The Companies Registry responds to queries raised by members of The Hong Kong Institute of Chartered Secretaries relating to the extent of due diligence required for compliance with Hong Kong’s new anti-money laundering and counter-financing of terrorism (AML/CFT) regimes.
Following the implementation, from 1 March 2018, of the regimes relating to the keeping of significant controllers registers (SCRs) and the licensing of trust or company service providers (TCSPs), The Hong Kong Institute of Chartered Secretaries (the Institute) has received questions and comments from members, including those working at TCSPs, regarding the extent of due diligence required to ensure compliance with the new regimes. The Institute is grateful to the Professional Services Panel and the Companies Registry for the questions raised and the responses thereto summarised below.
Extent of due diligence relating to listed issuers
The Institute raised an issue with the Companies Registry as to the extent of the requisite due diligence in the making up of SCRs where an applicable company has significant controllers, and in identifying the registrable persons behind these it becomes necessary to conduct due diligence over companies listed in Hong Kong or elsewhere on any recognised stock exchange. The Companies Registry had earlier made it clear that in accordance with the Companies Ordinance an applicable company is not required to investigate further beyond a registrable legal entity which is listed in Hong Kong as the latter is already subject to stringent disclosure requirements under the Securities and Futures Ordinance. But otherwise, due diligence would extend to companies listed in Hong Kong or elsewhere.
As the devil is in the details, the Institute honed in on whether the Companies Registry could provide some practical guidance to members as to what constitutes ‘reasonable’ due diligence in the context of the requisite due diligence over Hong Kong and overseas listed companies. This is especially important in respect of overseas listed companies as the extent of what constitutes reasonable due diligence would affect the extent of advice, time and costs required in making up the SCRs. For example, are the Institute’s members obliged to follow financial news regarding mergers and acquisitions of the listed companies concerned in making up the SCRs?
The Institute submitted that it would be useful if the Companies Registry could accept that reasonable due diligence has been conducted where there is service of notice upon a listed issuer, whether listed in Hong Kong or elsewhere, to call for information for making up the SCR. This is without the need for further investigation as to whether there is need to serve a notice on any other persons.
The Institute also pointed out that under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and the Guideline on Compliance of AML and CTF Requirements for TCSPs issued by the Companies Registry, where the client is a corporation or has in its ownership chain a corporation listed on a stock exchange body in a jurisdiction, which is a member of the Financial Action Task Force (FATF), simplified due diligence (SDD) may be applied. Under SDD, a TCSP is not required to identify and verify the beneficial owner of the listed corporation. It seems that the approach applied in dealing with the requirement for transparency of beneficial owners of a listed corporation under the two regimes are not the same.
Companies Registry response
‘As you are aware, the FATF, of which Hong Kong is a member, requires member jurisdictions to take measures to enhance the transparency of beneficial ownership of companies by requiring companies to take reasonable steps to ascertain and identify natural persons who have ultimate beneficial ownership interest or control of the company through various means. Further, companies are required to keep adequate and accurate information of these natural persons that can be obtained or accessed in a timely manner by competent authorities.
Presently, companies incorporated in Hong Kong are required to ascertain and identify registrable persons and registrable legal entities for the purposes of compiling the SCR. To strike a balance between meeting the requirements of FATF on the one hand and reducing the compliance burden and costs of companies on the other, instead of requiring companies to disclose the particulars of all legal entities in the chain of ownership, a registrable legal entity is restricted to a legal entity that is a member of the company (that is, the disclosure of registrable legal entities is restricted to the first level of ownership).
On this basis, the exemption given to listed companies is therefore only relevant to a registrable legal entity and the first level of ownership. It is not the legislative intent to extend the exemption to higher levels of ownership as the higher levels of legal entities are not required to be disclosed in the SCR and, more importantly, such extension of exemption would impede the identification of registrable persons and would likely fail to meet the requirements of the FATF, which in essence require that competent authorities should have access to adequate, accurate and timely information on beneficial ownership.
Under section 653P of the Companies Ordinance (CO), a company has the obligation to take reasonable steps to ascertain whether there is any significant controller of the company and to identify each of them. Taking reasonable steps will include, but is not limited to, the giving of notices in accordance with sections 653P(2) and 653P(3). There is further guidance on the issue in Chapter 4 of the Guideline on the Keeping of Significant Controllers Registers by Companies and FAQ 5.
In situations, for example, where the applicable company knows the ownership (direct or indirect) of the listed company in the applicable company but not if any other person holds ownership, or has significant control, through the listed company, notice(s) may be given to the listed company under section 653P(2). If, however, the company knows or has reasonable cause to believe that another person (who holds ownership through the listed company) is a significant controller of the applicable company, a notice is also required to be sent to that person.
In relation to updating the SCR, pursuant to section 653T of the CO, if the company knows or has reasonable cause to believe that there is a registrable change with respect to a person, a notice must be given to the person to whom the registrable change relates. In fulfilment of the FATF’s requirements, it is the obligation of each company (unless exempted) to investigate and maintain accurate and up-to-date information on its significant controllers for inspection upon demand by law enforcement officers.
As you appreciate, the AML requirements applicable to a TCSP licensee and the legal obligation to keep an SCR by an applicable company are two entirely different regimes, which reflect different international requirements on the conduct of customer due diligence by a TCSP and the need to enhance beneficial ownership by a company, respectively. Even though SDD may be applied by a TCSP licensee in certain circumstances, the relevant FATF requirements remain, as pointed out above, for a company to identify the natural persons who have ultimate ownership interest, or control, of the company.’
The Companies Registry has set out in its FAQs that: ‘A company must designate at least one person as its representative to provide assistance relating to the company’s SCR to a law enforcement officer. A company’s designated representative must be either a shareholder, director or an employee of the company who is a natural person resident in Hong Kong or, alternatively, an accounting professional, a legal professional or a person licensed to carry on a business as trust or company service provider.’
The Institute raised a query as to why company secretaries are not in this list. The context is that a company secretary of an applicable company is quite often an employee only of the holding company, or one of the group companies for companies within a group, and not an employee of the applicable company. The Institute urged that recognition be given to company secretaries, as it would be reasonable that a company secretary, being an officer in charge of company administrative matters, be the designated representative of the applicable company.
Companies Registry response
‘Your views are noted and we will keep in view the implementation of the relevant statutory provisions. Meanwhile, to ensure proper compliance, we should be grateful if you would remind your members that the appointment of a designated representative has to comply with the requirements set out in section 653ZC(2) of the CO.’
A recent incorporation application submitted by a member of the Institute was selected for checking by the Companies Registry. In this case, no information was provided on how long the incorporation application would take. Members of the Institute would like to have further guidance on this matter so that they can alert clients regarding the implications for existing performance pledges. In addition, would post-incorporation vetting for licensed TCSP be more appropriate? Also, would the checking apply to the one-hour online incorporation timing?
On another matter, members of the Institute also report being asked for submission of proof of address for company incorporations when this is no longer required under the AMLO or the Companies Registry AML/CFT Guidelines.
Companies Registry response
‘As you appreciate, in order to ensure the integrity of the Companies Register, to ensure that incorporation applications comply with the statutory requirements of the CO and to mitigate the risks of money laundering/terrorist financing, the Companies Registry has strengthened the checking of incorporation documents submitted both in paper and online. The enhanced checks are part of our enforcement efforts to prevent the use of companies for illicit purposes in compliance with international requirements.
As such, it would be inappropriate to disclose or publicise particulars of the enforcement measures. We should be grateful if members of the Institute would, among other things, duly conduct customer due diligence measures as required and comply with any requests made by us for further information and/or clarifications timely and properly so that the relevant applications can be processed smoothly.’
More information is available on the Companies Registry website: www.cr.gov.hk.