Hong Kong’s new anti-money laundering (AML) regime gives law enforcement agencies in Hong Kong easier access to information about the beneficial owners of Hong Kong companies, a move which has been lauded for its focus on transparency. But areas of uncertainty remain for those companies that don’t have a standard corporate structure.
The framework has at its core a requirement for local companies to create and maintain registers of persons with significant control. It has been lauded for introducing a heightened degree of transparency around ownership and control, and will be welcomed by regulators and law enforcement agencies alike.
Spotlight
According to Jeckle Chiu, partner at Mayer Brown JSM, the intention of the significant control register is to bring Hong Kong’s regulatory regime up to date and in line with international requirements as promulgated by the Financial Action Task Force (FATF). The new regime reflects an increasing global trend towards greater ownership transparency. The primary aim of the new regime is to strengthen Hong Kong’s AML and counter-terrorist financing (CTF) laws. Companies formed and registered in Hong Kong, except for listed companies which need to fulfill separate obligations, must take reasonable steps to identify individuals or entities with significant influence or control over the company’s affairs, record their details in a register, and designate a representative to serve as a contact point for providing information about the register to law enforcement agencies in Hong Kong.
Joanna Caen, partner at Herbert Smith Freehills said that the new requirements aim to address deficiencies identified in Hong Kong's previous laws and regulations which focus on disclosure of legal ownership and didn’t require companies to ascertain, keep or file information about their ultimate beneficial owner which is accessible to law enforcement authorities. Failure to comply is a criminal offence, and can result in criminal prosecution of not only the company itself but also its officers.
Paul Dorrans, consultant at Simmons & Simmons, notes that similar arrangements exist in jurisdictions such as the UK, Singapore, Cayman Islands, and British Virgin Islands. Unlike the UK however, the Hong Kong register is not publicly available, being only accessible to law enforcement agencies.
“For some, that difference could be seen as a significant limitation on the strength of the Hong Kong regime,” said Dorrans. “Others however will view it as striking an appropriate balance between privacy and law enforcement priorities.”
KEY TAKEAWAYS
Hong Kong has introduced a requirement for companies to create and maintain registers of persons who have significant control;
Businesses with complex corporate structures can expect more scrutiny over their beneficial owners;
The change introduces a heightened degree of transparency around ownership and control, and will be welcomed by regulators and law enforcement agencies alike.
Ifs and buts
While the legislation is detailed, for the most part its application should be relatively straightforward, and the process of identifying and recording the particulars required is not expected to be an overly burdensome process.
“For some companies, however, determining how far to go to establish who can direct the activities of a company or ensure that a company generally adopts the activities which the person desires will be less than straightforward,” said Dorrans. “Companies which find themselves in those circumstances should carefully record all steps taken to establish the identity of their beneficial owners, so if the reasonableness of those efforts are brought into question the company can more readily defend its position.”
Companies will need to deal with extra scrutiny on their corporate structures. “The gist of the requirement is its insistence on a reasonable due diligence process to make up-the-chain enquiries about significant controllers of companies,” added Chiu. “That insistence has lacked flexibility as it is now written into the law. The question is where to stop the up-the-chain enquiries.”
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"The gist of the requirement is its insistence on a reasonable due diligence process to make up-the-chain enquiries about significant controllers of companies" |
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Chiu points out that the law was written so that enquiries would not only stop above the public company level, but third to fourth tier subsidiaries of listed companies could incur an unintended obligation to make up-the-chain enquiries above the public company level. Another area that would need clarity are the requirements for insolvent and dormant companies.
A company will need to determine whether a person or entity has significant influence or control over the company, in which case the person or entity will need to appear on the significant shareholders register. This wording contained in the Hong Kong Companies Ordinance aims to ensure significant controllers cannot avoid the requirements by artificially structuring their interest so as to fall outside the scope of the regime.
Caen notes that although the Companies Registry has issued guidelines concerning this wording, they are only indicative of what constitutes control and significant influence in this regard. For example, the relevant guidance states that a right to exercise significant control or influence may arise from provisions in articles of association or shareholders agreement, including absolute decision rights or veto rights related to the operation of the business.
“Further guidance may be needed to clarify whether all such veto rights, including those that exist for the purpose of protecting minority or granted to prospective buyers on a temporary basis in mergers and acquisition transactions, constitute significant influence or control,” said Caen. “In this regard, absent of Hong Kong guidance, companies may find assistance from guidance issued concerning similar wording for equivalent rules in the UK.”
See also
