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Part A: General Topics - 12. Transparency/Confidentiality | 12.2 Beneficial Ownership

The momentum for enacting beneficial ownership legislation is gathering pace around the world, with a growing number of countries adopting principles on disclosure of beneficial ownership. The objective of such initiatives is to shed light on secret ownership structures that enables some extractive companies to evade tax payments or hide inappropriate relationships with relevant public officials. Mineral development benefits depend to a great extent on effective tax collection and extractives companies can evade by using complex ownership structures. While a complex and opaque ownership structure does not automatically mean that an extractives company is engaging in wrongdoing, the disclosure of beneficial ownership information helps to deter improper practices or facilitates their detection.

A mining law should define the meaning of “beneficial ownership” in detail, or include explicit reference to the definition provided in related laws. Defining the concept to cover all cases is challenging, but in most cases “beneficial ownership” means ownership which is enjoyed by any natural person who, directly or indirectly, has any significant control or economic interest in a given legal entity or receives significant economic benefit from such a legal entity, even where formal ownership (title) may be in the name of another entity. Preferably, each country’s choice of definition would be based on a clear understanding of what problems it most wants to address through the disclosure of beneficial ownership information, how companies operating in the country tend to structure their ownership, and whom the country anticipates to use the information.

Under the 2016 EITI standard, countries are required to adopt legislation that prompts the disclosure of beneficial ownership of entities that bid for, operate or invest in extractive assets. Such disclosure should include the identity of the owner, i.e. the name, nationality and country of residence; best practices indicate that the information should be made available through public registers.

With regards to a specific threshold of ownership at which beneficial owners must be declared, a ceiling of five percent or lower is recommended by international best practice. It is critical that countries pick thresholds with care, given that for large extractive projects even a 1 or 5 percent interest can generate substantial rents. Finally, legislation should provide for penalty for false, incomplete or misleading disclosures, such as revoking a company’s license or contract, or barring it from competing for contracts.

12.2 Example 1:

Article [_]

(1) All companies applying or bidding for a license are required to provide accurate information on their Beneficial Ownership as part of their application or bid documents and throughout the duration of a license, license holders will inform the [Regulating Authority] of any changes to this information, within one month of the change occurring.

(2) The [Regulating Authority] will promptly publish and maintain all Beneficial Ownership information in a publicly accessible format on its website.

(3) Failure to provide the information required in subsection (1) above, in good faith and in conformity with the regulations to this [Law][Act][Code] shall invalidate a license application, and be grounds for revocation where a license has been granted.

(4) For the purposes of this Article [_] (Beneficial Ownership), “Beneficial Ownership” means the control, possession, custody or enjoyment by any natural person, directly or indirectly, of a reasonably significant economic interest in a given legal entity or receives significant economic benefit from such a legal entity, even where formal ownership (title) may be in the name of another person or entity. In addition to any other qualifying criteria, a person is automatically considered to be a beneficial owner if such person owns 5% or more of the legal entity in question.

Annotation

This suggested example requires that companies provide beneficial ownership information to the State and inform the regulating authority of any changes to beneficial ownership structures throughout the duration of a license, for purpose of maintaining current and accurate information. It obligates the regulating authority to make such information public. It also sanctions the lack of compliance by extractives companies for failure to provide relevant information.

The example also provides a definition of the “beneficial ownership”, setting the threshold of ownership at 5%, the minimum required by international best practice. It is recommended that the definition of beneficial ownership, while useful at the site of the applicable provision, is best defined in the Definitions section of the mining law in order to allow for the definition to apply to the term no matter the site of occurrence in the law.

12.2 Example 2:

Article [_]

(1) All companies applying or bidding for a license are required to provide accurate information on their Beneficial Ownership as part of their application or bid documents and throughout the duration of a Mineral Right and all Mineral Rights holders will inform the [Regulating Authority] of any changes to this information, within one month of the change occurring.

(2) The [Regulating Authority] will promptly publish and maintain all Beneficial Ownership information in a publicly accessible format on its website.

(3) Failure to provide the information required in subsection (1) above, in good faith and in conformity with the regulations to this [Law][Act][Code] shall invalidate a mining right application, and be grounds for revocation where a mining right has been granted.

(4) The holder of a mining right shall provide to the [Regulating Authority] a trimestral report on the beneficial ownership of subcontractors hired for a value higher than [Minimum Contract Amount Allowed].

(5) For the purposes of this Article [_] (Beneficial Ownership), “Beneficial Ownership” means the control, possession, custody or enjoyment by any natural person, directly or indirectly, of a reasonably significant economic interest in a given legal entity or receives significant economic benefit from such a legal entity, even where formal ownership (title) may be in the name of another person or entity. In addition to any other qualifying criteria, a person is automatically considered to be a beneficial owner if such person owns 5% or more of the legal entity in question.

Annotation

While the first subsection is similar to the first example, this example goes further with the disclosure requirements, by soliciting the disclosure of beneficial ownership of subcontractors of the mineral rights holder.