The Financial Services and the Treasury Bureau (FSTB) recently issued a paper for public consultation on its proposal to introduce a regime under the Companies Ordinance (Cap 622) requiring Hong Kong incorporated companies to keep a register of people having significant control over the company. The purpose is to enable law enforcement agencies to have access to such information in order to combat money laundering and terrorist financing.

Background

There are increasing international concerns about the misuse of companies, particularly those with complex ownership and control structures, as a way to disguise and hide the proceeds of crime, facilitate money laundering, or serve illicit purposes such as tax evasion, corruption, or terrorist financing. The ultimate ownership of companies is often obscured so that those with illegal motives can distance themselves from the company’s assets which they really control.

The Financial Action Task Force (FATF), an inter-governmental body of which Hong Kong is a member, sets international standards on combating money laundering and terrorist financing. It requires member jurisdictions to adopt measures to prevent the misuse of legal persons for money laundering and terrorist financing and to ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained in a timely fashion by competent authorities. The FATF defines “beneficial owner” as a natural person who ultimately has a controlling ownership interest in a legal person, or who exercises control of the legal person through other means.

In 2018, as a member of the FATF, Hong Kong will undergo a mutual evaluation conducted by other member jurisdictions regarding its efforts to combat money laundering and terrorist financing. Hence the need to implement a statutory regime on the transparency of beneficial ownership of companies before such evaluation, to ensure that Hong Kong’s overall rating is not adversely affected.

Hong Kong’s current regime under Companies Ordinance (Cap 622)

The Companies Ordinance (Cap. 622) requires a Hong Kong incorporated company to disclose information about its members, directors and company secretaries, by keeping the information in registers at its registered office (or prescribed place), and filing the information with the Companies Registry in an Annual Return. There is no requirement, however, for a company to ascertain, keep or file information about its ultimate beneficial owner.

Legislative Proposals

The FSTB is seeking the public’s views on the following proposals.

Scope of Application

The requirement to keep beneficial ownership information will apply to all companies incorporated in Hong Kong under the Companies Ordinance, including companies limited by shares, companies limited by guarantee, and unlimited companies. It will not apply to listed companies, as they are governed by the Securities and Futures Ordinance, which already requires every listed corporation to keep a register of those individuals or entities owning 5% or more interests in any class of voting shares (including any beneficial owner of such interests).

Definition of “Beneficial Ownership”

Beneficial owner” in relation to a company will be defined as an individual who meets one or more of the following conditions:-

(a) directly or indirectly holding more than 25% of the shares;

(b) directly or indirectly holding more than 25% of the voting rights;

(c) directly or indirectly holding the right to appoint or remove a majority of directors;

(d) otherwise having the right to exercise, or actually exercising, significant influence or control; or

(e) having the right to exercise, or actually exercising, 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, or would do so if they were individuals.

Company’s Duty to Keep a Register of People with Significant Control (PSC Register)

A company will be required to identify and keep a PSC Register, a person with significant control, being an individual who qualifies as a “beneficial owner” under one of the requirements in (a) to (e) above.

To help identify the holding structure where a beneficial owner holds an interest in a company indirectly through successive layers of holding companies in a chain of ownership, a company will also be required to identify and register a relevant legal entity with significant control over the company, if it meets one or more of the conditions in (a) to (e) above and it is a legal entity immediately above the company in the company’s ownership chain.

When a company has identified a registrable individual or registrable legal entity, it will be required to obtain and ascertain the accuracy of certain particulars for entry into its PSC register, including, for example, name, address, nature of control of the registrable individual or registrable legal entity over the company.

The PSC Register cannot be empty and, where a company knows or has reasonable cause to believe that there is no registrable individual or registrable legal entity in relation to the company, a statement to that effect must be entered in the Register.

Obtaining and verifying beneficial ownership information

A company will be required to take reasonable steps to identify and ascertain its registrable individuals and registrable legal entities (if any), including reviewing a company’s register of members, articles of association, statement of capital, relevant covenants or agreements, and serving a notice on any person or legal entity (i) that the company knows or has reasonable cause to believe to be registrable in relation to the company; or (ii) that knows or may have reasonable cause to know the identity of a person or legal entity with significant control over the company.

A company will be required to enter into the PSC Register details of an authorised person responsible for providing information and further assistance to law enforcement agencies. A possible option being considered is allowing companies to either authorise a natural person resident in Hong Kong, or a locally-based designated non-financial business and professional (such as accountants, solicitors, trust or company service provider) as the authorised person.

Public Inspection of PSC Register

The PSC Register will be available for inspection (by any member of the company or person on the register without charge or by other members of the public on payment of a fee) at the company’s registered office or any other place in Hong Kong as determined by the company.

Criminal Sanctions for Non-compliance and False Statement

A company and its responsible officers will be liable to a maximum penalty of a fine at level 4 (i.e. $25,000) and further daily fine of $700 for failing to keep a PSC Register.

A company and its responsible officers will be liable to a maximum penalty of a fine at level 4 (i.e. $25,000) for failing to make available company records for public inspection.

Any person who knowingly or recklessly makes in the PSC register a statement which is misleading, false or deceptive in any material particular, may commit an offence under section 895 of the Companies Ordinance and be liable on conviction on indictment to a fine of $300,000 and to imprisonment for two years; or on summary conviction to a fine at level 6 (i.e. maximum of $100,000) and imprisonment for six months.

A statutory obligation is to be placed on a notice addressee whom the company knows or has reasonable cause to believe:-

  • to be a registrable individual or registrable legal entity; or
  • knows the identity of someone who is a registrable individual or registrable legal entity in relation to the company;
  • or knows the identity of someone likely to have that knowledge,

to comply with a notice to ascertain and confirm the relevant required particulars or relevant changes. Non-compliance is subject to a maximum penalty of a fine at level 4 (i.e. $25,000).

If any person knowingly or recklessly makes, in a document replying to a company’s notice, a statement which is misleading, false or deceptive in any material particular, he or she may commit an offence under section 895 of the Companies Ordinance and may be liable on conviction on indictment to a fine of $300,000 and to imprisonment for two years; or on summary conviction to a fine at level 6 (i.e. maximum of $100,000) and to imprisonment for six months.

Power of Court to Rectify Register

An interested person aggrieved by an entry in a PSC Register may apply to court for its rectification. The court may refuse the application, or order rectification and payment by the company of any damages sustained by any aggrieved person.

Next Step

The FSTB requested comments on the above proposals by 5 March 2017 and the aim is to introduce a bill into the Legislative Council in the second quarter of 2017. We shall report updates in our future newsletters.