How do identify beneficial owners

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South Eastern Europe Corporate
Governance Roundtable
Transparency and Disclosure.
Implementation and Enforcement.

 How to identify beneficial owners
            Dr Panayiotis Alexakis
               President, CEO
            Athens Exchange S.A.
                June 11, 2004
I.     Why is identifying the beneficial
       owner important?
II.    What is meant by the term
       “beneficial owner”
III.   Which are the main tools for
       identifying the beneficial owner?
IV.    The Greek experience

    I. Why is identifying the
    beneficial owner important?
   Registry purposes – Benefits for the issuer
   Allowing investors and most importantly retail
    investors to take decisions based on information,
    with regard to their participation in an investment
    – Benefits for the investor
   Improving the level of servicing and protecting the
    end investor – Benefits for for the investor
   State supervision – Benefits for the society

I.1) Why is identifying the beneficial
owner important for registry purposes?
   Identifying the beneficial owner helps the issuer to:
      perform corporate actions in a more satisfactory and
       speedy way for all its titleholders. If the issuer knows
       the identity and location of his shareholders, he can
       make all necessary arrangements for accomplishing
       corporate actions (e.g. dividend payments et.c.)
      study the patterns, which international investors follow,
       when they make their investment decisions. In other
       words, identifying the beneficial owner is a strong
       weapon for the company’s IR department
      understand significant changes in the shareholders’
       structure of the company. These changes may also
       signal future take-over attempts
I.2) Why is identifying the beneficial
owner important for investment

 The shareholder structure, as well as the exact
 moment of participation and exit of major
 investors, is a decisive factor, which helps the
 investor to take his investment decisions
 Identifying and revealing the above data is a
 strong weapon against insider dealing that
 could take place if an equivalent disclosure
 regime had not been in place

I.3) How is identifying the beneficial
owner contributing to investor servicing
and protection?
   In an ideal world, new technology enabling the
    employment of STP process at all levels of the
    transaction, would give the beneficial owner the
    opportunity to transact directly in the markets,
    limiting the scope of financial intermediation
   Direct registration of the beneficial owner in the
    central system (for example in the CSD)
    facilitates the employment of STP at all levels of
    transaction and practically broadens the
    beneficial owner’s opportunity for direct access in
    the markets.
I.4) Why is identifying the beneficial
owner important for reasons of state
   Money laundering concerns
       The New EU Directive extends the coverage to a series of non-
       financial activities and professions that are vulnerable to misuse by
       money launderers. Requirements as regards client identification,
       record keeping and reporting of suspicious transactions are
       therefore extended to external accountants and auditors, real estate
       agents, notaries, lawyers et.c.. This shows the concern of the EU for
       preventing money laundering, to which identifying beneficial owner
       contributes significantly
   Global safety concerns
   Tax avoidance issues
   Special purposes, for which the identity disclosure of the shareholders
    is deemed as essential. As paradigms:
        State contractors

        Media companies

II) What is meant by the term “beneficial
   It is a term derived by the common law “equity” regime.
    It means the person, who is entitled to enjoy the
    economic rights stemming from the ownership, although
    the ownership has been registered in the name of
    someone else (the legal owner), who holds the object in
    his own name but on behalf of the beneficial owner
   The beneficial owner is the “indirect” owner. Therefore
    beneficial registration structures are known as “indirect
    holding”, “nominee registration” or “omnibus holding”
    structures as opposed to the “end-investor” or “direct
    holding” structures.

   Continental property law traditionally lacked beneficial ownership
    structures. However, indirect holding in a global economy had
    originally been seen as a practical necessity. To resolve the problem,
    most continental legal orders incorporated a clause in their insolvency
    law whereby it was recognized that holdings registered in omnibus
    accounts were segregated from the pool of asset of the legal owner in
    his insolvency event. In this way, indirect holding systems became
    legally safer and business-wise eligible
   Systems that chose the end-investor approach on the other hand,
    were based on a proxy whereby the (natural or legal) person
    registered in the system, namely the accountholder, was recognized
    as the final owner of the securities. Improper registration in end-
    investor systems (namely, registration of merely the legal owner)
    entailed some degree of legal risk for the beneficial owner, who ran
    the danger of having a mere contractual claim, instead of a property
    right, in the case of the legal owner’s insolvency.

III) Which are the main tools for
identifying the beneficial owner?

   The two main tools for beneficial owner
    identification are:
      The obligation to disclose to the market major
       holdings acquisitions or disposals
      The end investor registry system

   These tools are not interchangeable, neither
    from a legal nor from an operative perspective.
    They serve different needs and perform different

III.1a) The obligation to disclose
   From a legal point of view, the obligation to disclose has, since 1988,
    been a piece of European legislation (Dir.88/627 later incorporated in
    the 2001/34 Dir and currently a substantive part of the Transparency
   In the current EU regime, the obligation lies initially with the person
    who acquires or disposes and at a second level on the issuer, if and
    when he is informed. The person must make the announcement the
    seventh calendar day the latest from the day he learnt he has acquired
    or disposed the shares
   The new Transparency Directive extends the period of announcement
    to 7 trading days and it alters the process: the acquiring or disposing
    person will be obliged within 4 trading days to notify the issuer, who
    will within the next 3 trading days, notify the market.
   The home Member-State is not prevented from employing a more
    stringent regime

III.1b) The obligation to disclose as a
tool of identifying the beneficial owner
– Pros and cons
   CONS
   Significant time lapse of 7 days from the acquisition or disposal
   Lack of any central cross-checking mechanism. The disclosure rests on
    the hands of the beneficial owners
   Limited help to the registry function, since only major shareholdings
    are declarable and the time lapse is considerable
   This tool is a common practice for all markets and is practically easier
    for very large markets, where the employment of a direct holding
    structure would possibly require heavy technological investment

    III.2a) The end – investor approach /
    The end-investor approach is, as we previously said, legally created by
     a proxy whereby the person registered as the account owner (normally
     in a CSD system) is assumed as the final (both legal and beneficial)
     owner of the securities recorded therein
     The end investor system has the effect of the direct disclosure of the
     beneficial owner identity with the analyzed positive effects for the
     issuer, the investor, the state control mechanisms et.c.
    Direct holding systems are facilitated by the new technology (APIs)
    These systems are of a minimum legal and operative risk, since all
     holdings are directly registered in the database of a CSD, whose risks
     are minimum in comparison to the custody risks of a chain of
     intermediaries in an indirect holding system. In addition, issues with
     regard to the law applicable for the determination of ownership rights
     receive a more straightforward answer: usually the law applicable will
     be the one that governs the direct holding system.
    III.2b) The end – investor approach /
    Despite gradual unification of technological solutions applied in
     registry and custody services, the issue remains that direct holding
     structures appear as demanding from the global custodian, the
     development of various interfaces that enable him to connect with
     local systems. Therefore, concentration of back office operations is
     not encouraged. This disadvantage will gradually disappear with the
     employment of new technological solutions (APIs)
    Proper direct holding registration requires a satisfactory degree of
     effective and efficient communication between the registry system
     (normally, the CSD) and its participants (the custodians), which is
     not always easy.
    Direct holding systems must not deprive the investor and most
     importantly the intermediary of the privilege to keep in anonymity
     data connected to his/her identity or to the identity of its clients

   The existence of the proxy with regard to the identity of
    the beneficial owner (namely, the assumption that the
    final owner of all the holdings recorded in an account is
    the account owner) may be seen as arbitrary. The
    problem is due to improper registration. However this
    “misuse” of the direct holding system has the following
      Discrepancy between the data stemming from the
       CSD system and those stemming from the major
       holdings disclosure system, as regards the beneficial
       owner’s identity.
      Wrongful information to the issuer or to other info-
      High level of legal risk on the circulation of the title
       through indirect holding chains, as above described.
IV) The Greek experience
   The Greek market uses both tools for identifying the beneficial
    owner of securities
   P.D. 51/92 implementing Major Holdings Disclosure Directive into
    the Greek law has been interpreted restrictively and currently
    requires the person, who has acquired or disposed, to notify the
    market on T+1, namely the next trading day
   The CSD registry database is oriented to the end-investor, who
    becomes owner of securities directly from the title-leg CSD
    settlement on T+3
   CSD registry system facilitates STP and the interconnection between
    the trading and registry system gradually develops
   CSD registry system secures anonymity in the sense that no account
    operator (the CSD, included) has access to other parts of the
    investor’s account, unless he is expressly authorized by the account

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