Governments worldwide have committed to curb money laundering and terrorist financing by enhancing the transparency of company ownership and control. As the rest of the world trends toward greater beneficial ownership transparency, a new category of persons has emerged: the Person of Significant Control.
The Rise of Beneficial Ownership Disclosure
We were first introduced to the Person of Significant Control concept on April 6th, 2016 when a new law in the United Kingdom went into effect requiring all companies to keep a register of the people who can influence or control a company. In the UK, these individuals meet at least one of the following criteria:
- Hold more than 25% of shares in a company.
- Hold more than 25% of the voting rights in a company (directly or indirectly).
- Own the right to appoint or remove the majority of the Board of Directors in the company.
- Have the right to exercise or actually exercise significant influence or control over the company.
Last year, Singapore enacted a similar amendment to their Companies Act. Effective March 31st, 2017, this amendment requires companies, foreign companies, and limited liability partnerships (LLPs) to maintain beneficial ownership information in the form of a register of registrable controllers (unless exempted), and to make the information available to public agencies upon request. A controller is defined as an individual or a legal entity that has a significant interest in or significant control over the company.
Even jurisdictions with reputations for confidentiality, such as the Cayman Islands, have established centralized (but not public) registers for maintaining beneficial ownership information that are made available to law enforcement under certain circumstances. Beneficial owners are analogous to controllers in having an absolute right to exercise, or actually exercise, significant influence or control over a company.
Hong Kong Joins the Disclosure Movement
Now, it is Hong Kong’s turn. On January 24th, 2018, Hong Kong’s legislative council passed the Companies (Amendment) Bill 2017 bringing about the Companies (Amendment) Ordinance 2018, effective March 1st, 2018. Under the Companies (Amendment) Ordinance, all companies incorporated in Hong Kong (except listed companies) are required to identify and ascertain a person or persons who has/have significant control over the company, and to maintain a Significant Controllers Register to be accessible by law enforcement officers upon demand.
Although listed companies are exempted, note that there is no exemption for Hong Kong companies that are subsidiaries of a Hong Kong listed company. Significant controllers in Hong Kong are defined the same as Persons of Significant Control in the UK (25% of voting shares, 25% of voting rights held, the right to appoint or remove the majority of directors, and/or otherwise has the right to exercise significant influence or control over the company).
In addition to identifying significant controllers and producing a register with the required information, Hong Kong also requires a designated representative. This representative needs to be local, a resident in Hong Kong who will act as a contact point for law enforcement officers and assist with producing and explaining the register. The Companies (Amendment) Ordinance obliges the designated representative to be either a member, director, or employee of the company who is a natural person resident in Hong Kong; or an accounting professional, legal professional, or “trust or company service provider” licensee (defined here in Section 2.2) registered in Hong Kong.
Impact on Existing and Future Hong Kong Entities
What does this mean for a Hong Kong formation or an existing Hong Kong entity? These additional steps are recommended for compliance.
- Review the group structure and identify its Significant Controller(s).
- Send relevant notices in writing to the Significant Controller(s) (if known from the corporate structure), or any person who can (or a Hong Kong company has reasonable cause to believe can) identify the Significant Controller(s).
- Gather the prescribed Significant Controller(s) information within 1 month of the notice.
- Appoint a local person as designated representative.
- Create a Significant Controller Register (SCR) containing the prescribed information.
- SCR must be made available at the company’s registered office or a prescribed place, and with controls to ensure that the Register is always up-to-date.
- A company has 7 days to give notice in writing to Significant Controller(s) after first knowing or believing there is registrable change. Significant Controller(s) are required to confirm within 1 month.
- Entries in the SCR relating to a person may be destroyed after a 6 year period from when the person ceases to be a Significant Controller.
- A company is not required to show its SCR for public inspection, with the exception of persons with rights to inspect and request a copy of the register.
Hong Kong’s Companies Registry has issued comprehensive guidelines that provide specifics as to where the Register is to be kept, the format of the Register, how to provide notice to those who are Significant Controllers, and the conditions for significant control. Additionally, it provides guidance on the interpretation of “significant influence and/or control” to include where a person can direct the activities of a company, and/or where a person can ensure that a company generally adopts the activities which the person desires.
Additional Countries Likely to Add Persons of Significant Control to Definition of Beneficial Owner
No doubt other countries, in their commitment to beneficial ownership transparency, will roll out legislation that includes persons of significant control or influence over a company as part of their definition of beneficial owner. As more legislation goes into effect and more guidelines are issued, there will be more certainty as to what constitutes reasonable cause in believing that a person exercises significant control and influence, and how that person’s particulars are to be maintained on the register.
With the knowledge and lessons of the jurisdictions that came before, identifying beneficial owners should become a straightforward process and we’ll be following this transition closely as relevant legislation is enacted worldwide.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.