting and updating information, clear details regarding the data to be collected and retained, as well as precise obligations for the regular verification of this information. Moreover, the Regulation introduces robust measures for the protection of personal data, limiting access to sensitive information and reducing the risks of misuse. The extension of reporting obligations to trustees and other similar legal entities, as well as the requirement to provide explanatory statements if beneficial owners cannot be identified, ensures increased transparency and more rigorous supervision.

Under the European Regulation, will there still be entities exempted from identifying their beneficial owners and from reporting information about them to the authorities?

Certain entities may benefit from exemptions from the obligation to identify beneficial owners and to report information to the authorities, depending on the low level of risk that their activities present as regards money laundering and terrorist financing. The Regulation clearly sets out that these exemptions are granted only for specific, well-justified cases and are designed to ensure that the regulations do not become an unnecessary burden for low-risk entities.

In detail, the Regulation provides that Member States may request the European Commission’s approval to exclude certain entities from these obligations if they can demonstrate that the risk associated with their activities is insignificant. The assessment criteria include the nature of the activities carried out, the volume of transactions, as well as the ownership and control structure of the entity. Additionally, the Regulation requires these exemptions to be published annually in the Official Journal of the European Union, listing the exempted entities and the reasons for their exemptions. This annual publication mechanism allows for continuous monitoring and review of the exemptions, ensuring that only entities that continue to present a low-risk benefit from these exemptions.

These measures reflect a balanced approach that combines the need to prevent misuse of the financial system with the reduction of administrative burdens for low-risk entities. In comparison with Law 129/2019, which did not explicitly specify these exemptions, Regulation 1624/2024 provides a clear and detailed framework for the identification and application of exemptions, thus contributing to a better adjustment of the regulations to the economic realities and the different risk profiles of legal entities within the European Union.

Why is the transition to a directly applicable EU Regulation in the field of money laundering prevention necessary?

The transition to a European Regulation that would be directly applicable in all EU Member States in the area of money laundering prevention is essential to effectively address contemporary challenges related to financial crime and to ensure the integrity and security of the European financial market. Regulation 1624/2024 introduces a set of uniform and stringent requirements that eliminate existing discrepancies between different national regulatory systems and ensure a consistent application of measures to prevent money laundering and terrorist financing by aligning the definitions and requirements with international standards and the recommendations of the Financial Action Task Force (FATF).

It is important to note that European regulations have an immediate and binding effect in all Member States, without the need for implementation into national legislations, which speeds up the implementation of money laundering preventive measures and avoids delays or divergent interpretations that may arise in the process of transposition of the directives. Measures are thus applied more quickly and effectively, reducing the possibilities for exploitation of legislative loopholes.

Another identified benefit is that a directly applicable European regulation facilitates cooperation and information exchange between competent authorities from different Member States. By establishing common procedures and standards, the regulation contributes to the creation of an integrated cooperation framework, essential for effectively combating money laundering, which often involves complex cross-border transactions. This facilitates the creation of a rapid and coordinated response mechanism in cases of money laundering and terrorist financing.

Furthermore, the transition to a directly applicable European Regulation in all EU Member States in the field of money laundering prevention is necessary to respond quickly and effectively to technological developments and the new challenges associated with them. Emerging technologies, such as cryptocurrencies and fintech, present new methods of money laundering that require a flexible and adaptable legal framework. By establishing directly applicable rules, the Regulation allows the European Union to promptly update and adjust preventive measures, thus ensuring continuous and effective protection of the European financial system. This dynamic and proactive approach is essential to maintain the integrity of the financial market and to effectively combat complex and ever-changing threats.

In conclusion, the adoption of a directly applicable European regulation is crucial for strengthening the efforts to prevent money laundering and terrorist financing at EU level. It ensures the uniformity and consistency of regulation, improves supervisory efficiency as well as transparency and facilitates international cooperation, thus contributing to safeguarding the financial stability and economic security of the European Union.

Are there any problematic aspects in the new European regulation regarding the identification of beneficial owners? If so, what are they?

The adoption of Regulation 1624/2024 by the European Union marks an essential and ambitious step in the fight against money laundering and terrorist financing by imposing stringent and uniform requirements for the identification and reporting of beneficial owners. However, the implementation of the Regulation raises several problematic issues that require attention and effective management to ensure the success of the proposed measures.

Thus, the Regulation introduces detailed transparency requirements which, although necessary, impose a significant administrative burden on legal entities, especially small and medium-sized ones. The costs associated with implementing and maintaining compliance with the new reporting requirements are significant and may adversely affect entities that have limited resources.

The complexity of the ownership and control structure adds another difficulty level. Identifying beneficial owners in multi-level and cross-border structures can be extremely complex and resource-consuming for both legal entities and competent authorities. Moreover, determining the appropriate thresholds for different types of entities, especially in the context of the high risk of money laundering, can create confusion and uncertainty, requiring periodic reviews.

Data protection and privacy represent another sensitive point. The Regulation requires the collection and storage of a large amount of detailed personal information about beneficial owners, which raises risks related to the security and misuse of this data. Ensuring adequate protection of personal data thus becomes crucial to maintain trust in the system.

Moreover, bureaucratic obstacles and the lack of full harmonization between Member States can complicate the exchange of information and effective cooperation between national authorities.

Therefore, although Regulation 1624/2024 brings implementation challenges, the benefits it provides in terms of financial security, transparency, and international cooperation far outweigh these difficulties. Effective management of the problematic issues and the necessary adjustments will ensure the success of the proposed measures, contributing to a robust and adaptable regulatory framework capable of combating financial threats at the European level.

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