The importance of reporting beneficial owners of shares: An overview for board members - Part 2: Obligations towards banks
In today's corporate world, boards of directors of stock corporations are increasingly faced with complex regulatory challenges. One of these challenges relates to the obligations in connection with the beneficial owners of shares. These duties have a dual significance for boards of directors: on the one hand, they must ensure that the requirements are implemented correctly within the stock corporation. On the other hand, the stock corporation's business relationships with banks give rise to additional disclosure and notification obligations, which the authorised representatives - in SMEs in particular the members of the board of directors - must fulfil conscientiously.
In a series of blogs, we shed light on the obligations in connection with the beneficial ownership of shares, both within the company limited by shares and vis-à-vis banks. We also provide an outlook on possible future developments in relation to the transparency of legal entities and beneficial ownership.
This blog post is the second part of the series and provides an overview of the obligations towards banks..
The banks' obligations to identify the controlling person
As a hub for financial flows, banks are particularly affected by the clarification obligations in connection with combating money laundering and terrorist financing. In this context, they must clarify the origin and beneficial ownership of the assets brought into their business relationships. This also includes the obligation to identify the so-called controlling person of operationally active, unlisted stock corporations for which they hold accounts or to which they grant loans. This regulation was issued as part of the fight against money laundering, serves the purpose of transparency and is intended to prevent unlawful actors from exerting influence on companies or attempting to launder criminally acquired assets through the company.
The duties of the Board of Directors in disclosing the controlling shareholder to the bank
In order to determine the controlling person, the bank is dependent on the co-operation of the customer, i.e. in the present context the operating, unlisted stock corporation. Due to the anonymity of stock corporations from the outside (the French term for stock corporation is "societé anonyme" or SA for short, whereby the "anonyme" refers to the lack of external recognisability of the ownership structure), it is impossible for the bank to find out independently who the controlling persons of the stock corporation are.
The stock corporation, and in particular the Board of Directors, therefore bears a special responsibility for correctly identifying the controlling shareholder. Within the stock corporation, the Board of Directors has a special responsibility to determine the controlling shareholder, as the Swiss Code of Obligations explicitly requires it to do so, although it may delegate this task. For details, please refer to the previous blog post in this series..
Clarification cascade
According to the relevant provisions for banks, a person has control if he or she actually directs the company, e.g. determines business policy or selects legal representatives.
The clarification takes place in three steps:
- Shareholding:Are there persons who alone or together hold 25% or more of the voting rights or capital? If so, these persons must be recognised as controlling shareholders. If another company holds these shares, the natural persons behind them must be identified.
- De facto control:Are there persons without a 25% shareholding who nevertheless have significant influence, e.g. through contracts or loans? These persons are also deemed to have control.
- Management:If no controlling persons are found, the managing person who manages the company but ultimately acts on behalf of the Board of Directors is recognised instead.
Standardised notification form: Form K
For the Board of Directors, this means that it must document the surname, first name and residential address of the controlling person in the so-called Form K and submit it to the bank. This information must be confirmed in writing and made available to the bank. By signing the Form K, the authorised representatives undertake to inform the bank of any changes without being asked. It is well known that paper is patient, but this should not apply to Form K: together with the other forms for declaring beneficial ownership, the Swiss Federal Supreme Court has classified its probative value so highly that it has granted it the status of a document within the meaning of the Swiss Criminal Code. In other words, knowingly and wilfully providing false information on this form constitutes forgery of a document and is punishable by a custodial sentence of up to 5 years or a fine.
Challenges in identifying the control holder
In practice, the correct determination of the controlling shareholder poses a considerable difficulty for the Board of Directors. On the one hand, this is due to the complexity of the rules, with which most board members are unlikely to be familiar in practice. In particular, the determination of "joint control", possibly its correct consolidation to 25% of the capital or votes or the recognition of another form of control, are likely to be a number of sources of incorrect information.
Particularly in the case of shareholdings via several intermediate companies and nested company structures, it can be complex to identify the actual controlling shareholder, even with knowledge of the rules, especially if the latter holds a minority shareholding and possibly only reaches the 25% threshold together with other shareholders via a shareholders' agreement. The obligation to notify extends not only to natural persons with a direct shareholding, but also to those who exercise control indirectly via intermediary companies. In this case, the Board of Directors must determine who actually has control over the last of these companies and thus controls the shareholder. A person has control over an intermediate company if he or she holds more than 50% of the votes or capital in it or exercises influence in some other way. This control is then attributed to the person who ultimately has the decision-making power. However, if a so-called domiciliary company holds at least 25% of the shares or votes in the company, all persons who benefit economically from this must be declared directly. This is the case, for example, with pure investment vehicles, investor syndicates, etc.
Conclusion: A challenging task with a high level of responsibility
Reporting the controlling person is a complex and responsible task for the board of directors of a non-listed stock corporation. In addition to practical challenges, the determination of the controlling person by banks is based on the determination of the beneficial owner by the stock corporation, but is based on different sets of rules and terminology. This does not make proper implementation any easier for the Board of Directors, which has a duty to both the bank and the stock corporation.
Support in the correct fulfilment of obligations in connection with economic entitlement
Konsento enables stock corporations of all sizes to manage their share register in a legally compliant manner and involve shareholders directly in the collection and updating of master data. This also includes a simple and comprehensible declaration of beneficial ownership. Konsento also supports stock corporations in identifying and correcting outstanding or obviously incorrect declarations and in consolidating threshold values. Contact us for a free, no-obligation consultation on the implementation of beneficial ownership obligations.
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