A recent overhaul of the regulations concerning the determination of an Ultimate Beneficial Owner (UBO) has brought about considerable changes in the UBO determination and filing for entities in the UAE. The most significant is the ability of the Registrar to adopt a risk-based approach in the determination of the UBO which will be discussed in greater detail in this Article along with practical considerations for businesses in UAE.
The legislative changes referred to are as follows:
- Cabinet Resolution No. 109 of 2023 on the Regulation of the Real Beneficiary Procedures (the “UBO Regulations“), which replaced the existing Cabinet Resolution No. 58 of 2020.
- Cabinet Decision No. 132 of 2023 (the “Cabinet Decision“) relating to the administrative fines for violations of the UBO Regulations, which superseded Cabinet Decision No. 53 of 2021.
The UBO Regulations apply to all entities in the UAE mainland and freezones with the following exceptions:
- Entities incorporated in the financial freezones- DIFC and ADGM.
- Entities wholly owned by the Federal or Local Government or their subsidiaries.
- Governmental Partners- defined as a Federal or Local Government that contributes or owns shares in the company.
Determination of the UBO
An Ultimate Beneficial Owner in all cases shall be a natural living person. The rationale behind the UBO determination is to identify the person for whose benefit the company operates. A UBO determination involves both a control and ownership test, as provided in further detail below.
- Under the UBO Regulations, the UBO is defined as any natural person who ultimately owns or exercises control or has the right to vote over at least 25% of the legal person’s capital, through direct or indirect ownership or control, or through control by any other means, such as the right to appoint or dismiss the majority of their directors.
- If no natural person is identified under point (1) above, then the natural person who exercises control over the legal person through other means shall be considered as the UBO.
- If no natural person is identifiable under points (1) and (2), the Beneficial Owner shall be deemed to be the natural person holding the position of Senior Management Officer.
Control is generally exercised through shareholding or a senior management position or a combination of both. However, the UBO Regulations recognize control through other means. Though these other means have not been defined, they may include control by virtue of an agreement or Power of Attorney. In these situations, the role of the Registrar is notable, as the Registrar has the discretion to determine the UBO upon evaluation of various factors. Certain powers possessed in isolation may not confer the status of the UBO, however, upon pairing these with other powers exercised by the natural person, these may lead to a conclusion that the person acts as the UBO of the legal entity.
With the aim of addressing such challenges faced in determining the UBO and the necessity for evaluation on a case-to-case basis, the UBO Regulations introduce the concept of a complex legal structure. A Complex Structure is defined as an institutional mechanism that identifies a legal person as part of a group of different entities that are intricately linked to each other with the aim of concealing the identity of the natural person who owns or controls the legal person. The current UBO Regulations are well equipped to deal with such sophisticated attempts at concealing the UBO of a legal entity.
Risk-based Approach by the Registrar
One of the notable provisions of the UBO Regulations is the role of the licensing authority in each relevant jurisdiction (the “Registrar”). A few of the important considerations are provided below:
- The Registrar has the power and obligation to adopt a risk-based approach, in the determination of the UBO, especially in matters involving complex legal structures. As such, discretion is granted to the Registrar to determine UBOs in the event where the UBO cannot be identified based on the conditions specified in the UBO Regulations.
- Apply a risk-based approach to the facilities registered with it, in order to ensure that the entity is not misused for the purposes of money laundering and financing of terrorism.
- An administrative Unit Combating Money Laundering and Financing of Terrorism must be established at the Registrar.
The concept of a risk-based approach is well embedded in AML/CFT legislations and involves consideration of various factors including the nature and size of the business, business sector, customer base, crime risk and financial risks. The Registrar thus is obligated to take proportionate measures to mitigate risks in relation to money laundering.
Practically, businesses must be mindful of this risk-based approach, as this might give rise to enhanced requirements and determination of the UBO based on factors other than those explicitly provided in the UBO Regulations.
For businesses with complex structures, it is advisable to seek professional advice to ensure compliance with the legal regime. Please do not hesitate to reach us at info@fichtelegal.com.
