Beneficial owner(s) disclosure requirement in France

In application of a European directive aimed at fighting against money laundering and the financing of terrorism, recent French regulations impose to all French unlisted companies, foreign companies having a branch located in France, and all other legal persons required to be registered under French law, to disclose the identity of the individual(s) who is(are) its ultimate beneficial owner(s).

The definition and the methods for determining such beneficial owner(s) were unclear to a certain extent, as French legal provisions used as a reference for this obligation the pre-existing definition of "beneficial owner" set out in the French Monetary and Financial Code, relating to the diligence obligations of certain economic actors with regard to their clients. As a result, in some situations, there were uncertainties to identify the beneficial owner of French companies and entities, and an implementing decree was expected to clarify the definition and the method for determining such beneficial owner(s). Such decree has been issued on 18 April 2018 (the "Decree"); the Decree relates to the obligation for companies or entities to disclose their beneficial owners, and also concerns various other aspects of the French regulation aimed at fighting against money laundering and the financing of terrorism. It is effective, with respect to its provisions referred to below, as from 21 April 2018. The Decree does clarify certain points, however it is the insufficiencies of the Decree that must especially be denounced. Now that this Decree has been published, the whole set of texts applicable in France with respect to the obligation to disclose beneficial owner(s) is complete and its main aspects are set forth below.

The clarifications of the Decree on the definition and method for determining the beneficial owner

Definition of the criteria of "power of control by any means"

The applicable legal provisions initially provided that any person exercising a "power of control by any means" over the management, administrative, or executive bodies of the corporation or the general meeting of its shareholders, had to be regarded as a beneficial owner.

The nature of such "power of control by any means", which could be assessed in a particularly broad way, has been clarified by the Decree. Indeed, "Control" is now defined as the situation where an individual (i) determines, in fact, by the voting rights at his/her disposal (via for example a voting agreement or existing concert), the decisions of the general meeting of shareholders of the company (or of the management company in case of a collective investment fund) or (ii) when he/she is a shareholder of the company and has the power to appoint or dismiss the majority of the members of the administrative, management or supervisory bodies of the company (or of the management company in case of a collective investment fund).

The criteria of "control by any other means" has thus been narrowed and clarified, answering thereby numerous questions which arose previously with respect to the assessment of factual situations.

Situation where no beneficial owner can be identified

The Decree also settles the situation where no individual could be identified as being the beneficial owner, by application of the relevant rules. In such case, the Decree now provides, as the Clerks of the Commercial Courts already recommended and in line with the text of the European Directive, that by default, the beneficial owner(s) is(are) the legal representative(s) of the company/entity (or the individual representing it if it is an entity). However, this solution applies only if the reporting entity has no grounds of suspicion of money laundering or terrorist financing related activities.

These material clarifications remain however insufficient in view of the numerous shortcomings of the Decree, which leave many uncertainties unresolved.

The insufficiencies of the Decree

Method of calculation of the indirect holding of share capital or voting rights

The methods of calculation of the indirect holding of the share capital or voting rights of a company or entity is still not defined. Indeed, it can be carried out by applying different methods (ie. a mathematical approach or the method of control of intermediary entities), which may render different results. Practitioners were hoping that the Decree would clarify this point but this is not the case. They might thus continue to recommend to apply cumulatively the two calculation methods above.

Requirements applicable to subsidiaries of listed companies

Non-listed companies controlled by listed companies still do not benefit from a specific exception. Indeed, from a strict application of the current legal provisions, a non-listed company owned by a listed company is required to identify and declare the identity of its ultimate beneficial owner(s) whereas its listed parent company does not have to do so, listed company being excluded from this requirement.

The national committee of the clerks of the Commercial Courts (Conseil National des Greffiers des Tribunaux de Commerce) published in November 2017 certain guidelines relating to beneficial owners disclosure, and in this situation recommended that subsidiaries of listed companies (i.e. the majority of the share capital of which is held by a listed company) declare their legal representative as their beneficial owner (by default), and highlight to the Clerk of the Commercial Court that their parent company is a listed company. Since the Decree has not confirmed this recommendation, one can question whether the national committee of the clerks of the Commercial Courts will maintain its recommendation in this respect.

Situation of the legal representative in case of suspicion of money laundering or financing of terrorism related activities

As indicated above, when no individual could be identified as being the beneficial owner, the legal representative of the reporting company or entity must declare himself/herself in such capacity; however, this solution applies only when there is no suspicion of money laundering or financing of terrorism related activities. One could question what the legal representative should do in the opposite case, i.e. if after having investigated in order to identify the beneficial owner, he/she has such suspicions? Is there any alternative other than resigning from his/her functions? He/she indeed would be in a dead-end situation, French regulations not providing rules in this case.

Lack of readability of applicable texts 

Finally, this Decree can be criticized for still not distinguishing clearly the beneficial owner to be disclosed by companies and entities from the one to be identified by certain economic actors (such as banks in particular) in their relationship with their clients, which was pre-existing in the French Monetary and Financial Code mentioned above. Indeed, the regulation on disclosure obligations for companies and entities uses, by reference, the same definition of beneficial owner. As a result, a strict reading and application of such definition would lead to consider that the individual for whom an operation is "carried out" or for whom an activity is "carried out" should be disclosed as beneficial owner of the concerned company or entity. French practitioners unanimously consider that this criteria is inappropriate within the context of the disclosure obligation of companies or entities, and thus inapplicable. The national committee of the clerks of the Commercial Courts (Conseil National des Greffiers des Tribunaux de Commerce) seems to share this view, which is reassuring. However, one would note that this approach is pragmatic but not fully consistent with the existing texts. Similarly, the provisions applicable by reference refer to the beneficial owner as being the "client" of the reporting entity, which corresponds to the situation of a bank with its clients for instance, but is far less appropriate when applied to the obligation to disclose the beneficial owners of companies or entities. Here again, practitioners retain a pragmatic reading despite the deficiencies or gaps of the French set of applicable texts.

These numerous shortcomings will thus continue to raise questions about the identification of the beneficial owner(s) of companies and entities in France, which is regrettable considering the severe criminal penalties attached to this reporting obligation. 

The main aspects of the French disclosure requirement 

The main aspects of the French requirement to identify and disclose the identity of the beneficial owner(s) of corporations and other entities, taking into account the latest provisions of the Decree, are as follows:

The French requirement in short

In application of a European directive, recent French regulations impose that all French unlisted companies as well as all foreign commercial companies having a branch located in France, identify and disclose the identity of the individual(s) who is(are) its ultimate beneficial owner(s).

Definition of the beneficial owner(s)

The beneficial owner of a company or entity is the individual (a) who directly or indirectly holds more than 25 per cent of its share capital or voting rights, (b) who exercises by any other means, control over the company, such "control" being defined as the situation where the individual (i) determines, in fact, by the voting rights at his/her disposal, the decisions of the general meetings of shareholders of the company (or of the management company in case of a collective investment fund), or (ii) when he/she is a shareholder of the company, has the power to appoint or dismiss the majority of the members of the governance bodies of the company (or of the management company in case of a collective investment fund). Despite the recent decree on this topic (Decree dated 18 April 2018 referred to above), certain aspects of this definition remain unclear in practice.

Form to be filled-in and filed

The companies and entities subject to these new requirements must fill-in and file a dedicated form with the competent Registry of the Commercial Court in France; the information to be completed in this form includes detailed identification elements and personal domicile of the beneficial owner(s), as well as the means of control it/they exercise(s). In case of indirect holding of shares or voting rights, as well as in case of control "by any other means" referred to above, the modalities of such control must be further detailed in the form.  

If no beneficial owner can be identified

If it is impossible to identify the beneficial owner according to the prescribed criteria, and if the reporting company or entity has no suspicion of money laundering or financing of terrorism related activities, by default, the legal representative(s) of the reporting company or entity (thus the foreign company as the case may be) must be designated as the beneficial owner(s). 

Who can access to the identity of the beneficial owner(s)

The information filed is recorded and kept by the Clerk of the Commercial Court on a dedicated register which is not public. However, a certain number of authorities and public administrations (such as judicial authorities and tax administration (including of other States of the European Union)) have unrestricted access to this register. Under certain conditions, any person evidencing a "legitimate interest" can request from a judge to be granted access to the information concerning a specific company or entity. 

Timing for such disclosure

Companies incorporated as from 1st August 2017 must file this form at the same time they file for incorporation or within 15 days therefrom. Companies incorporated before 1st August 2017 were due to file this form before 1st April 2018. For all companies and entities, a revised form must be filed within thirty days of any event triggering a change of any of the information included in the form (such as a change of control but also the mere change of the personal address of the beneficial owner). 

Sanctions in case of failure to comply with the disclosure requirement

French regulations provide for severe criminal sanctions against the reporting companies and their legal representative (on a personal ground; including potential imprisonment and prohibition of management) which fail to file the relevant form with the Registry of the Commercial Court or which file forms which include inaccurate or incomplete information. Because of the recent entry into force of this new obligation, French practitioners do not yet have a view on its application by French Courts.

Similar regulations in all Member States in the European Union 

This new French regulation results from the European Directive (EU) 2015/849 dated 20 May 2015 relating to the fight against money laundering and the financing of terrorism, applicable to all Member States. Generally speaking, these European requirements have been incorporated in the different internal legislations of the Member States, with certain differences from one country to another as the Directive offered a certain range of flexibility.