In our practice, we are often faced with commercial law issues that affect the application of anti-money laundering legislation.
Traditional cases of this type are the ones where the capital of a sole owned limited liability company (EOOД) is owned by a natural person. Such circumstance does not imply that the Ultimate Beneficial Owner (UBO) of the company shall be registered with the Commercial Register.
However, at some point, after executing a Share Purchase Agreement (SPA), it is not uncommon that the ownership passes to a joint-stock company or to a foreign legal entity, which activates the obligation of the company to register the change in the UBO with the Commercial Register.
In such situations, the following question should be answered: when exactly the obligation of the company under Art. 6, para. 2 of the Commercial Register and the Register of Non-Profit Legal Entities Act (CRRNPLEA) to apply for registration of the changed circumstance within 7 days of its occurrence arises. Clarity is also needed regarding whether the obligation arises from the moment of executing the SPA or from the moment of its registration with the Commercial Register. Finally, when is the moment this deadline expires, and from which point onward should the company be considered in violation and subject to sanctions.
What usually happens
Very often the business focuses on the more intuitive and logical step, namely – to ensure the registration of the transaction with the Commercial Register with the corresponding application form.
Only after that, when the registration is already a fact, the companies begin to organize the issue of preparing and obtaining the necessary set of documents for the registration of their UBOs under their files with the Commercial Register. This process often requires a lot of time and effort, as it is related to notarizations, issuance of certificates of good standing from foreign jurisdictions, procedures for translations and legalizations, provision of persons to serve as the so called “contact persons” within the meaning of the Anti-Money Laundering Measures Act (AMLMA), etc.
Using such approach, the business rarely considers that its actions formally violate Art. 63, para. 1 of the AMLMA, thereby exposing itself to the risk of potential sanctions.
What exactly is the breach
Although there are conflicting interpretations on the matter, it is commonly accepted that the transactional effect in between the parties occurs from the moment of the conclusion of the SPA in the validity form provided by law – notarization of the signatures and contents, carried out simultaneously, and not from the moment of the registration of the transfer with the Commercial Register. The latter is considered to have only notifying and protective purposes.
Therefore, since the signing of the contract is the moment when the change in the company’s ownership occurs, it is also the moment from which the 7-day deadline for updating the changes in the company’s record begins to run.
Subsequent registration with the Commercial Register does not, in itself, create any rights or obligations; it merely aims to inform third parties.
Such understanding is advocated in the otherwise scarce caselaw on the matter. The main argument being that it is not possible that the 7-day term for the declaration of the UBO starts from the registration of the change in the ownership with the Commercial Register, as this would render the obligation to declare UBOs after a transaction meaningless. The court finds that, if, hypothetically, such logic is followed, the obligation in question could never be practically violated, insofar as its fulfilment is dependent on the action of the obligated person themselves.
In view of this, if the company delays declaring its UBOs under the pretext of first waiting for the ownership change to be reflected in its file, and more than 7 days have passed since the signing of the SPA, this constitutes a violation of Art. 63, para. 1 of the AMLMA in connection with Art. 6, para. 2 of the CRRNPLEA.
How to Avoid Potential Financial Sanctions
The above has the following practical implication: the two deadlines—one for submitting Application A4 for updating the company ownership with the Commercial Register, and the other for submitting Application Б7 to register details about UBOs—should be considered to run simultaneously from the moment of signing the SPA, rather than consecutively.
Applications should be submitted in the order of Application A4 first, followed by Application Б7, with the assumption that the registry official will process them in the same order. The reverse is not feasible, as UBOs can only be registered once the transaction has been disclosed in the Commercial Register.
This approach significantly reduces the risk of financial sanctions being imposed by the competent authorities.
The article above is for information purposes only. It is not a (binding) legal advice. For a thorough understanding of the subjects covered and prior acting on any issue discussed we kindly recommend Readers consult Ilieva, Voutcheva & Co. Law Firm attorneys at law.
