Dr Panayiotis Alexakis

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OECD WORLD BANK 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

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1. Why is identifying the beneficial owner
   important?
2. What is meant by the term beneficial owner
3. Which are the main tools for identifying the
   beneficial owner?
4. The Greek experience

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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

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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.) efficiently
• 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
  companys IR department
• understand significant changes in the
  shareholders structure of the company. These
  changes may also signal future take-over attempts

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I.2) Why is identifying the beneficial owner
important for investment decisions?

• 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

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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 owners opportunity for direct access
  in the markets.

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I.4) Why is identifying the beneficial owner
important for reasons of state supervision?

• 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

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II) What is meant by the term beneficial owner

• 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.

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• 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 owners insolvency.

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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
  functions

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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 Directive)
• 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

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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
• HOWEVER
• 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

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III.2a) The end investor approach / pros

• 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.

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III.2b) The end investor approach / cons

• 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

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• 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 disadvantages
• Discrepancy between the data stemming from the
  CSD system and those stemming from the major
  holdings disclosure system, as regards the
  beneficial owners identity.
• Wrongful information to the issuer or to other
  info-receivers
• High level of legal risk on the circulation of
  the title through indirect holding chains, as
  above described.

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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 T1, 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 T3
• 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
  investors account, unless he is expressly
  authorized by the account holder.

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For more informationhttp//www.ase.gr

• Thank you very much for your attention!