Why did Vietnam quickly include the regulation "Beneficial owners" in the Law on Enterprises 2020?

In the context of deepening international economic integration and the requirement of transparency in business activities becoming a global standard, Vietnam has included the regulation on "beneficial owners" in the Law on Enterprises 2020. This regulation not only reflects Vietnam's commitment to comply with international standards on anti-money laundering and prevention of terrorist financing, but also an important step towards improving the investment environment, improving the efficiency of financial management, and promoting transparent corporate governance.

1. Understanding the concept of "Beneficial owner"

A beneficial owner is defined as an individual or group of individuals who actually own or control a legal entity, such as a company, organization, or foundation, even though they do not necessarily have to be named on official legal documents. According to the provisions of the Law on Enterprises 2020 (amended), beneficial owners are those who have direct or indirect ownership of more than 25% of the company's charter capital, or have the right to control important decisions of the enterprise. This regulation requires enterprises in Vietnam to disclose information about the business registration system and update this information in the national database on business registration.

The Law on Enterprises 2020 is not the first legal document to mention this concept. Previously, relevant regulations appeared in the Law on Prevention and Combat of Money Laundering 2022 and the implementing guiding documents of the State Bank of Vietnam. However, the official inclusion of beneficial owner regulations in the Law on Enterprises 2020 marks a step forward in systematizing and strengthening the legality of this requirement, in order to meet international standards and domestic management needs.

The beneficial owner regulation not only helps to clearly identify who actually controls the business, but also assists the authorities in supervising financial transactions, preventing illegal acts such as money laundering, tax evasion, or using a front company to conceal assets. It is an important tool in building a transparent and sustainable economy that meets progressive international standards.

2. Vietnam includes the regulation of beneficial owners in the Law on Enterprises

a. Recommendations from international organizations

Vietnam, as a member of the International Financial Action Organisation (FATF) and a member of the OECD's BEPS (Base Erosion and Profit Shifting) Initiative, faces increasingly stringent requirements for financial transparency and business ownership. The FATF, with its 40 recommendations on combating money laundering and terrorist financing, emphasizes the importance of identifying financial services in international financial transactions. These recommendations require Member States to establish mechanisms to collect, store and provide information on CS in a transparent and accessible manner.

Meanwhile, the OECD's BEPS Initiative focuses on preventing the transfer of profits abroad in order to evade taxes[1]. One of the key requirements of BEPS is that countries must have a data system on beneficial owners to ensure transparency in transnational business activities. At FATF and OECD conferences, the issue of ownership transparency has always been at the forefront, with countries being asked to build a database of health insurance to support inspection and monitoring.

Vietnam's inclusion of beneficial owner regulations in the Law on Enterprises 2020 is an effort to meet these recommendations, avoiding the risk of being blacklisted by the FATF or having limited access to the global financial system. This is especially important in the context that Vietnam is looking to attract foreign investment and improve its position in the global economy.

b. Major impact on the economy if not compliant

Failure to comply with the recommendations of the FATF and OECD can lead to many serious consequences for Vietnam. First, the country may be listed as a high-risk country for money laundering and terrorist financing, negatively affecting the national reputation. Second, international financial institutions may impose restrictive measures on financial transactions related to Vietnam, reducing the ability to attract foreign investment. Third, the lack of transparency in ownership information can lead to loss of tax revenue, abuse of legal entities to hide assets, and hinder the sustainable development of the economy.

Therefore, the inclusion of beneficial owner regulations in the Law on Enterprises 2020 is a strategic step to ensure that Vietnam complies with international standards, while protecting the national finance from risks related to illegal financial activities.

c. Vietnam's internal requirements in the new context

First, anti-money laundering and terrorist financing

Money laundering and terrorist financing are sore issues in the context of Vietnam's rapidly growing economy and deep integration into the world economy. This is very clearly shown that Vietnam is an official member of many international organizations as well as signing many agreements and FTAs with many countries and regions around the world. It is increasingly recognizable that criminal organizations often take advantage of front companies or fake legal entities to conceal the origin of illicit funds. The beneficial owner regulation will help the authorities retrieve information about the individuals or organizations behind these legal entities, thereby detecting and preventing violations.

For example, by requiring businesses to disclose information on tax returns, tax authorities and investigating agencies can easily check the origin of assets, cash flows and irregular financial activities. This not only helps protect the national financial system, but also strengthens the ability of international cooperation in the pursuit of transnational financial crimes, an increasingly complex and sophisticated type of crime.

Secondly, improve transparency in corporate governance

Transparency in corporate governance is a key factor to build trust with domestic and foreign investors. Disclosure of beneficial owner information helps reduce fraud, such as using a nominee to hide true ownership. This is especially important in businesses with complex ownership structures or with the participation of foreign investors.

A transparent business environment not only enhances the prestige of Vietnamese businesses but also helps attract international investment flows. In the context of Vietnam's participation in free trade agreements such as CPTPP and EVFTA, ensuring transparency in business ownership is essential to meet the requirements of international partners.

Third, strengthen the ability to manage and inspect enterprises

Regulations on beneficial owner create favorable conditions for state management agencies to supervise and inspect the operation of enterprises. Through the database of beneficial owner, the authorities can easily verify information about individuals or organizations that control businesses, thereby detecting and promptly handling violations such as tax evasion, financial fraud, or taking advantage of legal entities to carry out illegal activities.

Moreover, the control of tax information also helps to improve the efficiency of tax collection, especially in the context of Vietnam's efforts to modernize the tax administration system. This contributes to strengthening financial resources for the state budget, supporting socio-economic development programs.

d. International integration and legal requirements from this

1. Free Trade Agreements (FTAs)

Vietnam is currently a member of many free trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the EU-Vietnam Free Trade Agreement (EVFTA), and bilateral agreements with countries such as Japan, South Korea, and the United States[2]. These agreements all require member states to maintain a transparent business environment and comply with international standards on financial management.

The inclusion of beneficial owner regulations in the Enterprise Law 2020 is part of Vietnam's efforts to meet these requirements. By ensuring transparency in business ownership, Vietnam not only strengthens its position in trade agreements but also facilitates domestic businesses to expand into international markets.

2. Promoting domestic legal reform

The inclusion of beneficial owner regulations in the Law on Enterprises 2020 is part of the legal reform process in Vietnam, aiming to modernize the legal system and improve the efficiency of state management. This regulation not only serves the goal of combating money laundering but also contributes to building a modern market economy, deeply integrated into the global economy. This is an important step forward in improving the business environment, promoting healthy competition and protecting the interests of investors.

3. Challenges and solutions for Vietnam

Although the beneficial owner regulation offers many benefits, the implementation still faces a number of challenges. Firstly, many businesses, especially small and medium-sized enterprises, may have difficulty complying with the owner information disclosure requirement due to a lack of resources or personnel in charge of understanding this regulation to comply. Second, building and maintaining a database requires a large investment in technology and personnel. Third, there needs to be close coordination between authorities such as tax authorities, banks, and business registration agencies to ensure the accuracy and efficiency of the system.

To address these challenges, Vietnam needs to strengthen advocacy and guidance for businesses on social security regulations, and invest in technology infrastructure for data management. In addition, international cooperation in sharing information and experience will also help Vietnam implement this regulation more effectively.

The inclusion of beneficial owner provisions in the Enterprise Law 2020 is an important step forward for Vietnam in meeting international standards, improving the investment climate, and building a transparent and sustainable economy. This regulation not only helps Vietnam comply with commitments with the FATF, OECD and free trade agreements, but also strengthens its ability to manage finances, fight money laundering and prevent illegal activities. Although there are still many challenges in the implementation process, with careful preparation and close cooperation between stakeholders, the owner regulations will contribute to bringing Vietnam closer to the goal of becoming a modern, integrated and competitive economy in the international arena.