I. An overview of money laundering
A. Money laundering’s connection with financial transactions
Countries throughout the world have passed laws criminalizing individual or organized criminal acts locally and internationally. These crimes generate illegal revenue and criminals feel the need to clean the revenue to appear legitimate. Therefore, criminals seek to carry out fictitious financial transactions so that they appear as if they originate from legitimate sources, thereby reducing or eliminating the criminal nature of the transaction.
A financial transaction is considered suspicious if it is fictitious for the purpose of laundering criminal funds, aiming to:
a) Granting criminal funds a legitimate source. For instance, a trader of illegal materials may give his profits to an affiliated person who purchases shares or jewelry at exorbitant prices from an institution owned by the same trader. Therefore, the illegally generated funds are returned to the criminal in a cleaned manner as if it were a legitimate price for valuable commodities.
b) Commingling illegally generated funds with legitimate ones. In this case, the criminal hands over cash to a wealthy affiliated person who buys shares in his name, but the actual beneficiary of the purchase and ownership is the criminal.
B. Ultimate beneficiary owner’s (“UBO”) association with money laundering
Beneficial ownership is not always associated with money laundering. UBOs may be used to circumvent applicable laws, such as foreign ownership restrictions, tax evasion, avoiding competition rules etc.
The UBO is defined under Article 1 of the Money Laundering Law No. 106/2013 (“MLL”) as “any natural person who owns or exercises final control – direct or indirect – over the client or the person on whose behalf the transaction takes place, as well as the one who exercises final effective control over a legal person or legal arrangement”. Therefore, the following may be inferred:
a) The UBO is a “natural person” not a company.
b) The used person is a private “corporate person” and this includes all types of companies, institutions and establishments with a corporate identities. However, MOCI’s Resolution No. 4/2023 subject of this note (“Resolution”), excluded from its scope state owned or affiliated companies, on the basis that these are in the public domain and the actual beneficiary is the state of Kuwait.
c) The UBO exercises effective ownership or control. For instance, the violating party is typically in control of a subordinate who launders money on his/her behalf, whether directly or through other subordinates to the subordinate.
d) The UBO exercises ultimate effective control over a corporate entity or a legal arrangement. The violating party is in control of the voting rights in the general assembly of the company through subordinates who appear as the shareholders. The legal arrangement may take the form of a large ownership chain, with ultimate control given to the UBO.
II. Reasons for issuing the Resolution
A. Broadness of the Money Laundering Law
The MLL was general and somewhat ambiguous especially in terms of (i) determining the percentages of the capital that lead to actual control; and (ii) the means to discover the actual beneficiary through nominees.
The MLL explicitly referred to other regulators – including the Ministry of Commerce and Industry as well as the Central Bank and the Capital Markets Authority – for the purpose of setting and applying standards for ownership or control with regard to the actual beneficiaries. This is where the Resolution came in play.
B. Determining the UBO
The Resolution sets out the procedures to determine the identity of the UBO under any financial transactions according to the following criteria:
a) Possession or control of the capital through shares’ ownership in a corporate entity or direct or indirect ownership of shares, at a rate of 25% or more of the capital.
b) Possession or control of the voting right, also at a rate of 25% or more. The criterion over here is not based on the capital ownership, but on the voting power that affects the passing of resolutions. Voting provides a privilege for different classes of shares in a shareholding companies. A member of the board of directors may have 1,000 votes on 100 shares only, while the other 3,000 thousand votes are distributed over 3,000 shares. Thus, this member is a UBO in the company and although he does not own (25%) of the capital, he has (25%) of the voting power.
III. Nominee Arrangements
A. Current Practice
This practice is largely common in Kuwait with the regulators giving their blind eye despite violating the provisions of the Commercial Law No. 68 of 1980. Prior to the introduction of the Kuwait Direct Investment Promotion Authority (“KDIPA”), every foreigner wishing to take control of a company, needed to engage a nominee to hold the shares which represent more than 49%, the maximum limit awarded to a foreigner.
This practice of nominee arrangements continued despite the introduction of KDIPA which allowed foreigners, subject to meeting certain criteria, to own up to 100% of the company’s share capital. The practice developed further with creating companies whose purpose is built around nominee arrangements.
B. Effects of the Resolution
Under the current Resolution, the regulator compels each company to disclose the identity of their UBOs. If this were to happen, violations to article 23 of the Commercial Law No. 68 of 1980 (“Commercial Law”) will likely surface. Some interested parties have expressed their doubts as to whether or not this is the intention of the regulator, therefore, it remains to be seen if companies will voluntarily disclose the identity of the UBOs and how would the courts treat such disclosures.
C. What’s Next?
Foreign investors will need to keep an eye out on future MOCI decisions, courts’ judgments and Department of Income Tax’s decisions so they can make an assessment in respect of their investments in Kuwait.
Meysan Partners, as always, closely monitor legal updates in Kuwait and will keep you apprised of any potential changes to the current practice that could affect foreign ownership, tax and disclosure requirements.
Talk with Michel Ghanem if you have questions about the potential impact on your own situation.
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