On November 25, 2014 the Law ofUkraine "On amendments to some legislative acts of Ukraine concerning thedefinition of final beneficiaries of legal persons and public figures"№1701-VII (hereinafter - "the Law") came into force. It was designedto ensure the transparency of business and to help fight corruption. In orderto accomplish that this Law, among other things, forces all legal entities inUkraine to reveal their real owners, including "final beneficiaries",as well as all “shadow” owners with "substantial participation" insuch entity.

According to the Law the finalbeneficiary is an individual, who, regardless of formal ownership is able toexercise a decisive influence over the management or operations of the company,directly or through other related persons. "Decisive influence" has apretty wide interpretation and, in particular, includes the direct or jointrelated party ownership of 25% or more of the authorized capital of the companyor of the voting rights. The Law does not regard agents, nominal owners andother intermediaries as final beneficiaries.

Those with "materialparticipation" are classified by the Law as individuals - members of legalentities that control the activities of companies, through direct or indirectownership of 10% or more of the charter capital or voting rights.

The above information must besubmitted to the state registrar within six months, starting from November 25,2014. However, to our knowledge, state registry software has not been developedas of yet, the format of the record hasn’t been approved either and the stateregistrars themselves do not have a complete understanding what is it that theyare supposed to do and how, since there are no detailed instructions on howthis information should be filed.  

But even after these technicalproblems shall be solved, for many companies, the question remains, whatinformation they should actually disclose. This is a burning issue first andfor most for the executives and in-house lawyers of companies that:

a)    have acomplex structure of ownership and are controlled by a number of companies,which in turn are controlled by several other companies and do not incorporateindividual participants;

b)    arecontrolled by several persons, each of which meets all the formal criteria ofthe final beneficiary;

c)    arecontrolled by a number of individuals, none of whom formally comply with thecriteria of the final beneficiary;

d)    arecontrolled by public companies whose shares are publicly traded on a stockexchange, or by trust companies, the actual owner of which is hidden.

No official clarification fromthe regulators on these and similar questions have been issued yet. It is mostlikely that in cases of the complex corporate structure of the business thesearch for the final beneficiary must continue until a natural person who has adecisive influence on the company by means of intermediate entities has beenidentified. In addition, we assume that the information on all persons formallyfalling under the criteria of the final beneficiary and persons holding"substantial participation" would need to be disclosed. But stateregulators may come up with a different explanation as regards to the formatand the scope of providing the requested information.

The current versionof the Law stipulates that the registration of the above mentioned data shallbe purely declaratory, it does not ask for supporting documents to be submittedby companies. Nevertheless, the management should in fact have these documentshandy since the Law holds it responsible (both administrative and criminalliability) for false or incomplete data. Possible sanctions include penaltiesin the amount of 34 000,00 hryvna, up to 6 months under arrest or supervisedrelease for a term of up to 5 years with no right to occupy the appropriatepositions for up to 3 years. Therefore, we advise to start looking for theseanswers and get ready to comply with this Law immediately.