Significant Controllers Register
Companies (Amendment) Ordinance 2018
On 1 March 2018, the Companies (Amendment) Ordinance 2018 ("CAO") will come into force. The new requirements aim to make beneficial ownership of Hong Kong incorporated companies more transparent. Hong Kong incorporated companies (excluding Hong Kong listed companies) will be required to maintain up-to-date beneficial ownership information on their corporate shareholding structure by identifying persons who have significant control over the companies and by maintaining a significant controllers register ("SCR") recording this information. These requirements align Hong Kong's laws with the recommendations put forward by the Financial Action Task Force ("FATF") (of which Hong Kong is a member) to enhance its regulatory regime in relation to money laundering and terrorist financing.
An overview of some of the key requirements is set out below.
Current Legal Position
Although the Companies Ordinance (Cap. 622) ("CO") does not currently require companies to provide information on beneficial ownership, the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615) ("AMLO") requires financial institutions to verify the identity of the ultimate beneficial owners in relation to their customers. Such information does not have to be disclosed by the financial institution concerned unless it is compelled to do so by a court order. Hong Kong's Legislative Council considered this lack of transparency to be a key deficiency in Hong Kong's money laundering and counter-terrorist financing regime, and saw the need for Hong Kong's regime to be more consistent with FATF standards.
Significant Controllers include both registrable persons and registrable legal entities. A person / legal entity will be registrable if it:-
i) holds, directly or indirectly, more than 25% of the issued shares in the company or, if the company does not have a share capital, the person holds, directly or indirectly, a right to share in more than 25% of the capital or profits of the company; or
ii) holds, directly or indirectly, more than 25% of voting rights of the company; or
iii) holds, directly or indirectly, the right to appoint or remove a majority of the board of directors of the company; or
iv) has the right to exercise, or actually exercises, significant influence or control over the company; or
v) has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or a firm that is not a legal person, but whose trustees or members satisfy any of the first four conditions (in their capacity as such) in relation to the company.
It is noteworthy that the conditions do not relate only to shareholding in a company but also to the influence or control asserted over a company. If an individual does not satisfy the first three conditions, the 4th condition can be relied on, and is a "catch-all" provision to ensure that significant controllers, who may not have the requisite shareholding to be a registrable person / legal entity, would be captured under this head.
The Guideline on the Keeping of Significant Controllers Registers by Companies ("Guideline") elaborates on what amounts to "control" and "significant influence" as follows:-
i) "control" is where a person can direct the activities of a company; and
ii) "significant influence" is where a person can ensure that a company generally adopts the activities which the person desires.
The Guideline notes that significant influence or control over a company may be provided under a company's constitutional documents, or through actions, which if taken, would result in the actual exercise of significant influence or control. Some examples include an ability to amend a company's business plan, appointing or removing the CEO, and changing the nature of a company's business. For the latter, how the individual interacts with a company and other company personnel must be considered. For example, an individual who is not on a company board but is regularly consulted on board decisions may be deemed to have significant influence / or control over the company.
Companies' duty to investigate and obtain information to update the SCR
Companies will be under a duty to take reasonable steps to identify their significant controllers. The Guideline encourages companies to keep and maintain a record of the steps taken to comply with this duty, and provides that the appropriate action depends on the circumstances of a company, but may involve:-
i) reviewing all readily available documents;
ii) considering the interests held by individuals, legal entities, and trusts or firms; and
iii) considering any evidence of joint arrangements or evidence of rights held through means that might ultimately be controlled by the same person.
After these steps are taken, unless a company has already obtained all of the information required to complete the SCR (the required particulars of an SCR are provided under a new Schedule 5B to the CO), it must issue written notices to those who it has reasonable cause to believe are significant controllers within 7 days of the company first attaining such knowledge or belief. This means that for existing significant controllers, companies must issue written notices between 1 – 8 March 2018 to ask for outstanding information, where necessary. Under the new requirements, a company can also issue notices to a third party where it has reasonable cause to believe that the third party may have information of a registrable person / entity. Sample notices to be issued by a company are provided in Annex D to the Guideline. A failure to respond to a notice within 1 month constitutes a criminal offence.
Once the particulars have been confirmed by the registrable person, a company should update the SCR within 7 days of the confirmation. The SCR is to be maintained by the company and be kept up-to-date. Again, if a company has any reasonable cause to believe that there is a registrable change in the particulars of a significant controller, it must give written notice to that person within 7 days of first attaining such knowledge or belief, and ask for the updated information.
Further, a company must designate at least one person to assist law enforcement officers with matters in relation to its SCR. The representative must be a member, director or employee of the company who is a natural person resident in Hong Kong. The representative may also be an accounting professional, a legal professional or a Trust and Company Service Provider licensee as defined in the AMLO.
A company's failure to comply with the above obligations will constitute a criminal offence. The company and each responsible person of the company would be subject to a fine of HK$25,000 (Level 4 fine).
In light of this new wide-ranging Hong Kong law, Hong Kong incorporated private companies should take note of the required particulars to be completed in the SCR and start preparing straight-away. Companies should also immediately start their review of all relevant documents on hand and identify any outstanding information or additional persons who may qualify as a significant controller. Notices based on the Guideline samples should be prepared and issued within the prescribed time limit.
For further details on the new requirements, please refer the external circular No. 2 / 2018 and Guideline issued by the Companies Registry.
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