Attachment J.6 - EDGE Investment Transparency Rapid Assessment Pilots.pdf

DISCLAIMER: This rapid assessment was produced at the request of the United States Agency for International Development.

It was prepared independently by International Development Group and EIF. The author’s views expressed in this assessment do not necessarily reflect the views of the United States Agency for International Development of the United States Government.

RAPID ASSESSMENT

PILOT 1: ULTIMATE BENEFECIAL

OWNERSHIP LAWS AND REGISTERS

NOVEMBER 2023

PHOTO CREDIT: CREDITSAFE

RAPID ASSESSMENT: PI | 1

Pilot 1: Ultimate Beneficial Ownership Laws and

Registers

USAID Economic Development, Governance, and Enterprise Growth (EDGE)

Investment Transparency Activity

November 2023

7200AA19C00055

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TABLE OF CONTENTS

ACRONYMS

ANALYTICAL OVERVIEW

PILOT SELECTION

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ACRONYMS

AML

AMLD

BiH

BO

BODS

CBK

CFT

CJSCs

EDGE

E&E

EITI

FATF

FMS

JSCs

PML

SOEs

UBO

USAID

Anti-Money Laundering

Anti-Money Laundering Directives

Bosnia and Herzegovina

Beneficial Ownership

Beneficial Ownership Data Standard

Central Bank of Kosovo

Combatting the Finance of Terrorism

Closed Joint-Stock Companies

Economic Development, Governance, and Enterprise Growth Project

Europe and Eurasia

Extractive Industries Transparency Initiative

Financial Action Task Force

Financial Monitoring Service

Joint-Stock Companies

Prevention of Money-Laundering

State-Owned Enterprises

Ultimate Beneficial Ownership

United States Agency for International Development

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ANALYTICAL OVERVIEW

The Ultimate Beneficial Ownership (UBO)1 is the real natural person, at the very end of a chain in a web of ownership and/or control, who has the ultimate authority and power to make decisions and exercise controls directly or indirectly; and who ultimately benefits from a legal entity. Such person may not necessarily be the legal owner or immediate shareholder in the legal entity. Disclosure and identification in the utmost transparent manner for UBO is essential for domestic and international

UBO review, regulatory, supervisory, enforcement, and compliance authorities to comprehend how companies are owned and controlled. Beneficial owner is defined under the Financial Action Task

Force (FATF). In most international regulations, it is defined as a person or entity who directly or indirectly owns more than 25% stake in a company, controls more than 25% of the voting rights, and/or exercises significant control over the company.

In 2003, the FATF set global standards on beneficial ownership (BO) for allowing authorities to obtain and hold current, adequate, and accurate information on the BO and control of companies and other legal persons, trusts, and foundations in a timely fashion. Official UBO dedicated registers are becoming increasingly required for filing and disclosing UBO data to ensure adequate transparency and easy access to required information for the purpose of UBO search and discovery.

Well-developed and comprehensive UBO registers are effective tools for identifying bad and corrupt actors hiding behind shell companies in complex ownership and control webs and chains in order to prevent malign influence and behavior, corrupt practices, and illicit and criminal activities such as money laundering, fraud, and tax evasion.

All selected Europe and Eurasia (E&E) countries (except Azerbaijan, Georgia, Bosnia and

Herzegovina (BiH), and Kosovo)2 have adopted legal frameworks for establishing BO registries through either specific legislation, in their Anti-Money Laundering/Combating the Finance of

Terrorism (AML/CFT) laws, and/or in their laws on registration of legal entities. There is no harmonized/standardized legal framework among these countries, including the definition of BO which dramatically varies from one country to another in EE region. All laws use the term BO except for Ukraine, which specifically refers to UBO. The definition of BO includes the term

“ultimate owner” or “ultimately owns” for all countries. The term “direct and indirect ownership” is however used in the laws of these countries. Please see Table 1 for the list of relevant laws.

Table 1 – UBO Legal Basis in Selected E&E countries

Country3 Legal Basis

Albania Law No. 112/2020 on the Register of Beneficial Owners of July 29, 2020;

amended in 2022.

1 FATF - In the context of legal persons, beneficial owner refers to the natural person(s) who ultimately* owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those natural persons who exercise ultimate effective control over a legal person. Only a natural person can be an ultimate beneficial owner, and more than one natural person can be the ultimate beneficial owner of a given legal person.

*Reference to “ultimately owns or controls” and “ultimate effective control” refer to situations in which ownership/control is exercised through a chain of ownership or by means of control other than direct control.

Reference to “ultimate effective control” over trusts or similar legal arrangements, including situations in which ownership/control is exercised through a chain of ownership/control.

2 The laws of these four countries however provide for BO definitions.

3 The Council of Europe has been supporting Azerbaijan in developing the legal framework for BO. In addition, the Council’s AML body (MONEYVAL) has (i) provided guidance to BiH in addressing AML/CFT deficiencies

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Country3 Legal Basis

Armenia Law No. HO-127-N on State Registration of Legal Persons, State Record-

Registration Subdivisions, Institutions of Legal Persons, and Individual of

March 19, 2012; and amendments No. HO-246-N and No. Ho-246-N of June

17, 2021.

Azerbaijan Law No. 767-IIIQ of the Republic of Azerbaijan on the Fight against the

Legalization of Property obtained through Crime and the Financing of

Terrorism of February 10, 2009.

BiH Law No 372/2009 on AML and Financing of Terrorist Activities of June 15, 2009.

Georgia Law No. No 5226-Iს on Facilitating the Prevention of Money Laundering and

Financing of Terrorism of October 30, 2019; amended in 2022.

Order of the Head of the State Insurance Supervision Service of Georgia No.

55 of May 30, 2022.

Kosovo Law No. 05/L-096 on the Prevention of Money Laundering and Combating

Terrorist Financing (PML/CFT) of May 25, 2016.

Central Bank of Kosovo (CBK) Instruction on Identification of Beneficial

Owners4 approved the Executive Board of the CBK of December 26, 2017.

Moldova Law No. 220/2007 on State Registration of Legal Entities and Individual

Entrepreneurs; and amendment by Law No 150 of October 28, 2021.

Law No. 308 on Prevention and Combating Money Laundering and Terrorism

Financing of December 27, 2017.

Montenegro Law No. 33/14 on Prevention of Money Laundering and Terrorist Financing of

August 4, 2014; last amended in 2021.

North Macedonia Law No. 120/2018 on the Prevention of Money Laundering and Financing of

Terrorist Activities of 2018; amended in 2022.

Serbia Law No. 41/2018 on Central Records of Beneficial Owners; amended in 2019, 2021, and 2023.

and increasing UBO transparency; and (ii) provided training to relevant authorities in Kosovo on UBO identification and delivered to Kosovo’s Financial Intelligence Unit a Monitoring Tool and related guidelines for evaluating the implementation of recommended improvements to its AML/CFT measures. In addition, the

Council has been providing guidance to Moldova in addressing remaining AML/CFT deficiencies and improving implementation of AML/CFT measures.

4 Pursuant to Article 36, paragraph 1, sub-paragraph 1.17, and Article 65, paragraphs 1 and 2, of the Law no.

03/L-209 on the Central Bank of the Republic of Kosovo (Official Gazette of the Republic of Kosovo, no.

77/16 August 2010), Article 85, paragraph 1 of the Law no. 04/L-093 on Banks, Microfinance Institutions and

Non-Bank Financial Institutions, and Article 66, paragraph 2 of the Law No. 05/L096 on the PML and CFT of

May 25, 2016.

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Country3 Legal Basis

Ukraine Law No. 2571 on Amendments to Certain Laws of Ukraine on Improving the

Regulation of UBO and the Ownership Structure of Legal Entities of

September 6, 2022.5

Law No. 361-IX On Prevention and Counteraction to Legalization

(Laundering) of Criminal Proceeds, Terrorist Financing, and Financing of

Proliferation of Weapons of Mass Destruction of December 6, 2019;

amended three times in 2020.

Law No. 755-IV on State Registration of Legal Entities, Individual

Entrepreneurs and Public Organizations of May 15, 2003.

Cabinet of Ministers of Ukraine and the National Bank of Ukraine Regulation

No. 1011 of September 19, 2023.6

BO thresholds for disclosure differs from one country to another. All countries however fall within the standard BO threshold of over 25% shares in the legal entity and over 25% of voting rights. In certain sectors, some countries have set lower thresholds. For example, Armenia has set 10% for extractive industries and Georgia has set 10% for commercial banks and no minimum threshold for broadcasting companies. The minimum threshold in BiH is 20%. Please see Table 2 below.

Table 2 – UBO Legal Thresholds

Country Thresholds7

Albania Direct ownership of 25% or more of shares/equity shares or ownership interests in a reporting entity.

Indirect ownership in one or more legal entities, which individually or jointly own 25% or more of the capital shares/quotas or ownership interests in a reporting entity.

Armenia 10% for extractive sector.

25% for the rest of economy.

5 This included amendments to the following laws: Law No. 3425- XII on Notaries of 1993; Law No. 2121-III on Banks and Banking Activities of 2000; Law No. 1909-IX on Insurance of 2002; Law No. 361-IX On

Prevention and Counteraction to Legalization (Laundering) of Criminal Proceeds, Terrorist Financing and

Financing of Proliferation of Weapons of Mass Destruction of 2019; Law No. 755-IV on State Registration of

Legal Entities, Individual Entrepreneurs and Public Organizations of 2003; Law No. 5076-VI on advocacy and advocates' activity of 2012; and Law No. 2258-VIII on Audit of Financial Statements and Audit Activities of

2017. On the one hand, this set of amendments improved the UBO review transparency, introduced a comprehensive methodology to identify UBOs of legal entities in Ukraine and other entities such as NGOs, increased liability for improper disclosure, and introduced enhanced control and reporting mechanisms. On the other hand, these amendments increased the number of legal exceptions.

6 The new BO methodology outlined in the Regulation largely meets the requirements of the EU-Ukraine

Association Agreement and implementing FATF.

7 As stated in respective legislation.

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Azerbaijan No specific percentage or qualitative indicator.

BiH At least 20% of the business share, stocks, voting right, or other rights

(directly or indirectly).

Direct or indirect beneficiary of more than 20% of property subject to management.

Georgia 25% or more than 25% of the holdings or voting shares of legal person

(directly or indirectly), or otherwise ultimate control over legal person.

Banks: 10%.

Broadcasting companies: no minimum threshold.

Kosovo 25% or more of shares and/or 25% or more of ownership interest.

Moldova At least 25% of shares or voting rights.

Montenegro Indirectly or directly owns at least 25% of the shares, voting rights, and other rights on the basis of which he/she/they participates in the management, or owns more than 25% share of the capital or has a dominating influence in the management of the assets of the business organization or legal person.

North Macedonia Direct: Ownership of over 25% of the shares, the voting rights, or the other rights in the legal entity or the ownership of 25% plus one share.

Indirect: Ownership or the control of the natural person (persons) over one or several legal entities that individually or jointly have over 25% of the shares or 25% plus one share.

Serbia Indirectly or directly the holder of 25% or more of the ownership interest, shares, voting rights or other rights, based on which he/she/they participates in the management of a registered entity, or participates in the capital of a registered entity with 25% or more of the ownership interest.

Ukraine Direct: At least 25% share of the authorized (contributed) capital or voting rights of a legal entity.

Indirect: No less than 25% share of the authorized (contributed) capital or voting rights of a legal entity through related individuals or legal entity; trusts or other similar legal formations; or the exercise of decisive influence by exercising the right to control, own, use or dispose of all assets or their shares; the right to receive income from the activities of a legal entity, trust or other similar legal formation; the right to decisive influence on the formation of the composition, the voting results of management bodies, and carrying out of transactions that make it possible to determine the main conditions for the economic activity of a legal entity; or the activity of a trust or other similar legal formation; or approve binding decisions that have a

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decisive influence on the activities of a legal entity, trust, or other similar legal formation, regardless of formal ownership.

According to the text of consolidated AMLDs, the EU defines BO as any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted:

➢ Direct ownership: a shareholding of 25% plus one share or an ownership interest of more than 25% in the customer held by a natural person;

➢ Indirect ownership: a shareholding of 25% plus one share or an ownership interest of more than 25% in the customer held by a corporate entity, which is under the control of a natural person(s), or by multiple corporate entities, which are under the control of the same natural person(s).

EU members may apply lower percentages. Article 3.6.a.i of the consolidated AMLD provides for only exempting from BO registration companies listed on a regulated market that are subject to disclosure requirements consistent with Union law or subject to equivalent international standards which ensure adequate transparency of ownership information. Some EU countries have interpreted this exemption to include subsidiaries owned by the listed companies. Further, some EU countries appear to have deviated from the AMLD by subjecting additional entities that are under direct or indirect control of public authorities. Some countries (e.g., Austria) have exempted churches,8 agricultural communities, and sole proprietors.9

Albania, Georgia, Montenegro, North Macedonia, Serbia, and Ukraine have excepted certain entities from UBO identification and verification. Please see Table 3 below. Ukraine has the highest number of exceptions. Albania, North Macedonia, Serbia, and Ukraine have legal exemptions of State-Owned

Enterprises (SOE) from UBO reporting requirements. In addition, Montenegro and North

Macedonia have similar exceptions for budget users/beneficiaries. Moreover, there are legal restrictions in certain countries which makes it difficult to identify UBO. For example, Georgian companies which are fully or partially owned by entities registered in offshore zones are not required to disclose ownership information due to secrecy.10 It is generally challenging to identify shareholders of Joint-Stock Companies (JSC) in Georgia. In Armenia, there are legal barriers to disclose the owners of Closed JSCs (CJSCs).11

Table 3 – Legal Exceptions from UBO Identification and Verification

Country Exceptions

Albania 1. Natural persons, traders registered in the trade register.

2. Companies fully owned by the state, religious communities, and political

8 Exemption of churches by Austria was later revoked in 2019.

9 Implementation of the UBO registration requirement in the EU/EEA countries, PriceWaterhouseCoopers, March 2022.

10 Around 3,200 companies fall under this category in Georgia.

11 Ten of the 26 companies with mining licenses in Armenia are CJSCs.

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Country Exceptions parties.

Montenegro 1. Entrepreneurs.

2. Limited liability company with one owner.

3. Direct and indirect budget users.

North Macedonia 1. Sole proprietorship.

2. SOEs12

3. Budget beneficiaries.

There is no need to identify and verify the identity of the BO if the client is a legal entity whose securities are listed on a domestic or foreign securities exchange from states which meet the international standards for prevention of money laundering and financing of terrorism and data for BOs that are transparent and publicly available.

Serbia 1. SOEs.13

2. Establishments which are wholly owned by the Republic of Serbia, an autonomous province, or a local self-government.

Ukraine 1. Political Parties.

2. Trade Unions.

3. Lawyers’ associations and law firms.

4. Organizations exercising professional self-government in the field of notary services.

5. State bodies and local authorities.

6. Chambers of commerce and industry.

7. Public companies (legal entities established in the form of a public joint stock company with shares listed on at least one stock exchange (regulated market) from the list of foreign stock exchanges (regulated markets), which is formed in accordance with the procedure established by the Cabinet of

Ministers of Ukraine, and which are subject to the requirements for disclosure of information on UBO equivalent to those adopted by the

European Union).

12 Without indication whether fully or partially owned by the State.

13 Ditto.

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Country Exceptions

8. Housing, summer cottage, gardening, and garage associations.

9. Associations of co-owners of apartment buildings and associations of owners of residential buildings.

10. Agricultural associations and agricultural cooperative associations included in the register of non-profit institutions and organizations.

11. Separate structural subdivisions (subsidiaries) with the status of a legal entity (except for a separate subdivision of foreign non-governmental organizations).

Table 4 below summarizes findings related to UBO registers, review bodies, and respective legal basis. Albania, Armenia, North Macedonia, and Serbia have dedicated registers for UBO. In Moldova and Montenegro, the register for UBO is within the central register of legal entities. In Ukraine, it is part of the Unified State Web Portal of Electronic Services (unified register) – Portal DIIA.14

Although the relevant laws of Azerbaijan, BiH, Georgia, and Kosovo articulate BO definitions, they do not call for establishing BO registers. Thus, BO registers have not been developed in these countries. Banks and financial institutions in BiH, Georgia, and Kosovo must conduct due diligence of customers and identify and verify UBO. Armenia is the only country publishing BO data in line with

Beneficial Ownership Data Standard (BODS).

The 2022 Amendments15 to the Law of Georgia No 5226-Iს on Facilitating the Prevention of Money

Laundering and Financing of Terrorism of October 30, 2019 call for the adoption of a legal act by the supervisory body to determine the electronic identification and verification of a client, the identification and verification of a beneficial owner, and the procedure for examining the ownership and control (management) structure of a client (Article 12.6). The Order of the Head of the State

Insurance Supervision Service of Georgia No. 55 issued on May 30, 2022 for implementing the 2022

Amendments (including Article 12.6) fell short of requiring the establishment of a UBO register.

Table 4 – UBO Registers and Review Bodies in Selected EE Countries

Country UBO Register Review Body

Albania Register of BOs for legal entities.

Court of Tirana for Not-for-Profit

Organizations.

National Business Centre16 under the

Ministry of Finance and Economy.

Armenia E-Register of BO Electronic

Declaration System.

State Registry under the Ministry of

Justice.

14 “DIIA” means “Action” in Ukrainian.

15 Law No. 1566 of May 11, 2022.

16 The National Business Center is the central government agency that administers Albania’s commercial registry.

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Azerbaijan No clear legal basis. The Law calls for establishing a centralized internal archive.17 No UBO register exists.

Financial Intelligence Unit - Financial

Monitoring Service (FMS)18 under

National Bank of Azerbaijan.

BiH

No reference in the Law for establishing a UBO register.

BiH Federation): Private providers

(banks) when opening a bank account.

Republic of Srpska: Commercial courts, when incorporating a business entity with the competent court.

Georgia No clear legal basis. No UBO register exists.

Private providers (financial institutions) are obliged to identify and verify a beneficial owner and take reasonable measures for the verification thereof based on a reliable source.

Kosovo No reference in the law for establishing a UBO register. No

UBO register exists.

Private providers (all reporting subjects: e.g., banks, financial institutions, casinos, real estate agents, lawyers, notaries) must conduct customer due diligence.

Moldova Trade Register (state registration of legal entities).

Public Services Agency.19

Montenegro UBO Register within the Central

Register of Business Entities.

Revenue and Customs Administration under the Ministry of Finance and

Social Welfare.

North Macedonia Register of UBOs. Central Registry (independent).

Serbia Central Records.20 Business Registers Agency

(independent).

17 Article 12.1.2 of Law 767: Establishment of a centralized internal archive to identify and verify the customers, the persons acting on behalf of customers, beneficial owners, and transactions, or to determine whether a potential customer, a customer, or the beneficial owner is a politically exposed person of a foreign country.

18 FMS shall take measures on identification and verification of customers and beneficial owner under certain circumstances outlined in Article 9 of Law No. 767 19 Reports to a Council which consists of: Secretary General of the Government (Chairman); State Secretary of the Government; Deputy Prime Minister of the Minister of Economic Development and Digitization; State

Secretary of the Ministry of Economic Development and Digitization; and Head of the Cabinet of the Prime

Minister.

20 Defined in Law No. 41 as a public, unique, central, electronic database of information about natural persons who are beneficial owners of a registered entity.

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Ukraine Unified State Web Portal of

Electronic Services (unified register)

– Portal DIIA.

• Enterprise “DIIA” reporting to the Ministry of Digital

Transformation.

There is an obvious need for harmonization of legislation governing AML/CFT among E&E countries, particularly provisions related to UBO definition, institutional framework for BO disclosure, review, identification, and verification. Given most of these countries’ aspiration to accede to the EU, harmonization with the EU Anti-Money Laundering Directives (AMLD), especially the Fourth

AMLD21 concerning UBO definition and the creation of a BO register, should be a priority in addition to full compliance with FATF recommendations. The current legal exceptions from disclosure need to be revisited to ensure broader coverage. Convergence of legal frameworks toward EU BO directives and regulations should be a priority during the next two to three years.

The data types, structure, and format of UBO disclosure registers should be standardized among these countries and aligned with those of EU countries to allow interoperability to facilitate, in the long-run, sharing and linking among UBO registers. Following the BODS22 and Extractive Industries

Transparency Initiative (EITI) standards (on disclosure of BO information for extractive companies) by all countries should also be considered. Effective algorithms / identifiers, data analytics tools / methodologies, and verification and auditing modules, based on appropriate digital solutions that use artificial intelligence where possible, should be developed to: 1) help in identifying the full range of relationships and ensuring data consistency and accuracy through effective verification; and 2) enable effective search and discovery. Open data format and access should be followed to allow easy access using a user-friendly interface with graphical illustration of relationships.

FATF Recommendation 24 (Transparency and Beneficial Ownership of Legal Persons) requires countries to ensure adequate, accurate, and up-to-date information on the BO and control of legal persons that can be obtained or accessed rapidly and efficiently by competent authorities through a register of BO. Periodic MONEYVAL23 24 evaluations25 and follow-up reports in recent years have revealed numerous deficiencies in many of the selected E&E countries. These vary from one country to another and include incomplete, inaccurate, and not current records in existing registers. Review bodies do not appear to always check the accuracy of filing diligently. In addition, most businesses in rural areas in many of these countries are not registered in the UBO registers. Further, time limits for registration and updating information (especially when there is ownership change) are not always observed. Last, access in a timely manner to UBO data is severely hampered in countries which do not presently have registers. These deficiencies and practices need to be addressed through, inter alia: capacity building; awareness; legislative changes; optimizing / streamlining procedures for submitting and verifying UBO; improving UBO registers; and setting effective and deterrent

21 Adopted in 2015 and entered into force in June 2017.

22 BODS is an open standard providing guidance for collecting, sharing, and using high-quality data on BO.

23 MONEYVAL is a permanent monitoring body of the Council of Europe entrusted with the task of assessing compliance with the principal international standards to counter money laundering and the financing of terrorism.

24 All concerned countries are MONEYVAL members except Kosovo.

25 These range from 150 to 300 pages per country.

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sanctions for non-compliance with UBO rules. A detailed assessment to capture the current situation is warranted. This should lead to a time-driven reform agenda.

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PILOT SELECTION

The Economic Development, Governance, and Enterprise Growth (EDGE) Project has developed the following criteria for selecting countries to conduct Pilot 1 on UBO registers:26

1. USAID mission interest;

2. Local demand / Host Government full-support / political will;

3. Other USAID projects providing support related to UBO registers;

4. Implementation of EU AMLD and FATF Recommendations;

5. Level of Russian / Chinese economic influence and dependence;

6. Existence of register and its adequacy;

7. Level of compliance in registering;

8. Concerns by the investment community; and

9. FATF watchlist.

First and foremost, it is critical to determine local demand and the interest of the USAID missions in the respective countries. This will largely depend on two factors:

1. Local demand by stakeholders, specifically host government review, regulatory and supervision bodies, and their full support for conducting Pilot 1. Our sources indicate that most countries are committed to comply with FATF recommendations and address deficiencies identified in MONEYVAL evaluation and follow-up reports. However, this will have to be confirmed through discussions between USAID missions and counterparts or directly by

EDGE with counterparts, if authorized to do so. For obvious reasons of non-interest in cooperation with USAID, Azerbaijan will not be considered for this pilot; and

2. Existence of USAID project(s) delivering support related to UBO registers. To the best of our knowledge, there are presently no USAID projects in any of these countries providing technical assistance or capacity building related to UBO registers.

To varying degrees, all concerned countries need to implement reforms (including legislative reforms) for harmonizing with EU AMDL and standardize to the maximum possible extent UBO definitions, review, and verification processes. Similarly, each of the countries need to implement reforms and measures for addressing deficiencies and practices identified in the MONEYVAL evaluation and follow-up reports. This factor is, to a large extent, neutral in the selection criteria.

The lack of UBO registers is the most important technical factor in the selection criteria. BiH, Georgia, and Kosovo have not developed UBO registers. The absence of an adequate legal framework for UBO registers in some countries (BiH, Georgia, and Kosovo) could complicate supporting these countries in establishing UBO registers. An order could however be issued in

Georgia based on Law No. 5226-I of 2019 to establish the legal basis for developing a UBO register.

26 Factors 1 and 2 must hold true before considering factors 3-9.

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Similarly, it would be possible to work with BiH and Kosovo to adopt necessary legislation for providing the legal framework for UBO registers. USAID can support these three countries by:

building awareness; providing model legislation for adopting UBO legal framework; providing a modality for developing UBO registers covering, inter alia, functionalities, design, required data sets, and structure; search and analytical tools for discovery; and building related capacity.

The level of compliance with UBO registration rules and procedures is another key factor. There are honest concerns by companies about the lack of UBO compliance by fraudulent companies, which tend, for example, to underbid on public procurements. This issue is acute for Ukraine particularly, where potential investors in the reconstruction effort raised serious concerns regarding

BO transparency and accountability during the International Ukraine Recovery Conference in

London (June 21-23, 2023). During the conference world leaders stressed the importance of BO transparency as a key building block for Ukraine’s future. As noted, MONEYVAL evaluations and numerous articles in various countries, as well as reports / articles by civil society organizations point out a significant lack of compliance by businesses and review bodies, which tend to not check the accuracy and completeness of submitted information. There is a need for building awareness about BO’s responsibilities for various stakeholders. There is a lack of adequate or up-to-date guidelines on BO. Some countries27 have amended their BO legislation in recent years without making any updates to their BO guides for businesses and review bodies. Opportunity exists for supporting select countries in this respect.

Exceptions from UBO disclosure and review is another important factor. The exceptions of SOEs in

Albania, North Macedonia, and Serbia and budget users in Montenegro and North Macedonia as well as the closed nature of CJSCs in Armenia and the no disclosure for offshore companies in Georgia might waive subjecting in some cases Chinese and Russian investors in these countries to UBO disclosure and review. Policy advice in this area can be delivered to reduce and / or eliminate such exceptions.

Based on the above, we suggest that the three pilots for UBO registers be selected from the following countries in the order of priority:

1. Georgia: Given the non-existence of UBO register in Georgia; the priority to comply with

EU requirements for advancing accession and Euro-Atlantic integration; the barriers for disclosure by off-shore companies; and the challenges in identifying JSC shareholders.

2. Ukraine: Given the high level of exceptions from UBO disclosure and review; the anticipated high level of investments for reconstruction and economic recovery and concerns by investors about BO transparency and accountability in Ukraine; and the priority to comply with EU requirements for advancing accession and Euro-Atlantic integration.

3. BiH: Given the non-existence of a UBO register and the high level of Chinese and Russian investments in the country.

4. Kosovo: Given the non-existence of a UBO register.

27 For example, Ukraine amended Law No, 2571 in 2022; and adopted a regulation introducing a comprehensive methodology to identify UBOs of legal entities in Ukraine and other entities such as NGOs, investment institutions/funds, and partnerships established in foreign jurisdictions in September 2023.

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5. Albania: Given that Albania is the only country on the FATF watchlist; the significant exceptions from UBO review; and Chinese investments in the country.

Opportunities for Engagement in these countries are the following considering the allocated resources (six weeks per pilot / per country) under the USAID Investment Transparency Activity

Buy-in. Targeted support could include the following:28

Georgia, BiH, Kosovo

1. Develop a toolkit for establishing effective UBO frameworks.

2. Disseminate and build training on its basis in these three countries.

3. Develop model legislation for establishing legal framework for UBO registers based on EU

AMLDs to be adopted by these countries.

4. Build capacity on understanding required UBO reforms and provide guidance and support for adaptation to local legal norms and practices in all three countries.

5. Develop modality and roadmap for establishing UBO registers, based on, inter alia, EU BO registers, BODS, and EITI standards.

6. Build capacity and provide guidance for developing UBO registers in all three countries.

The expected results are draft legislation on UBO register put through the legislative process and functional design for UBO register agreed upon in each of the three countries.

Ukraine

1. Develop a guide for UBO disclosure reflecting Law No. 361 of 2019 and its amendments;

Law No. 2571 of 2022; and Cabinet of Ministers of Ukraine and the National Bank of

Ukraine Regulation No. 1011 of September 19, 2023. The guide should cover legal persons and legal arrangements.

2. Provide training to private sector, financial institutions, and civil society based on this guide.

3. Develop guide on verification and identification of UBOs of legal entities and other types of entities and arrangements as per new methodology in Regulation No. 1011.

4. Provide training to review body and financial institutions based on this guide.

5. Develop and discuss with relevant authorities a policy paper for reducing the number of excepted entities from UBO disclosure.

6. Assess required changes to Unified State Web Portal of Electronic Services (unified register)

– Portal DIAA to align with the new comprehensive methodology for identifying UBO as outlined in Regulation No. 1011 of September 2023.

Albania and Other Countries

1. Build capacity of review bodies to consistently check accuracy of filing.

2. Develop practical guidelines for UBO registration and build awareness of businesses in rural areas to ensure greater compliance.

28 ITA is open to consider suggestions for other priorities by respective missions.

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3. Provide technical advice on measures (e.g., penalties) for ensuring that time limits for registration/updates are observed.

Final Note:

In all pilot countries, ITA will keep respective USAID missions informed on progress and issues; and cooperate with relevant stakeholders in the public sector and private sector, including financial institutions, banks, the legal community, civil society organizations (especially local transparency organizations), and other relevant parties.

Some of the materials (e.g., toolkit for establishing effective UBO frameworks) developed under these pilots will also be disseminated to non-pilot countries to take appropriate actions for enhancing their UBO legislation and registers.

KEY NEXT STEPS

1. By mid-December 2023, USAID missions to confirm interest and local demand and counterpart interest in performing aforementioned activities in selected countries.

2. USAID E&E to make a final decision on the three selected countries and specific activities in each country by December 22, 2023.

3. TORs for engaging international and local experts to be developed by ITA and approved by

USAID E&E by end of December 2023.

4. First round launched on/or about January 15, 2024; second round on/or about March 15, 2024;

and third round on/or about May 15, 2024.

DISCLAIMER: This rapid assessment was produced at the request of the United States Agency for International Development. It was prepared independently by International Development Group and EIF. The author’s views expressed in this assessment do not necessarily reflect the views of the United States Agency for International Development of the United States Government.

PILOT 2A: CONFERENCE ON COMPLYING

WITH EU-ACQUIS-CHAPTER 5

Photo Credit: Emerging Europe

RAPID ASSESSMENT: P2a | 2

PILOT 2A: CONFERENCE ON COMPLYING WITH

EU-ACQUIS-CHAPTER 5

RAPID ASSESSMENT: P2a | 3

ACRONYMS

INITIAL CONCEPT FOR A CONFERENCE ON COMPLYING WITH EU ACQUIS-CHAPTER 5

INITIAL FINDINGS ON COMPLIANCE WITH EU ACQUIS-CHAPTER 5

KEY NEXT STEPS

RAPID ASSESSMENT: P2a | 4

AA Association Agreement

BiH Bosnia and Herzegovina

CEPA Comprehensive and Enhanced Partnership Agreement

DCFTA Deep and Comprehensive Free Trade Agreement

EDGE Economic Development, Governance, and Enterprise Growth Project

EU European Union

GPPD Global Public Procurement Database

GPA Government Procurement Agreement

IMF International Monetary Fund

MEAT Most Economically Advantageous Tender

PCA Partnership and Cooperation Agreement

PP Public Procurement

PPP Public – Private Partnership

SAA Stabilization and Association Agreement

SMEs Small and Medium Size Enterprises

SOEs State-Owned Enterprises

USAID United States Agency for International Development

WTO World Trade Organization

RAPID ASSESSMENT: P2a | 5

INITIAL CONCEPT FOR A CONFERENCE ON COMPLYING WITH

EU ACQUIS-CHAPTER 5

A sound legal, regulatory, and institutional framework for Public Procurements (PP), Public Private

Partnerships (PPPs), and concessions is crucial to: improve fiscal efficiency and allow governments to effectively utilize scarce budget resources; provide best value for money; increase transparency and accountability; ensure non-discriminatory practices; enhance competition; increase participation of Small and Medium Size Enterprises (SMEs) in PP; attract foreign investors; enable the provision of quality public services at competitive prices for consumers; and instill strong safeguards against corruption. These will have a positive impact on economic growth, governance, and private sector development and will contribute to advancing integration into the European Union (EU).

Achieving these objectives requires implementing legal and regulatory reforms and strengthening institutional mechanisms and capacities for effective management, complaint/review processes, legal enforcement, and PP oversight by a wide array of stakeholders including state audit services (performance audit), civil society, whistleblowers, media, and parliamentary oversight.

According to the International Monetary Fund (IMF),1 underdeveloped public infrastructure in the

Western Balkans poses a major barrier for higher economic growth and faster income convergence. This is also true for other E&E countries. PPP will reduce fiscal expenditures of these countries on Capital

Investment Projects and diversify risks by relying on the private sector to address their infrastructure gaps. A clear and well-designed PPP governance framework covering all stages of the PPP life cycle is critical to encourage private investments in PPP.

The purpose of this rapid assessment2 is to identify typical and most common issues facing E&E countries in complying with EU Acquis Chapter 53 to advance reforms and fulfill requirements for EU membership.

Based on findings, the Economic Development, Governance, and Enterprise Growth (EDGE) Project ITA

Buy-in will design, during the coming weeks, a conference to take place on/or about May 20, 2024, in

1 The Future of PPPs in Western Balkans, IMF, February 2023.

2 Systematic article-by-article legal conformity analysis (using concordance tables) of existing laws and sublegal acts

(governing PP, PPP, and Concessions) and assessment of the adequacy and effectiveness of relevant institutions is necessary. This is not within the scope of this Buy-In.

3 Chapter 5 is one the 35 chapters of the EU Acquis with which countries, having AA and/or SAA and/or seeking to accede to the EU, must comply. Chapter 5 on public procurement includes general principles of transparency, equal treatment, free competition and non-discrimination. In addition, specific EU rules apply to the coordination of the award of public contracts for works, services and supplies, for traditional contracting entities and for special sectors. Chapter 5 also specifies rules on review procedures and the availability of remedies. Specialized implementing bodies are required. For more information please see: https://neighbourhood-enlargement.ec.europa.eu/enlargement-policy/conditions-membership/chapters-acquis_en#:~:text=Chapter%205%3A%20Public%20procurement,free%20competition%20and%20non%2Ddiscrimin ation.

RAPID ASSESSMENT: P2a | 6 cooperation with the E&E Bureau and will consider input from respective USAID missions and beneficiaries/stakeholders.

This intervention will facilitate full compliance with EU acquis for E&E countries through focusing on addressing gaps and deficiencies in their current legal and institutional frameworks governing PP, PPP, and

Concessions. The conference will serve as a forum for exchanging experiences, failures, and successes;

and drawing country-specific roadmaps to achieve full compliance with EU Acquis – Chapter 5.

The location of the conference is to be determined. It is envisioned that the conference will take place over a period of three days:

⮚ Day 1: Presentations by representatives (TBD) of participating countries on progress, challenges in addressing outstanding issues, successful experiences and failures, and current plans for achieving full compliance with Acquis-Chapter 5.

⮚ Day 2: A series of panels involving international experts (AM on PP; and PM on PPP and

Concessions) for sharing regional experiences and best approaches for compliance with EU

Acquis. In addition to focusing on EU compliance, some focus will be on stressing the economic benefits of becoming a member of the World Trade Organization (WTO) Government

Procurement Agreement (GPA) for attracting foreign investors.

⮚ Day 3: Mini-workshops for facilitating the development of action plans for advancing compliance with EU Acquis by participating countries under guidance of international experts.

Subsequently, a report summarizing conference proceedings and actionable outcomes will be developed and disseminated to all stakeholders.

Participants in this conference will include:

⮚ Representatives from relevant organizations in beneficiary countries (please see Table 1 below) as well as relevant EU representatives.

⮚ Representatives of business associations and committees:

● Parliamentary Committees - Members of committees responsible for legal and economic affairs and procurement oversight

● Chambers of Commerce and industry

● American Chamber of Commerce

● European Business Association

⮚ Representatives of Civil Society:

● World Association of Public Private Partnerships Units and Professionals

● Open Government Partnership

● OECD Anti-Corruption Action Network

● Transparency International’s Global Coalition Against Corruption

● Organized Crime and Corruption Reporting Project

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● Global Financial Integrity

● Coalition for Integrity

⮚ International organizations as participants and speakers/panelists: World Bank, European Bank for Reconstruction and Development, European Investment Bank, Organization for Economic

Co-operation and Development, World Trade Organization, Asian Development Bank, and the

IMF.

Participants other than those listed in Table 1 will be responsible for their own travel and lodging expenses.

No fees will be charged for participation.

This document will be updated as needed based on additional findings and input from USAID missions and beneficiaries/stakeholders.

Table 1 – Stakeholders in Public Sector

Countries PP Administration

Body

Review, Complaint, or

Dispute Body

PPP Administration

Body

Albania Public Procurement

Agency

Public Procurement

Commission

The PPP and Concessions

Unit within the Ministry of

Economy

Armenia Ministry of

Finance/Department of

Public Procurement

Policy

Procurement Complaint

Review Board

PPP Unit under the

Ministry of Economy

Azerbaijan The State Service for

Antimonopoly and

Consumer Market

Control under the

Ministry of economy

Procurement Agency

Manager

The Ministry of Economy

Bosnia and

Herzegovina

(BiH)4

Public Procurement

Agency

Office for Review of

Appeals

The Concession

Commission

Georgia State Procurement

Agency

Dispute Resolution Council PPP Agency

Kosovo Public Procurement

Regulatory Commission

The Procurement Review

Body

PPP Committee under the

Ministry of Finance

4 Some variations exist at Republika Srpska and other entities and cantons.

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Countries PP Administration

Body

Review, Complaint, or

Dispute Body

PPP Administration

Body

Moldova Public Procurement

Agency

Complaint Settlement

Agency

PPP unit, within the Public

Property Agency

Montenegro Public Procurement

Agency

Commission for protection of Rights

PPP Unit within the

Ministry of Economic development5

North

Macedonia

Public Procurement

Bureau

The State Appeals

Commission on Public

Procurement

PPP Unit within the

Ministry of Economy

Serbia Public Procurement

Office

The Republic Commission for the Protection of Rights in Public Procurement

Procedures

The PPP Commission/PPP

Unit

Ukraine Public Procurement

Department under the

Ministry of Economy

The Antimonopoly

Committee of Ukraine

The State Agency on

Support of PPP (“the PPP

Agency”)

Source: Compiled by EDGE

INITIAL FINDINGS ON COMPLIANCE WITH EU ACQUIS-

CHAPTER 5

Initial findings on the level of compliance with EU Acquis are mainly based on Communication on EU

Enlargement policy reports (for Albania, BiH, Kosovo, Montenegro, North Macedonia, and Serbia) from

2022 and Commission Analytical Reports on Alignment with the EU Acquis (for Georgia, Moldova, and

Ukraine) from 2023. This is complemented by additional research and quick review of existing laws, analysis of data provided under the World Bank Global Public Procurement Database (GPPD), and findings in the Interim Report.

All selected E&E countries (except Armenia and Azerbaijan) are seeking to become EU members.6

Please see Table 2 below for current EU integration and WTO membership status. Of the seven WTO

Members in the region, Albania7 and Georgia8 are the only two countries which have not yet acceded to

5 The Commission on Concessions within the Ministry of Economy has a general oversight function.

6 In light of this, Armenia and Azerbaijan will not be included under this Pilot.

7 As of date, Albania has not submitted an entity offer or entered into accession negotiations. In 2020, Albania indicated that its new law complies with the legal text of the Revised GPA, but no conformity checklist has been completed. Albania indicated to the WTO that it remains committed to join the GPA, but it is not in a position to engage in the accession process due to administrative capacity constraints.

8 Georgia submitted in 2003 a draft informal/initial entity offer for launching accession negotiations. The process however stalled in 2004. Georgia indicated in 2020 that its draft law on procurement (which was adopted

RAPID ASSESSMENT: P2a | 9 the WTO GPA and have applied for accession in 2001 and 2009 respectively. Apart from making GPA coverage commitments enhancing market access to foreign bidders/investors, GPA membership requires full compliance with the Revised GPA. None of the selected E&E countries have achieved full compliance with the legal text of the Revised GPA. Countries seeking EU membership are required to fully comply with Chapter 5 of the EU Acquis. Specifically, they need to have in place appropriate laws, institutional mechanisms, and efficient remedy systems compliant with:

1. Directive 2014/24/EU of the European Parliament and of the Council of February 26, 2014 on

Public Procurement;

2. Directive 2014/25/EU of the European Parliament and of the Council of February 26, 2014 on procurement by entities operating in the water, energy, transport, and postal services; and

3. Directive 2009/81/EC of the European Parliament and of the Council of July 13, 2009 on the coordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defense and security, and amending Directives 2004/17/EC and 2004/18/EC.9

Table 3 shows the EU Chapter 5 Review Ranking.10 Armenia and Azerbaijan are not reviewed for compliance with Chapter 5. None of the selected countries are at a well-advanced stage. Moldova is notably still at an early stage. Montenegro is the most advanced among all these countries. All countries have adopted laws on PP, PPP, and concessions (except no specific laws on concessions in Armenia, Azerbaijan, and Kosovo).11 Please see Table 4 below. PP, PPP, and Concessions frameworks are not harmonized among E&E countries.

subsequently in 2023) complies with the legal text of the Revised GPA, but no conformity checklist has been prepared to verify such. According to local experts, there is no opposition in Georgia for GPA accession. The process seems to have fallen through the cracks and someone at the leadership level needs to order its resumption. Capacity building is required to understand the process and prepare a formal entity offer. Awareness about GPA benefits is needed to galvanize public and private sector support to push for accelerating the process.

9 Public utilities, whether state or privately-owned, with a dominant position that could distort competition are subject to special procurement rules.

10 Ranking - worst to best:

1. Early stage.

2. Some level of preparation.

3. Moderately prepared.

4. Good level of preparation.

5. Well…