The Government has launched a two month consultation exercise on proposals to enhance the transparency of beneficial ownership of Hong Kong incorporated companies. This is part of a number of reform proposals aimed at bringing Hong Kong in line with international standards to combat money laundering and terrorist financing. With a mutual evaluation of Hong Kong’s regime with other members of the Financial Action Task Force (FATF) looming in 2018, the Government is keen to enhance Hong Kong’s regime to require transparency of beneficial ownership in line with FATF’s standards.
The consultation paper proposes amending the Companies Ordinance (Cap 622). Under the proposals, all Hong Kong incorporated companies (other than listed companies who will be exempt) will be required to obtain and hold beneficial ownership information which will be available for public inspection. The regime will be backed by criminal sanctions for non-compliance.
Summary of the key features of the proposals to enhance transparency of beneficial ownership
Applies to Hong Kong incorporated companies – The proposals apply to all companies incorporated in Hong Kong including companies limited by shares, companies limited by guarantee and unlimited companies. Listed companies, however, will be exempt given the existing regime imposed on them under the Securities and Futures Ordinance (Cap 571) for the disclosure of interests and related registers and record keeping.
Company to identify and keep a register of people with significant control – Under the proposals, companies would be required to identify and keep a register (PSC register) of persons with significant control over the company. Persons with significant control means any individual who falls within the definition of beneficial owner detailed below (registrable individual). To capture indirect holdings through corporate structures, the PSC register should also include details of any entity meeting the beneficial ownership definition (registrable legal entity). To ease the administrative burden, only an entity which is immediately above the company in the company’s ownership chain needs to be included.
Definition of beneficial owner – The beneficial owner definition proposed is similar to FATF’s definition. It catches any individual who meets one or more of the following conditions:
directly or indirectly holds more than 25% of the shares in the company;
directly or indirectly holds more than 25% of the voting rights in the company;
directly or indirectly holds the right to appoint or remove a majority of directors;
otherwise has the right to exercise or actually exercises significant influence or control; or
has the right to exercise or actually exercises significant influence or control over the activities of a trust or firm that is not a legal person but whose trustees or members satisfy any of the above conditions in relation to the company, or would do if they were individuals.
Details required in the PSC register – The company will need to establish and record in the PSC register information about the registrable individuals and registrable legal entities including name; identity card or passport details or company registration number; correspondence or registered address; date of becoming registrable and the nature of the control. Where there is no registrable individual or legal entity, that fact must be stated in the PSC register. The PSC register must be kept in English or Chinese.
Company to verify beneficial ownership information – Information must only be included in the PSC register once provided by the registered individual or ascertained by the company. The company will be required to take reasonable steps to identify and ascertain its registrable individuals and registrable legal entities. The consultation paper cites examples of possible steps a company could take including reviewing a company’s register of members, articles of association, statement of capital and relevant agreements or by sending a notice to persons seeking confirmations of ownership.
Notice to persons to confirm beneficial ownership – A company will be able to serve a notice on any person or entity that the company knows or has reasonable grounds to believe either is registrable or knows of a person or entity that is registrable. The consultation proposes that non-compliance by a recipient or the provision of misleading, false or deceptive information in response will attract criminal penalties as a means of ensuring the regime is effective.
PSC register to be open for public inspection – The consultation paper proposes that the PSC register is available for public inspection on payment of a fee (or for free for members of the company or any person on the PSC register). As with the existing register of members, the location of the PSC register would need to be notified to the Registrar of Companies. However, the information in the PSC register does not need to be filed with the Registrar of Companies.
Criminal sanctions for non-compliance – The Government is proposing criminal sanctions for breaches of the regime similar to those that currently apply to maintenance of the existing statutory registers. Sanctions would include penalties for non-compliance which will apply to the company, its responsible officers and any person who knowingly or recklessly makes a misleading, false or deceptive material particular in the PSC register.
Timeframe for the reforms
The consultation is open for comments until 5 March 2017 and the Government seems set to move quickly towards introducing a bill into the Legislative Council in the second quarter of 2017. With the mutual evaluation of Hong Kong’s regime with other FATF members fast approaching in 2018, the Government is under time pressure to push through these changes.
Other reform proposals
To ensure consistency in the regulatory regimes, the current definition of beneficial owner in the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap 615) (AMLO) may be increased from 10% to 25% consistent with the proposed level for beneficial ownership under the Company Ordinance.
Further, the Government has also simultaneously launched a consultation setting out proposals to enhance the anti-money laundering regulatory regime under the AMLO. The AMLO currently only applies to financial institutions and the Government proposes to extend aspects of this to certain non-financial businesses and professions. This would provide a statutory obligation on solicitors, accountants, real estate agents and trust or company service providers to carry out due diligence on their clients before they engage in certain types of transactions. The Government is also proposing that trust or company service providers become subject to a licencing regime. We will discuss these proposals in more detail in an upcoming e-bulletin.