Chronicle of a Foreseen Change: New Transparency Rules for Corporations… or Are They?

Some background information

In recent years, money laundering, terrorist financing, and tax evasion have dominated the agenda of international organizations and individual nations. Milestones with global significance, such as the so-called Panama Papers and the financing of terrorism in the Middle East have reaffirmed the international community’s obligation to take precautionary measures to prevent similar incidents and, in turn, to establish standards that provide greater financial safeguards in economic transactions.

In this context, the Financial Action Task Force, better known by the acronym FATF, the leading international body in the fight against money laundering, of which Paraguay is a member, issued in 1990 (and subsequently revised and expanded in 1996, 2001, 2003, and 2012), 40 recommendations that outline a framework of measures to combat money laundering. Recommendation 24 of the aforementioned document pertains to the identification of the beneficial owner of legal entities. The recommendation stipulates that countries with legal entities that may issue bearer shares or bearer share certificates must take effective measures to ensure that these instruments are not misused for money laundering. In other words, the FATF suggests that the beneficial owners of corporations with bearer shares be identified.

New Law 5895/17 – Transparency Requirements for Corporations

This situation led to the recent enactment in our country of Law 5895/17, “WHICH ESTABLISHES TRANSPARENCY RULES FOR JOINT-STOCK COMPANIES,” which, in thirteen articles, provisions regarding the new regime for corporations and amends the corporate provisions of our Civil Code, bringing them into line with the FATF’s recommendations. It is worth providing a brief analysis of the main provisions of the new law.

Transparency Regime Chosen by Paraguay – Share Swap

First, it is worth noting that the FATF, within the framework of its recommendations on this matter, offers possible solutions to the problem of bearer shares. These include the following mechanisms: 1) a ban on bearer shares; 2) conversion of bearer shares into registered shares; 3) blocking of shares at a regulated financial institution; 4) a shareholder registry that allows for their identification.

Paraguay has opted for the second alternative. Article 3 of the new law stipulates that bearer shares must be exchanged for registered shares within twenty-four months of the law’s effective date. The exchange of shares must be carried out before the company’s board of directors, with notification to the Treasury Attorney General’s Office.

Article 2 deserves special attention, as it provides that the articles of incorporation of companies whose capital is represented by bearer shares shall be amended by right, once the law takes effect. This would mean that a meeting to amend the bylaws is not required, as provided for in the second part of the article. We understand that this provision, while seemingly innocuous, could nevertheless pose some practical difficulties, since the change would not be expressly recorded in the company’s statutory records.

Penalties

Articles 4 and 6 set forth some of the possible consequences for legal entities in the event of failure to comply with exchange obligations, which may range from a prohibition on conducting transactions in the financial system, to the suspension of the Single Taxpayer Registry (RUC), to fines, ranging from fifty to five hundred times the minimum daily wage for various unspecified activities.

Tax Exemption and Exception for SAECAs

For its part, Article 7 establishes a tax exemption for the conversion of shares, which serves as an incentive mechanism to carry out the exchange required by law without significant “costs” to the parties subject to the requirement.

According to Article 8, public limited companies that issue securities through public offerings and operate on the stock market are excluded from the scope of the law. We understand that the ratio legis The basis for this provision lies in the stringent regulations governing this type of company, which is overseen by the National Securities Commission (CNV).

Amendments to the Civil Code

Finally, the law has also included some amendments to the Civil Code to facilitate the implementation of the new body of law. Articles 1050, 1069, and 1070 of the Paraguayan Civil Code have been amended. Essentially, compared to the previous version, these amendments eliminate the possibility for corporations to issue bearer shares.

Concluding Remarks

The new transparency regime for corporations is, without a doubt—and without delving into the technical aspects of its implementation—a legislative success on the part of the government, in its effort to comply with the recommendations of international organizations in the fight against money laundering, terrorist financing, and tax evasion. The—now enshrined—intent of this recent amendment brings Paraguay “up to date” with its obligations as a member of the international community, in line with the standards required to provide greater legal certainty for financial transactions, the impact of which on the economy and foreign investment is unquestionable.

To illustrate the significance of this adjustment for our country, it is worth noting that, according to figures cited in the report by the Economic Commission for Latin America and the Caribbean (ECLAC), foreign direct investment (FDI) figures showed a 5.1% increase in 2016, which translates to approximately $274 million in investment. These figures will naturally tend to rise as Paraguay provides a solid platform with legal certainty for investments.

Over time, and once the share swaps are implemented, it will be necessary to examine how the implementation of this new law is progressing in order to determine whether the mechanism chosen by the Legislature is consistent with the reality of our market.

Under this new system, it could be argued that, strictly speaking, we have excluded “anonymous” corporations from our legal system, and the anonymity of their members is now a thing of the past.