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Noose tightens around shadow owners

Govt plans to strengthen disclosure norms on ‘beneficial owners’.

Written by Shruti Srivastava | New Delhi |
October 3, 2011 12:22:12 am

Corporate entities,who issue bearer shares or share warrants,may have to provide information about the “ultimate owner” as a result of these transactions. This will also apply to non-resident owners controlling a corporate entity and also in the case of the funding of a trust or partnerships.

The government,suspecting that many such entities are using these methods for illicit purposes like insider dealings,money laundering,financing of terrorist activities and corruption,is planning to tighten and strengthen its laws to ensure that the “beneficial owner” is known by the regulatory bodies and the government.

This provision will also ensure that banks and financial institutions,would carry out due diligence on the beneficial owners or controllers,before entering into business relationships with these entities.

The move becomes significant in the wake of the 2G spectrum deals where the issue of beneficial ownership came up while trailing the money in the scam.

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In the case of Swan Telecom and Loop Telecom,the CBI had focussed on the sale of 9.9 per cent equity to Mauritius-based Delphi Investments by Reliance,who was initially part of Swan Telecom and had sought the details about the beneficial owner of the 9.9 per cent equity in Swan.

Waking up to the need of identifying the “beneficial owners”,the government has started working on tightening the noose around companies where the ultimate owner,the beneficial owner,is not known.

The government has formed a committee comprising senior officials of investigating agencies like Enforcement Directorate,CBI,Directorate of Revenue Intelligence (DRI),Financial Intelligence Unit (FIU),and ministry of corporate affairs to look into all aspects of the concept,official sources told The Indian Express.

Experts say that the move though late,is one in the right direction. Former president of accounting regulator ICAI Amarjit Chopra said,“It is a very important. But if the government feels that beneficial ownership should be disclosed,then it must be stringently enforced as well.”

He said that the disclosure of beneficial owners is important more so in the real estate sector,which lacks transparency.

In fact,sources said that the ministry of corporate affairs has recommended inclusion of the study of beneficial ownership in companies Audit Report Order (CARO),which is like a rule book for auditors that guides them in performing audits.

A beneficial owner is not a mere legal owner but the actual owner of a company or a share.

The committee,which will submit its report in two month,will work on several indicators like absence of residency requirement for directors,use of bearer shares or share warrants even where they are permissible,or even the cases where a company meets minimum capital requirement. The government is likely to make changes in the Companies Act,Trust Act and Prevention of Money Laundering Act,to plug the loopholes.

The sources said that a non-publicly traded corporation that holds shares in a corporate entity or where shares of a company or any business entity are held by a trust,the government will try to devise mechanisms for identifying the ultimate “beneficial owner of the company,the trustees or promoters.

The issue also becomes important in wake of the Financial Action Task Force recommendations that calls for recognising the beneficial owners for anti-money laundering and combat of terrorist financing purposes.

The committee will deliberate on the nature of transactions in a trust and probe the identity of individuals who furnish funds into the trust,whether trustees are acting according to the “wish of a letter and if so,who is the author of the letter”,the identity of the persons who control the trust and make investment decisions and the true identity of a protector “if there is one and the kind of powers vested in him”,the sources added.

The committee will also deliberate upon foundations,the allocation of resources to a foundation and the identity of designated beneficiaries,and also whether the jurisdiction permits the use of a nominee to form the foundation and the final authority.

Training the spotlight

* A beneficial owner is not a mere legal owner,but the actual owner of a company or a share.

* All entities such as corporations,trusts,foundations will have to disclose beneficial ownership once the regulations come into effect.

* Changes are likely to be made in the Companies Act,Trusts Act and the Prevention of Money Laundering Act to plug the loopholes.

* The move is aimed at unearthing entities that are engaged in criminal activities such as money laundering.

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