INTRODUCTION
The concept of disclosure of beneficial ownership in legal entities is not a novel one as corporate entities play an essential role in the global economy by conducting a wide range of commercial and entrepreneurial activities. Unfortunately, many corporate vehicles have been misused by criminals to disguise and convert proceeds of their crimes. Anonymous shell companies are notorious for laundering the proceeds of crime and corruption. The appeal lies in the fact that companies can be used to circumvent controls by disguising the identity of known or suspected criminals and the source of funds or assets. By setting up one or more corporate vehicles, criminals are able to hide their identity, the true purposes of the account and the source or use of funds or property associated with the corporate vehicle.
Nonetheless, the misuse of corporate vehicles could be significantly reduced if accurate information regarding both the legal owner and the ultimate beneficial owner, the source of the corporate vehicle’s assets and its activities were readily available to authorities. In 2003, the Financial Action Task Force (FATF) became the first international body to set global standards on beneficial ownership as a measure to fight money laundering and terrorist financing. It required countries to ensure their authorities could obtain up-to-date and accurate information about the person(s) behind companies, trusts and other legal persons. The FATF has since strengthened and clarified its beneficial ownership requirements through various publications such as:
- Guidance on Transparency and Beneficial Ownership, 2012, 2014;
- Best Practices on Beneficial Ownership for Legal Persons, 2019.
BENEFICIAL OWNERSHIP TRANSPARENCY PRINCIPLES
In developing legislation for disclosure of beneficial ownership, the FATF has provided ten fundamental principles that should be integrated into a country’s legislation for purposes of achieving transparency and accountability. These are:
- The definition of a beneficial owner;
- Risk assessment relating to legal entities and arrangements;
- Beneficial ownership information of legal entities;
- Access of beneficial ownership information of legal entities;
- Beneficial ownership information of trusts;
- Access to beneficial ownership information of trusts;
- Roles and responsibilities of financial institutions and businesses and professions;
- Domestic and International cooperation in sharing of beneficial ownership information;
- Beneficial ownership information and tax evasion;
- Bearer shares and nominees.
As an endorser of the FATF recommendations, Kenya has taken action in implementing the disclosure of beneficial ownership in its national and subsidiary legislation. In its Open Government Partnership National Action Plan (2016-2018), Kenya committed to create an open, usable and publicly accessible beneficial ownership register, including information on the ‘actual owners’ and ‘beneficiaries’ of companies. In 2019, Kenya introduced Section 93A of the Companies Act 2015, the the Statute Law (Miscellaneous Amendments) Act. This provided that all companies incorporated in Kenya (public and private) should keep a register of beneficial owners with relevant information relating to such owners. The Companies (Beneficial Ownership Information) Regulations was later published in 2020 to give effect to Section 93A of the Act. A public notice was issued by the Registrar of Companies advising that the E-register would be operational from the 13th of October 2020. It was a fundamental requirement that all companies comply with the updating of their respective beneficial ownership registers by the 31st day of January, 2021. Nonetheless, there were concerns that a 3 month time frame is far too restrictive to accommodate the updating of innumerable company registers. For this reason, the Registrar extended the deadline to the 31st day of July, 2021 which falls due in exactly 30 days.
WHO IS A BENEFICIAL OWNER (BO)?
This is a natural person who ultimately owns or controls a legal person with or arrangements, or the natural person on whose behalf a transaction is conducted, and includes those persons who exercise ultimate effective control over a legal person or arrangement. According to the Regulations, a Beneficial Owner of a company is a natural person who directly or indirectly (i) holds at least 10% of the issued shares in the company, (ii) exercises at least 10% of the voting rights in the company, (iii) holds a right to appoint or remove a director of the company, or (iv) exercises significant influence or control over the company. Significant influence or control an individual’s participation in the finances and financial policies of a company without necessarily having full control over them.
The register of beneficial owners in a company should contain the following particulars in relation to the BO: (i) full name, (ii) birth certificate number, national identity card number or passport number, (iii) personal identification number, (iv) nationality, (v) date of birth, (vi) postal address, (vii) business address, (viii) residential address, (ix) telephone number, (x) email address, (xi) occupation or profession, (xii) nature of ownership or control, (xiii) the date on which the person became and ceased to become a beneficial owner of the company, (xiv) any other detail of which the Registrar may require from time to time.
COMPLIANCE REQUIREMENT
Under the Beneficial Ownership Information Regulations, every company is required to undertake the following activities for purposes of compliance.
- Identify its beneficial owners and enter the respective particulars in the company register;
- Lodge a copy of the register of beneficial owners with the Registrar of Companies within 30 days;
- Lodge any changes to the BO register with the Registrar of Companies within 14 days;
- Give notice to persons it knows or has reasonable cause to believe is the BO of the company to provide details of their particulars within 21 days from the date of notice;
- Issue a warning notice to the person who fails to comply with the notice to provide BO particulars;
- Restrict the relevant interest of a person who fails to comply with a warning notice within 14 days from the date of notice and file the restriction with the Registrar within 14 days of its issuance.
- Withdraw the restriction placed on the relevant interest of the BO within 14 days of compliance of the warning notice and file the withdrawal with the Registrar of compliance.
*Relevant interest in this case refers to (i) shares held by a person in a company, (ii) voting rights exercised by a person in the company, (iii) the right to appoint or remove any member of the board of directors of the company.
PRIVACY ISSUES
The Beneficial Ownership Information Regulations has upheld the principles of data protection and safeguarded the rights of a data subject (BO) by restricting public access to the BO register of a company. Regulation 13 provides that no person shall not use or disclose any information about its beneficial owner except (i) for communicating with the beneficial owner concerned, (ii) in order to comply with the Regulations, or (iii) in order to comply with a court order. Similarly, information relating to a BO may only be disclosed with the consent of the BO. In reference to the principle of purpose limitation, a person who discloses beneficial ownership information in any manner other than for the purpose for which the information was obtained commits and offence and shall be liable upon conviction to a fine not exceeding Kshs. 20,000/= or imprisonment for a period not exceeding 6 months or both.
A unique situation presents itself with regards to the disclosure of the beneficial ownership information. This relates to regulatory authorities who, in carrying out their mandate, require access to private or privileged information relating to a BO. For example, in the Proceeds of Crime and Anti-Money Laundering Act (POCAMLA), the AG is authorised to have access to any registers, records, documents and electronic data for purposes of carrying out money-laundering and terrorist financing investigations.
LOOPHOLES
Despite the enactment of the Beneficial Ownership Information Regulations and the requirement of disclosure of beneficial ownership, Kenyan law still provides for nominee directors and shareholders. This defeats the principle of transparency and accountability as a legal person is still enabled to operate under guise of another as an alternate director. Furthermore, individuals and corporations are still empowered to execute trust deeds and hold shares or act on behalf of each other with no mandatory requirement for registration (with the exception of incorporated trusts). Section 104 of the Companies Act provides that “A company shall not accept, and shall not enter in its register of members, notice of any trust, express, implied or constructive”.
CONCLUSION
Kenya’s adoption of the Beneficial Ownership Information Regulations is a welcome move to the global fight against corruption and illicit flow of funds through money laundering and terrorist financing. As we embark on this journey of transparency, it is imperative to conduct a comprehensive risk assessment of legal persons so as to develop a more thorough understanding of vulnerabilities and potential abuse of legal persons for money laundering and terrorist financing. This will help strengthen our legislative reform and remedy any weaknesses crippling the legal system.
