Problems in practice
We wrote in March 2024 on the new Act on Prevention of Money-Laundering and Financing of Terrorism in Bosnia & Herzegovina (“AML Act“) and its dubious provisions.
As foreseen, practical challenges have already arisen with respect to the obligation of banks, insurance companies, stok brokersnotaries and others obligers under the AML Act to identify ultimate beneficial owners of legal entities (“UBO“). UBO is defined as an individual having, directly or indirectly, alone or together with other individuals, at least 25% of business shares, stocks, voting rights, or other controlling rights in a company. The definition of UBO also includes an individual who indirectly provides or secures funds for a company and, based on that, has the right to significantly impact the company’s financing and operations.
According to the new AML Act, the obligation to determine UBO entails taking reasonable measures to verify the UBO’s identity, using relevant information from a reliable source. In practice, banks and notaries currently accept only the extract from the business registries as a reliable source for UBO identification. Director of a company registered in Bosnia & Herzegovina will be deemed an UBO only if no one else can be identified as UBO based on the inspection of the commercial registry excerpts for all companies in the ownership chain.
While no issues arise in case of companies with simple ownership structure, obtaining registry extracts from various countries for a plethora of connected legal entities within a reasonable timeframe is often impossible. Some commercial registry execrpts, depending on the country of issuance, may require apostille or even full legalization. By the time the applicant collects all required excerpts, the excerpts collected at the beginning of the process may already expire given that they must not be older than three months.
A particular challenge arises when a listed joint-stock company is in the ownerhip chain. The new AML Act provides that an AML obligor is not obliged to identify UBO of a listed company which is subject to disclosure obligations in accordance with the B&H legislation. As only companies listed in Bosnia & Herzegovina are subject to such disclosure obligations, notaries interpret this provision so to require UBO identification of foreign listed companies. This has in practice led to roadblocks for the parties wishing to sign a notarial deed.
Possible solutions
To overcome these challenges, a risk-based approach instead of a rule-based approach to AML principles is required. The rule-based approach assumes the application of the same level of AML rigour to all cases, without assessing the actual risks posed by actual client. In contrast, the risk-based approach requires a broader perspective that assumes evaluation and tracking of individual risks. This approach results in more meaningful AML controls that do not impede regular business operations.
A practical solution to the current impasse would be to accept the ownership structure chart prepared by the client and an extract from the relevant UBO register of the country in which the ultimate legal entity in the ownership chain is located, rather than require individual registry extracts for each company in the ownership chain. This approach would require that AML obligors establish internal procedures to determine the risk categories and corresponding procedures for each client category.
It remains to be seen whether the implementing regulation, due by 27 August 2024, will contain rules in line with the above recommendation.
