Bahrain: Ultimate Beneficial Owner and Economic Substance Return

The Ministry of Industry, Commerce and Tourism (MOICT) has recently introduced Ministerial Order No. 83 of 2020 regarding the Standards, Controls and Rules of Disclosing the Ultimate Beneficial Owner (UBO) (the UBO Order) along with further guidance notes relating to the Ministerial Order No. 106 of 2018 regarding the Requirements of Validating the Actual Economic Substance of Entities’ Activities (the ESR Order) in the Kingdom of Bahrain (Bahrain).

Purpose

The UBO Order along with the ESR Order have been introduced by the MOICT in an effort to:

1. tackle and prevent anti-money laundering and counter-terrorist financing;
2. circumvent the misuse of corporate vehicles for illicit purposes;
3. prevent tax evasion and profit shifting;
4. comply with the Financial Action Task Force's standards on transparency of the market to further prevent the above; and
5. preserve the rights of all of consumers, shareholders, partners and investors.

The illegal activities mentioned above may arise due to the abuse of Commercial Registers (CR). Therefore such negative effect could be considerably reduced and circumvented if information regarding the legal owner and beneficial owner as well as the source of the entity's assets were readily available to the competent authorities.

UBO Order

A UBO is a natural person who (amongst others) exercises ultimate control over a legal entity or on whose behalf a transaction is being conducted. The UBO Order defines a UBO as a natural person:

1. owning or controlling, directly or indirectly, a percentage equal to or exceeding 10% of the capital or voting rights of the trader registered in the commercial register (the Registered Person);
2. where the Registered Person is a legal person owned by another legal person or legal arrangement, then the UBO is the natural person who is the ultimate owner of the ownership chain or who exercises effective control over it;
3. who has the ability to make or influence decisions in the Registered Person either directly or through other means such as personal communications or through participation in the financing of the project, family relations or through any kind of contract, arrangement, understanding, relationship or through a hierarchical entity (in the ownership chain of legal entities);
4. who contributes to financing the business of the Registered Person or its assets, or that transactions are made in its favor, even if these contributions are hidden;
5. who has direct or indirect control over the operations of the Registered Person through a management agreement, power of attorney or similar instrument;
6. who has ultimate effective control through a series of ownerships or other means of control other than direct control of a Registered Person;
7. who may exercise control through management positions within the Registered Person in such a way that affects the strategic decisions or influences the general direction of the Registered Person; and / or
8. that satisfies any other conditions, criteria, and rules determined by the Minister of Industry, in accordance with international requirements and standards that guarantees the best practices related to improvement of the international tax compliance, anti-money-laundering and counter-financing of terrorism.

The UBO Order obliges all CRs in Bahrain to register the details of the relevant UBO(s). Notwithstanding the same, those licensed by the Central Bank of Bahrain are exempt from the UBO Order.

ESR Order

The ESR Order obliges certain types of entities registered in Bahrain to have an economic presence in Bahrain and carry out certain obligations (including, but not limited to, record keeping, outsourcing, requirements relating to board/shareholder meetings, intellectual property requirements, amongst others). In this regard, the relevant entities are required to submit a form detailing the same.

The aforementioned entities include entities that carry out the following:

1. activities of head offices;
2. activities of holding companies;
3. distribution activities,
4. service centers;
5. shipping activities,
6. leasing activities; and / or
7. intellectual property activities.

Consequences of noncompliance

In the event of failure to provide the UBO details in accordance with the UBO Order, the MOICT may impose the following penalties:

1. suspend the CR;
2. impose administrative fines ranging between Bahraini Dinars (BHD) 1,000 to BHD 100,000; and / or
3. remove the registered person from the CR,

(together, Penalties).

As for noncompliance with the ESR Order, the MOICT will give the entity a 30-day written notice to rectify the violation, from the date of the notice. In the event of failure to adhere to the notice, the MOICT shall impose the Penalties against the entity as deemed appropriate.

Next steps

Entities and relevant stakeholders in Bahrain should be aware that details of the UBO along with the ESR need to be updated on an annual basis.

Given the recent introduction of the UBO Order, the MOICT has allowed a grace period of up to six months for entities to comply with the same. That said, it is advisable to complete the registration of the UBO at the earliest in order to avoid the aforementioned penalties.

To ensure compliance with the UBO Order and ESR Order, contact our team members who are well equipped to provide legal advice and provide guidance to stakeholders.