Register of Significant Controllers

By Jocelyn Yuen

The loophole

It is not disputed that a loophole once existed in Hong Kong law, allowing ultimate controllers of companies to hide their identity behind complicated ownership and control structures. The Companies Ordinance (Cap.622) contains no requirement to disclose beneficial ownership or control of shares of a company. Consequently, the loophole had been manipulated and misused to hold proceeds of crime, accelerate money laundering and conduct financial crimes including tax evasion and corruption for a long time.

Amendment to the Ordinance

In order to close the loophole and increase the transparency of information regarding the beneficial owners and controllers of companies, one of the recommendations made by the Financial Action Task Force has been followed by the Hong Kong legislators. They have imposed a new regulation on Hong Kong companies (excluding listed companies) that requires them to maintain a register of its significant controllers under s.653H, the amended Ordinance. Contravention of this requirement constitutes an offense and attracts liability of a fine.

Eligible significant controller

Significant controllers can be categorized into registrable persons including natural persons and ‘specified entities’ such as governments and inter-governmental organizations; and registrable legal entities, both of whom have significant control over the company.

A person has significant control over the company if one or more of the following conditions are met:-

(1) the person holds, directly or indirectly, more than 25% of the issued shares in the company;
(2) the person holds, directly or indirectly, more than 25% of the voting rights in the company;
(3) the person holds, directly or indirectly, the right to appoint or remove a majority of the board of directors of the company;
(4) the person has the right to exercise, or actually exercises, significant influence or control over the company;
(5) the person has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or firm that is not a legal person, but whose trustees or members meet any of the first four conditions (in their capacity as such) in relation to the company.

Duty to investigate

Under s.653P of the Ordinance, the company must take reasonable steps to ascertain the existence of significant controllers and identify them if any.

Once the company discovers, or has reasonable cause to believe that any person is a significant controller, it must give an inquiry notice to that person requesting for (1) confirmation if he/she is a registrable person/ registrable legal entity of the company; (2) completion or confirmation of the required particulars of him/her; (3) specified particulars of another person whom he/she knows to be another significant controller of the company. Such a notice must also be complied with by the addressees within 1 month, violation of which constitutes an offense.

Removing Shelter

The new amendment to the Ordinance which impose new obligations to Hong Kong companies to disclose significant controllers is, after all, important in the sense that it takes away the shelter where criminals conduct money-laundering or terrorist financing and, hopefully, it will prevent the existence of financial crimes in future.