Dr Raymond Chan, Associate Professor; and Dr Angus Young, Senior Lecturer; Hong Kong Baptist University, take a look at Hong Kong’s proposed beneficial ownership regime and its implications for governance professionals.
Anti-money laundering (AML) measures are critical to the integrity of Hong Kong’s reputation as an international financial centre. To improve Hong Kong’s AML defences, the government proposes to enable beneficiary ownership information of companies to be captured to allow law enforcement agencies to access such information. The rationale is to detect laundered proceeds of crime held through corporate nominees and obscure and sometimes impenetrable ownership structures designed to disguise the ultimate beneficiaries of funds.
Money launderers tend to target nations that have not made significant progress in developing AML statutes, or fail to effectively enforce their AML statutes. For this reason, Hong Kong has enacted four main pieces of AML legislation in the last three decades to combat money laundering activities. The latest enacted was the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO). The AMLO stipulates the customer due diligence (CDD) and record-keeping obligations of specified financial institutions. It also confers powers to the relevant authorities to supervise compliance with these requirements.
In performing their CDD duties, financial institutions are required to verify their customer’s identity. This includes identifying any ultimate beneficiaries in relation to the customer. Section 2(1)(b) of the AMLO requires financial institutions to take ‘reasonable measures to verify the beneficial owner’s identity’. Where the customer is a legal person or trust, financial institutions are required to investigate the ultimate beneficiaries of the legal person or trust.
However, the information gathered under the AMLO is not normally accessible to law enforcement agencies unless these agencies seek a court order to direct specific financial institutions to produce the relevant records. Application of this order is not only time consuming, but also requires the investigator to have knowledge of which financial institution has an established business relationship with the suspicious company.
The FATF requirements
The Mutual Evaluation of Hong Kong, China – 4th Follow-up Report issued by the Financial Action Task Force (FATF) in 2012 noted the deficiencies of the current provisions in the Companies Ordinance (Cap 622) requiring company registers to maintain information pertaining ‘only to legal ownership/control, not so much to beneficial ownership’ (see page 40 of the report). Without this information, local law enforcement authorities cannot identify the beneficial owners of companies in a timely fashion.
FATF’s Recommendation 24 requires member jurisdictions to take measures to ensure ‘adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities’ in order to prevent the misuse of legal persons for money laundering and terrorist financing.
In its third mutual evaluation report released in 2008, Hong Kong was placed in a regular follow-up process. The territory had fallen short of relevant measures to meet the objectives of the FATF’s recommendations. Although some progress has been made since the 4th mutual evaluation report, a number of major deficiencies are still outstanding. To safeguard the integrity and stability of our financial system, the government has prioritised the fixing of all the major deficiencies mentioned in the latest mutual evaluation report before the next evaluation scheduled in late 2018. This was the driving force behind the recent consultation paper (see Enhancing Transparency of Beneficial Ownership of Hong Kong Companies on the Financial Services and the Treasury Bureau website: www.fstb.gov.hk), issued in January 2017 which proposed to introduce a statutory regime on the transparency of beneficial ownership of companies before the upcoming mutual evaluation, so as to improve the overall ratings of Hong Kong in the subsequent report.
The new beneficial ownership regime
The consultation conclusions, released in April this year, resolves to require all companies incorporated under Hong Kong’s Companies Ordinance to keep a register of beneficial owners for at least six years from the date such individuals cease to be registrable individuals or registrable legal entities. This register is to be accessible by the authorities. To help the authorities in investigating beneficial ownership, companies are required to enter into the register an authorised person who will serve as contact point to assist law enforcement agencies. Companies have the flexibility to designate either a natural person resident in Hong Kong or an external service provider (such as an accountant, solicitor or company secretary working for a trust and company service provider (TCSP) as the authorised person. Given that there are stringent disclosure requirements in place for listed companies under the Securities and Futures Ordinance (Cap 571), they are exempted from this proposal.
Companies have the status of ‘legal persons’ under the law and, according to FATF, a ‘beneficial owner’ is defined as a natural person who ultimately owns or controls the legal person, based on a threshold of having more than 25% direct or indirect shareholdings or voting rights. Individuals who can exercise significant control over the management or activities of the entity through other means (for example, via the right to appoint or remove a majority of directors), are also considered beneficial owners.
The government proposes to adopt a similar definition in Hong Kong’s new beneficial ownership regime. Studies indicate that the controllers of many large companies in Asia use pyramid structures as a means to exercise their control through a complex ownership chain with many successive layers of intermediate holding companies. As such, the identification and registration of all entities with a complex ownership structure will increase the compliance burden of companies. On the whole, the concept of the beneficial owner is novel to the local business community in Hong Kong and it may be difficult for these regulatory requirements to be implemented in the initial stages.
In tandem with the new beneficial ownership regime, the government is bringing in a new licensing regime for professionals in the designated non-financial business and professions (DNFBP) sector, which includes trust or company service providers (TCSPs). Under the licensing scheme, TCSPs will be required to apply for a licence from the Registrar of Companies before they can carry on a trust or company service business in Hong Kong. This is also designed to fulfil the requirements of FATF, which recommends that DNFBPs should be subject to effective systems of monitoring to ensure their compliance with anti-money laundering and counter-terrorist financing (AML/CFT) requirements.
In January this year, the government consulted on the licensing regime proposals (see Consultation on Enhancing Anti-Money Laundering Regulation of Designated Non-Financial Businesses and Professions on the Financial Services and the Treasury Bureau website: www.fstb.gov.hk). The consultation conclusion, also issued in April this year, noted the large amount of written submissions from various stakeholders including various professional bodies and associations. The Estate Agents Authority together with respondents from the real estate sector were the most vocal in arguing that the sector should be exempted from the statutory CDD and record keeping requirements, due to the low AML risk as well as the limited role estate agents play in property transactions.
The government concluded that, ‘We see no grounds to derogate from prevailing practice by offering exemption in the AMLO’. Other professionals in the DNFBP sector, such as lawyers and accountants, were equally keen to be exempted from this regulation. The government did not see a convincing case to exempt them either. However, the government is mindful of the administrative burden and compliance costs associated with the proposal. The government has opted to make the Companies Registry the regulator responsible for implementing the new beneficial ownership and licensing regimes. This is despite the fact that the government acknowledges the wishes of some for The Hong Kong Institute of Chartered Secretaries to assume the role of licencing authority for the TCSP regime. The justification was that there are other professions in the TCSP sector (see page 28 of the consultation conclusions).
It has also opted to allow accountants, solicitors and professionals working for TCSPs to be exempt the requirement to apply for a licence from the Companies Registry. However it notes that, ‘If accountants and solicitors operating TCSP business with persons not being accountants and solicitiors (as the case may be), they will be required to obtain a TCSP licence from the Companies Registry. Under such circumstances, the non-accountant or non-solicitor directors/partners/ultimate owners of the TCSP entities will be subject to the fit-and-proper test as well as disciplinary proceedings administered by the Company Registry, whereas their accountant/solicitor counterparts will continue to be subject to the conduct and disciplinary proceedings of the Hong Kong Institute of Certified Public Accountants and the Law Society’ (see page 32 of the consultation conclusions).
The new AML/CFT regulatory proposals are the latest in a series of compliance-centred regulatory requirements. They are aimed at complying with FATF’s expectations. The questions from the two consultation exercises had been somewhat confined to technicalities. The broader issues that relate to Hong Kong’s business and social norms have not been given much attention beyond the territory’s status as an international financial centre.
Regulatory compliance burdens are on the rise and individuals performing corporate governance roles have seen greater accountability demands. The proposed beneficial ownership regulatory requirements add to this trend. Over the last three decades the company secretary role has evolved from an administrative into a strategic and advisory role. Furthermore, with the emphasis on better governance and the ever increasing quantity of compliance regulatory obligations, it is time for company secretaries to seek regulatory support like lawyers and accountants and be designated as governance professionals.
Dr Raymond Siu Yeung Chan
Head and Associate Professor at the Department of Accountancy and Law, Associate Director, MBA and MScBM programmes at the School of Business, Hong Kong Baptist University
Dr Angus Young
Senior Lecturer at the Department of Accountancy and Law, Hong Kong Baptist University, Distinguished Research Fellow at the German-Sino Institute of Legal Studies, Nanjing University and Adjunct Fellow at the School of Law, Western Sydney University
The government’s consultation documents are available on the Financial Services and the Treasury Bureau website: www.fstb.gov.hk.