Perspective: The Road to Hell is Paved with Paperwork
A case study in policy implementation. December 18, 2024
American President Calvin Coolidge famously said that “The business of America is business.”1 In this quote the 30th president succinctly summarized the raison d'être driving most choices of the US government. A nation born out of a tax revolt was very clear that the right to private property (and thereby conduct of commerce) was core to its identity.
This isn’t the only thing that makes America “America,” but if you needed to pick one thing, President Coolidge’s observation would be a reasonable option.
Most nations have some underlying motivation like this - if only in the popular culture. The Roman Empire2 was essentially a bureaucracy designed with the singular goal of supporting the legions. Germany is famed for bureaucracy but most people would note that “the trains run on time” - indicating that the bureaucracy has the purpose of order and efficiency. While these ideas are oversimplifications they do speak to the core values that get built into a political and bureaucratic system - values that are hard to change.3
So what’s the raison d'être of the Moldovan bureaucracy? Paperwork.
Depending on whether you are inside or outside these bureaucratic institutions paperwork is either the cause of, or solution to, all problems.
Today we’re going to dive into just one recent example of this phenomenon that is roiling Moldova’s business sector as 2024 comes to a close. It’s a story of how even simple policies clash with an embedded bureaucratic system and how reforms meant to make things easier often come up short. Also, of how ad hoc solutions and last minute changes often avert disasters.
A Road Paved with Good Intentions
Our story begins with a set of legal amendments to “Law No. 308/2017 on the prevention and combating of money laundering and terrorist financing” passed in May 2023 altering the form of declaring the ultimate beneficial owners (UBOs) of a legal entity.
Simply defined the UBO is the list of people who actually “own” a company in the colloquial sense - the person who controls it and benefits when it makes money. Due to the numerous mechanisms for hiding company ownership through offshore entities and complex contractual arrangements it has become exceedingly common for criminals, oligarchs and tax-evaders to hide what they actually own. Creating a state registry of the UBOs of companies is critical for fighting corruption, money laundering and many other types of international malfeasance.
So knowing who owns a company is a good thing full stop. What’s the issue?
Implementation - the Devil’s in the Details
Here’s where things start to get messy. The law referenced above set 2 different implementation schedules. First, from September 4th 2023 all new companies being registered, and old companies restructuring their ownership, will need to fill out a new form declaring who the company’s UBO’s are. This date came and went without incident because nothing of substance changed. Companies always had to declare their beneficial ownership and the state keeps a very detailed record of this which can be searched online. What changed was the form, the document, on which things were declared. So if you were starting a new company or reorganizing an old one there wasn’t even a new step added - just a new form.
The second deadline is January 1st 2025 - on this date all companies that pre-date September 2023 and have not reorganized their ownership in that time need to file the new form. This has become a major problem for a few reasons which we will detail below, but let’s just first focus on what this means in practice.
In order to comply with the law legal entities must file a relatively straightforward document4 with the Public Services Agency (ASP). On the form, the company’s representative must declare who the UBO’s are that own more than 25% of the company and whether or not they are Politically Exposed Persons - basically whether or not they have a senior political position or are related to someone who does.
The company must attach to the document proof of the ownership structure that they are declaring - and here’s where things get kinda weird. The agency that maintains the records of proof of company ownership is… that ASP. So here’s how it works:
“Company Name” SRL5 requests an Extras (proof of ownership) document from the ASP paying 110 lei for an official copy
“Company Name” SRL appends this Extras to the filled out UBO form, most likely with copies of the IDs of the people listed on the form (also already on file with ASP)
“Company Name” SRL submits this document package to ASP and pays 1149 lei in fees for this “service”
You might notice some oddities here. Other than filling out a 1 page form what you are doing is paying the ASP to get an official document and then paying them again to take it back from you.
Things get more complex if a Moldovan company is owned by a foreign company or person. The concept of Ultimate Beneficial Owner passes through outside structures so each ownership tier must provide documents of the individual persons who are the final owners of the company. In these cases copies of documents from outside Moldova will need to be obtained, Apostilled6, translated to Romanian and for the translation to be notarized in Moldova. This is all well and good (and normal) but takes time - a problem we will look at below.
Ok, it’s a headache but at least we can file online! Right?
Yes and no. The good news is that the Ministry of Economy’s digitization efforts are objectively moving quickly and there are lots and lots of things you can do online now. Very pertinent to this process, companies can now easily obtain7 an “Extras” showing their ownership structures from the ASP online.
Unfortunately not everyone can file the whole UBO package online. Company representatives who want to file digitally need an electronic signature which not everyone has. For those who do have it the signature comes in 2 forms:
Mobile Signature - Your e-signature is linked to your network provider and you sign documents via short messages and a pin.
USB Signature - Your e-signature is in a special USB stick obtained from the Ministry of Justice.
For 99% of tasks it does not matter which version you have - naturally most people have mobile signatures (cause it’s easier). For *this* task with UBOs you need a USB stick.8
Taken together this means that the vast majority of legal entities are unable to conduct this process online and will need to go the ASP office to file their paper. Currently appointments appear to be very hard to get through January 1st. This would always be a hard time of year to get to the ASP with so many Moldovans from abroad visiting for the holidays and going in to conduct some business or another. It’s become much harder because everyone suddenly became aware of these UBO requirements very recently.
Timing, Scope and Consequences
While this requirement has been on the books for 18 months it wasn’t well known. There was no major informational campaign from the ASP or other state entities, no calls to entrepreneurs warning them they need to file.9 This isn’t to say that the information was hidden, just that many many people did not know this was coming.
This issue began to dawn on people in the last few weeks as some accountants called clients and pushed them to make the filings. This means that if you have a good accounting firm you probably got some heads up - if not, you likely learned from facebook (more on that below).
Taken together, and no matter who “missed” this, the situation is as follows - almost all legal entities covered by the law need to file this declaration, most of them in-person, by January 1st.
Scope - who does this apply to?
Here’s where an inconvenient process turns into a nuclear bomb of bureaucratic chaos. This requirement applies to every legal entity in Moldova that was formed more than 18 months ago and has not updated its ownership in that time.10
This applies to companies, NGOs, “individual entrepreneurs” and “peasant (farm) households” - basically all legal entities in Moldova.
Basically, every legal entity in Moldova became aware that they needed an appointment with the ASP to file this document this month, and that if they didn’t the consequences would be *severe.*
How severe? the law provides for penalties of “1000 to 1500 conventional units” in fines if you miss the January 1st deadline. This equates to around 50,000 to 75,000 lei ($2,721.00 to $4081.50).
Ok, at least this is Super Important right? Right?!
Wrong. As I mentioned above Moldova already maintains detailed records of who the UBOs of companies are. These records are filed when the company is opened and automatically updated if the shareholder structure in Moldova changes. If a foreign company owning a Moldovan entity changes its structure they have a set time (30 days or so) to notify the ASP.
If this wasn’t enough, all Moldovan banks are required to verify the UBOs of all account holders annually.
The only real change in this new form that needs to be filed is declarations around Politically Exposed Persons. The appendix has a list of positions including the president, MPs, members of the government, judges, heads of political parties, leaders of state owned companies, etc. If any company’s UBO’s are either in these positions or related to people that are they need to declare it. This is the only new information being gathered in this process.
Foreign owned companies are clearly the locus of the risk here, but that is a vanishingly small proportion of companies that need to comply with this regulation.
Let’s look for a moment at “individual entrepreneurs” - this is literally a legal form by which a person does business as an individual. I, David Smith, would get a tax code so that I could conduct limited business and pay taxes as myself. A requirement demanding that I spend time and money notifying the ASP that I am the UBO of something called “I.I. David Smith” is absurd on its face.
What about “Peasant Farms?11” This structure allows family smallholdings to operate a slightly advantageous business structure but with some key conditions - for example, the owners are limited to the family members. A UBO declaration is fundamentally about finding people who are hiding their ownership stake. Not only does the government know all of the owners of this structure already BUT it is literally impossible to sell shares in one to a foreign company.
This legislation is basically meant to target the small subset of companies with owners who are Politically Exposed Persons so they can update their filings. This isn’t using a sledgehammer to crack a nut, it’s using a 2000 pound bomb to crack a nut.
Backlash
Predictably, once this information started to get more publicly known a backlash started to form on social media. Posts about how ludicrous it was to charge high fees to file documents reasserting what the ASP already knows, and about how people suddenly realized that they needed to interrupt their holiday plans to wait in line at the ASP went viral.
Yesterday, Deputy Prime Minister for Digitalization and Minister of the Economy Dumitru Alaiba made a post saying that he and his colleagues had heard the complaints and that a solution would be announced today. Then, this morning the ASP posted on their facebook that parliament has agreed to extend the deadline by a year until December 31st 2025.
The ASP also notes that around 80,000 of the country’s 160,000 legal entities had already filed documents - showing some decent compliance but also the scale of whatever was set to unfold over the coming week.
So, the bomb was defused as the timer ticked down - whew.
The ASP also noted that they are rolling out a new online system to do these declarations easily… in April. Begging the question of why in the world the timeline is playing out this way in the first place.
Did it have to be this way?
No. While a crisis was averted it was also unnecessary to begin with. Let’s take a literally identical example in the United States. The US has never maintained any beneficial ownership registry12 but finally passed a requirement for all US companies to file UBO declarations by January 1st 2025. Similarly, companies had around 18 months from the passage of this law to the deadline. What was totally difference was the implementation. The whole process is done via an easy to use online form and the IRS and other relevant agencies spent a lot of time messaging to companies about the need to comply. Also, failure to file carries a penalty of around $5000 - a similar amount to Moldova’s upper fine rate unless you control for GDP.
Where this comparison breaks down completely is that the US is creating a new system out of scratch. New filings are required because no old filings existed. That is not the case in Moldova. The state knows who the UBOs of companies are, the banks know, the public knows.
Moldova wanted to add to this a declaration about Politically Exposed Persons - a totally reasonable goal. If the state’s raison d'être was “business” or “efficiency” or “the public not being enraged at us” they could have found a lot of ways to do this. For example, there could have been a rule requiring all companies with UBOs who are Politically Exposed Persons to file a new report by January 1st. With how few people it is you could literally call all of them and remind them that their companies, if they have any, need to report.
Another option would have been a “risk based” requirement to update filings. That would almost certainly have identified foreign owned entities as needing to refile while leaving “Peasant Farms” alone. Once again, you could make a list and call everyone that might need to file.
Lacking all of that, you could have cut out the whole “pay us to get a document and then pay us to take it back from you” step and just had most companies file a simple form online. It would mean 99+% of companies would just declare their affiliations, or lack thereof, with Politically Exposed Persons and the ASP could just check their own files about the ownership details. Remember, they already had this on file.
There were lots of ways to do this if the priority was anything other than “produce more paperwork.”
Unfortunately, the Business of Moldova is ludicrous paper shuffling.
Technically he said: “After all, the chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing and prospering in the world.” but this is traditionally quoted as “The business of America is business.”
Yes, I’m one of those guys who thinks about Rome daily. If you’re ever looking for a book on the topic that speaks (rather bleakly) to our political situation today check out “The Storm Before the Storm: The Beginning of the End of the Roman Republic,” by Mike Duncan.
Just ask Bernie Sanders
This link is to the documents on my google drive and is just for reference. If you actually need to file the form yourself look for an original on the ASP site.
SRL is the acronym for Limited Liability Company (LLC) in Romanian
I’m proud to say that in my role as the President of the Moldova Small Enterprise Alliance (AIM) we pushed for this reform and ultimately saw it passed in 2022.
Why? There are 2 levels of security from Moldova’s cryptographic e-signature system. The mobile signature is fine for almost all documents but not for documents where the ownership of companies changes or new registrations occur. Since this is neither of those things it isn’t clear why this document is restricted to the USB e-signature which is considered more secure.
Ironically, while the USB signature might be technically more secure, it is often less secure in practice. Using them is a challenge and since business owners need to sign *lots* of documents every month many people just give these to their accountants and forget about them.
There is another funny wrinkle in the system. When you sign documents (with either mobile or USB) it embeds a cryptographic signature in the PDF which can be verified by uploading the pdf to a government site. BUT sometimes the documents are also watermarked with a string of numbers as a cryptographic signature. Many government offices still print out all of their e-filings and put them in a folder (facepalm) so they sometime’s don’t accept documents without the watermark.
And they are more than capable of making calls given how often the state tax service calls me for the most trivial things.
It’s worth mentioning here that until late 2023 the legal mechanism for restructuring a company’s ownership was really problematic and discouraged (to put it mildly) complex shareholder structures. I wrote about this at the time when the government took up and passed a reform championed by AIM. The point is that most companies never change their shareholder structures.
This is an English translation of a Romanian name and yes it sounds horrible. Maybe “smallholder” is better? But most translations into English go with this so here we are.
An unmitigatedly disastrous policy decision that has made the US a global hub for laundering kleptocratic money and done untold damage to American politics and local communities. Check out Casey Michel’s book American Kleptocracy to dive into the story.
Wow, David, to have to deal with all that AND stick around, you must really love Moldova! Or perhaps, some very specific Moldovans!!