The Companies (Amendment) Bill 2017 was recently published by the Government.
This Note will first discuss the substantive provisions in the Bill, and then its background.
The Bill would require all companies incorporated in Hong Kong to:
(a) take reasonable steps to ascertain the individuals and legal entities that have significant control over the company (“significant controllers”), and to obtain accurate and up-to-date information about their identities; and
(b) maintain a register of the significant controllers (“significant controllers register”), which contains the required particulars of their identities, for inspection by law enforcement officers, upon demand, for the purpose of the officer’s performance under the law of Hong Kong of a function relating to the prevention, detection or investigation of money laundering or terrorist financing.
The only type of Hong Kong companies to be exempted from the above requirements would be listed companies. And this is because the Securities and Futures Ordinance already has a more stringent regime requiring listed corporations (including overseas companies listed in Hong Kong) to keep a register of interests in their shares (see below).
The Bill would give power to the Financial Secretary (including the Secretary for Financial Services and the Treasury) to make regulations providing for an exemption, should the need arise. However, this is intended to cover situations such as where the companies are in future bound by disclosure and transparency rules similar to the ones in relation to beneficial ownership.
At present, the Companies Ordinance requires a Hong Kong company to disclose information on its members (including the shares held by each member and the paid-up capital), directors and company secretaries, by keeping the information in the registers kept by the company at its registered office (or a prescribed place), and to file the information with the Companies Registry via specified forms for public inspection.
The current law focuses on disclosure of legal ownership, and does not require a company to ascertain, keep or file information about its beneficial owners, except in the case of a listed corporation which is required under the Securities and Futures Ordinance to keep a register of those individuals or entities that own a 5% or more interest in any class of voting shares (including beneficial interests).
The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance requires a financial institution to take reasonable measures, as part of the customer due diligence process, to verify the identity of the ultimate beneficial owner of a customer, including measures to understand the ownership and control structure of a corporate customer. However, the information gathered is not normally accessible by law enforcement agencies, unless a court order is obtained. This is often time-consuming, and can only be accomplished when an enforcement agency has information that a suspicious company has opened an account with a particular financial institution.
For individuals (“registrable persons”), significant controllers are, e.g.:
– a person who holds, directly or indirectly, more than 25% of the issued shares in the company;
– a person who holds, directly or indirectly, the right to appoint or remove a majority of the board of directors of the company;
– a person who has the right to exercise, or actually exercises, significant influence or control over the company.
Significant influence or control may be exercised through a trust or a firm, whose trustees or members satisfy any of the above conditions (in their capacity as such) in relation to the company.
Registrable persons also include a government, a local authority or local government, and an international organization.
A legal entity (including an overseas legal entity, corporate or unincorporate, but excluding a government, a local authority or local government, or an international organization) is a significant controller of a company if:
(a) it meets any of the above criteria; and
(b) it is immediately above the company in the company’s ownership chain.
The Bill sets out detailed rules to determine whether a person has the right to exercise, or actually exercises, significant influence or control. The Registrar of Companies may issue guidelines to provide guidance. Interpretational issues may be inevitable.
A creditor who holds security over shares would not become a significant controller in two cases. The first of which is: the right of the creditor over the shares is exercisable only in accordance with security provider’s instructions. The second case has 2 conditions: (1) the security is held in connection with the granting of loans as part of normal business activities, and (2) the right of the creditor over the shares is exercisable only in the interests of the security provider. It is not clear why the second case is needed in addition to the first. Creditors will unlikely be willing to assume a legal obligation to exercise rights in the interests of the security provider. In each case, there is an exception for exercising the right over the shares for the purpose of preserving the value of the security or of realizing the security.
Every company must take reasonable steps:
(a) to ascertain whether there is any significant controller of the company; and
(b) if any, to identify each of them.
If the company knows, or has reasonable cause to believe, that:
(i) a person is a significant controller of the company; or
(ii) a particular person knows the identity of another person who is a significant controller,
the company must give a notice within 7 days to obtain information from such person.
The particulars to be provided in response to such a notice include:
(a) the name of the significant controller;
(b) (if applicable) the number of the identity card, or the number and issuing country of a passport, of the person;
(c) the date on which the person became a registrable person of the company; and
(d) the nature of the person’s control over the company.
For a corporate significant controller, the information in (b) above would relate instead to the legal form of the entity (including the law that governs it) and the company registration number or the equivalent in its place of incorporation or formation.
If the company knows, or has reasonable cause to believe, that there is a change in the details of a person in the significant controllers register, the company must give a notice to that person within 7 days, in order to update the register.
A penalty (maximum HK$25,000) would apply to each person who commits an offence by not complying with a requirement of a notice within 1 month. It would be a defence to prove that the requirement is “frivolous or vexatious”.
The company must enter the required information into its significant controllers register within 7 days after the information has all been provided or confirmed by the registrable person or by another person with the registrable person’s knowledge.
Significant controllers register
Significantly, the Bill does not require the register to be open for public inspection.
A person whose name is entered in the register as a significant controller is entitled to inspect the register, and may apply to the Court for rectification of the register.
A fine (maximum $25,000) and a further daily fine of $700 would apply to the company (and each of its responsible persons) for failure to keep the register. This is comparable to that currently applicable to failure to keep registers of members, directors and company secretaries.
The company is not, because of anything required to be done by the new law, affected with notice of:
(i) the rights of a person in relation to shares in the company; or
(ii) other rights of a person with respect to the company.
Law enforcement officers
The “law enforcement officers” who may demand inspection of the significant controllers register are an officer of:
(a) the Companies Registry;
(b) the Customs and Excise Department;
(c) the Hong Kong Monetary Authority;
(d) the Hong Kong Police Force;
(e) the Immigration Department;
(f) the Inland Revenue Department;
(g) the Insurance Authority;
(h) the Independent Commission Against Corruption;
(i) the Securities and Futures Commission; and
(j) any other Government department, agency or body established or constituted by or under an Ordinance, that is specified by the Financial Secretary by regulations.
Every company must designate (i) an individual representative who is a director, employee or member of the company, or (ii), e.g., an accountant or legal professional to serve as a contact point for providing information about its significant controllers register and assistance to law enforcement officers when the need arises.
Certain criminal sanctions
If any person knowingly or recklessly makes, in a significant controllers register or in a reply to a company’s notice, a statement which is misleading, false or deceptive in any material particular, the person would commit an offence and be liable on conviction on indictment to a fine of HK$300,000 and to imprisonment for 2 years; or on summary conviction to a fine (maximum HK$100,000) and to imprisonment for 6 months.
Member jurisdictions of the Financial Action Task Force (“FATF”) take turns to evaluate the anti-money laundering and counter-terrorist financing (“AML/CTF”) regime of each other to assess the extent to which the relevant FATF recommendations are observed.
Hong Kong is scheduled to undergo a mutual evaluation in 2018/19. A gap analysis suggests that one of the key deficiencies in Hong Kong’s AML/CTF regime as against the FATF recommendations is the absence of statutory requirements for companies to keep their beneficial ownership information.
There are increasing international concerns over the misuse of companies, particularly those with complex ownership and control structures, as a way to disguise and hide crime proceeds, facilitate money laundering, or serve illicit purposes such as tax evasion, corruption or terrorist financing. This is posing significant challenges to law enforcement agencies when investigating the identity of known or suspected criminals who conceal the true purpose of an account or property, or the source or use of certain funds held through companies or layers of companies.
The FATF requires member jurisdictions to take measures to prevent the misuse of legal entities for ML/TF, by ensuring that adequate and accurate information on the beneficial owners and control of legal entities can be accessed in a timely fashion by competent authorities including law enforcement agencies. The FATF defines a beneficial owner as a natural person who ultimately has a controlling ownership interest in a company, or is exercising control of the company through other means. It is one of the Government’s priorities to enhance the transparency of beneficial ownership of Hong Kong companies.