Significant Controller Register in Hong Kong
Every company in Hong Kong, except for listed companies, needs to have a so-called ‘Significant Controller Register’ in place that will identify the beneficial owner(s) of a Hong Kong company. This is a rule that was introduced in Hong Kong as per 1 March 2018 through the Companies (Amendment) Ordinance 2018.
Why a Modernization of the Companies’ Ordinances was Needed?
Previously, the Hong Kong Companies’ Ordinance (Cap 622) (“CO”) did not provide for sufficient information on the beneficial ownership of companies incorporated in Hong Kong and therefore lacked transparency. As a result, it was rather difficult for law enforcement agencies in Hong Kong to understand a particular corporate structure and to retrieve information on who is ultimately in control of such corporate structure.
The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap 615) (“AMLO”) was not of much assistance either as although financial institutions are required under this ordinance to obtain ultimate beneficial ownership information about a customer, this information can only be accessed by the law enforcement agencies upon a court order.
As global institutions such as The Financial Task Force and the Global Forum on Transparency and Exchange of Information for Tax Purposes promote transparency of companies, it was proposed by the Hong Kong Government to amend the current CO as such that companies incorporated in Hong Kong will need to provide for beneficial ownership information and / or declare that it has no people with significant control.
As a result of making this information more readily available, the Hong Kong Government hopes that it will prevent Hong Kong companies of being used for money laundering and terrorist financing activities, and also that such information, when required, can quickly be accessed by law enforcement agencies.
The Significant Controllers Register
In general, the significant controllers register is based on the following rules:
1. To have a register for companies incorporated in Hong Kong (“HK Co”) in place containing information in respect of,
- Persons with significant control (a so-called “PSC”) over a HK Co. A person (whether residing in Hong Kong or not) is a PSC when it is a natural person who can be qualified as a (ultimate) beneficial owner (a “registrable individual”), and
- Companies with significant control over a HK Co (one could call it a “CSC”). A company (whether incorporated in Hong Kong or not) is a CSC when it is a legal entity that can be qualified as a (direct) beneficial owner (a “registrable legal entity)”.
2. Whereby a beneficial owner is defined as a registrable individual or a registrable legal entity that holds,
- Directly or indirectly more than 25% of the shares in a HK Co;
- Directly or indirectly more than 25% of the voting rights in a HK Co;
- Directly or indirectly the right to appoint or remove a majority of directors in a HK Co;
- Otherwise the right to exercise, or actually exercises, significant influence or control over the HK Co; and/or
- The right to exercise, or actually exercises, 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 conditions under a-d above (in their capacity as such) in relation to a HK Co, or would do so if they were individuals.
3. Such register is called a PSC register and would be in addition to the HK Co register of members, directors and company secretaries. Any changes and / or updates to the PSC register of a HK Co would need to be confirmed by the relevant registrable individual and/or the registrable legal entity. If a HK Co has no registrable individual and/or a registrable legal entity, then such absence should be expressly stated in its PSC register. If the registrable individual and/or a registrable legal entity cease to be a beneficial owner of the HK Co, the record in its PSC register can only be destroyed after a period of 10 years.
4. The PSC register of the HK Co should contain, either in English or Chinese, the following details:
- Name and address details of the registrable individual(s) and/or registrable legal entity(ies);
- ID card/passport details of the registrable individual(s) and/or company details of the registrable legal entity(ies);
- Date on which the individual(s) and/or entity(ies) became a registrable individual and/or a registrable legal entity;
- Nature of control of the registrable individual(s) and/or the registrable legal entity(ies) in accordance with the beneficial ownership definitions; and
- Details of the authorised person responsible for providing the PSC register information and further assistance to the law enforcement agencies when required. This could be either a natural person in Hong Kong or a locally-based designated non-financial business and professional (“DNFBP”), such as accountants, solicitors, trust and / or company service providers.
5. A HK Co should undertake reasonable steps to identify and ascertain its registrable individuals and registrable legal entities, which may include serving notices on any beneficial owner of which a HK Co knows or has reasonable cause to believe to be registrable in relation to the HK Co or that has information about a registrable person. In such scenario, the ‘notice addressee’ will have a statutory obligation to comply with such notice. Non-compliance and / or making knowingly and / or recklessly statements that are misleading, false or deceptive, may result into penalties and / or imprisonment for either the HK Co or the ‘notice trustee’.
6. The Hong Kong Companies of Registrar should be stayed informed, by means of a return, on the whereabouts of the PSC register. The PSC register should also be available for any member of the HK Co or any person on the register without charge. In addition, there should also be access for members of the public in return for payment of a fee. The public access would be organised through the already existing Company Records (Inspection and Provision of Copies) Regulation, Cap 622I, which amongst others would then also regulate the rights to inspect and take copies of a PSC register.
Beneficial Ownership & Significant Controller Register
According to the Hong Kong Government, the public available beneficial ownership information, to be stated in the PSC register, should prevent or reduce any money laundering and terrorist financing activities by HK Co’s. At the same time, the PSC register should benefit law enforcement agencies when they need an easy and quick access to the beneficial ownership information inside this register. The Hong Kong Government also believes that the PSC register will strike a proper balance between at one hand being transparent and at the other hand by taking account of privacy concerns and compliance costs. However, has this balance really been met? Very likely not.
The question arises, why do entities or people in general not like to have their (ultimate) beneficial ownership information revealed to the public? Is this purely because they want to ‘hide’ their money laundering and terrorist financing activities from the Hong Kong law enforcement agencies? No, the most important reason is obviously related to privacy concerns.
When the legislation was drafted, there was no discussion on how the principles of the Personal Data (Privacy) Ordinance (Cap 486) (“PO”) will fit in (institutions should not collect more information than really required for their operation): From the outside it looks like that the PO is not relevant here as most HK Co’s cannot be qualified as a so-called ‘data user’, however one can still wonder why banks and other financial institutions and DNFPB’s still need to adhere to the rules of the PO when information such as ultimate and direct beneficial ownership is just about to be spread around on the street?
In addition, the Hong Kong Government should be aware that apart from privacy concerns, people might have other reasons for not willing to reveal their interests in a HK Co to the public. This might for example be because of tax related issues, which are not necessarily related to aggressive tax planning exercises, or simply because they do not want their partner, child or family to know what interests in a HK Co including its assets they own.
Also, is it really correct to state that the previous CO does not provide for proper ultimate beneficial ownership information? Yes, an initial search might not always directly reveal the ultimate beneficial owner of a HK Co because of the several layers of companies on top of the HK Co, but subsequent searches either in the Hong Kong Company Registrar Database and / or in the overseas’ company databases, usually tend to reveal rather a lot of information on the ultimate beneficial owner.
Another important question to ask is the following: In respect of those HK Co’s that act fraudulently, in how many of those cases have the ultimate beneficial owners really been hiding behind several layers of companies? This number is likely to be low. In fact, in the majority of these cases, the ‘ultimate’ beneficial owners of the HK Co’s are just acting as a middleman and the real ‘culprits’ are nowhere to be found simply because no proper nominee agreements have been created.
Therefore, it seems that revealing ultimate beneficial ownership information will not assist Hong Kong at all. The new significant controller register will not prevent or reduce the current number of money laundering and terrorist financing operations.
In fact, it is even more likely to increase them as the culprits do now have access to ultimate beneficial ownership information that can be used somehow to the benefit of their criminal activities. In the meantime however, the vast majority of the ultimate beneficial owners of a HK Co will become a victim as although some transparency is good, too much transparency makes them very ‘vulnerable’.
Last but not last, by placing sanctions such as fines and imprisonment sentences on authorised persons in the event of their ‘non-compliance’, whatever that means, the risk exists that not the real culprits, but the authorised persons instead will be criminalised.