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By Eric Jordaan
First published on Moneyweb

Following South Africa’s greylisting in February – and the recommendations made by the Financial Action Task Force (FATF) – the General Laws Amendment Act (Anti-Money Laundering and Combating Terrorism Financing) places new obligations on companies to register prescribed information regarding beneficial ownership. Of the eight areas of strategic deficiencies found by the FATF, the need for relevant authorities to have access to beneficial ownership records is a notable one.

In this article, we explore the new obligations placed on company shareholders to report on beneficial ownership.

Why the need for opaque corporate structures in the first place?

Complex company structures are often used legitimately to protect the privacy of high-net-worth individuals and their families or to address the inherent risks faced by large family businesses, examples of which could include kidnapping, phishing attempts, or blackmail. However, such structures can also be used as a front for money laundering, fraud, financing terrorist activities, and tax evasion, to name just a few criminal activities. Because of this, the FATF report found that South Africa’s law enforcement agencies were facing significant challenges as a result of the lack of transparency.

Why is beneficial ownership transparency important?

The FATF found that South African authorities rely primarily on obtaining beneficial ownership from accountable institutions, although these measures were found to be insufficient. They recommended that South Africa ensure that their institutions are able to provide ‘adequate, accurate, up-to-date, and verified beneficial ownership information in a timely manner’, and that increasing the transparency of beneficial ownership within the South African environment would significantly bolster the fight against financial crime. It is believed that with full sight into the ownership of organisations and companies, our law enforcement agencies will be better equipped to combat money laundering, tax evasion, and other financial crimes. Without such transparency, organisations remain able to set up complex ownership structures as a front for behind-the-scenes corruption and criminal activity.

What is the definition of beneficial ownership?

In a nutshell, beneficial ownership is about creating transparency into the true ownership of a company or organisation. The FATF’s guide defines benefit ownership as ‘the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.’ In respect of a company, a beneficial owner includes any natural person with a shareholding of 5% or more in any legal entity or a person who exercises effective control of an entity.

Which legislation does the General Laws Amendment Act affect?

The FATF report indicated that our legislation should be amended to ensure that South African authorities have access to beneficial ownership information on legal persons and arrangements and that sanctions should be imposed for non-compliance. As such, the Act (which was assented to in December 2022) amends the regulation of beneficial ownership of the Companies Act, Trust Property Control Act, and the Financial Sector Regulation Act, amongst others. Specifically, amendments to the Companies Act provide the Companies and Intellectual Property Commission (CIPC) with a mandate to collect beneficial ownership information that is designed to address the existing deficiencies highlighted by the FATF.

How will beneficial ownership companies be recorded?

As it currently stands, the CIPC only holds records of legal owners in the form of members and directors and does not record company shareholders and beneficial owners. As such, the intention of the amended Act is for the CPIC to keep a register where accurate and updated beneficial ownership information can be recorded, something which the CPIC indicates will be ready in April this year. In line with the FATF’s recommendations, failure to register such information will amount to non-compliance with the Companies Act which could result in an administrative fine.

What do these amendments mean for companies?

Other than ‘regulated’ companies (or companies controlled by a ‘regulated’ company), such as a company listed on a securities exchange, companies will be required to record the information of natural persons who are beneficial owners of the entity on their share register. This means that, when filing their annual returns with the CPIC, such companies will need to file a copy of their securities register which duly reflects the beneficial ownership of the organisation.

When will this register be implemented?

Working closely with other key stakeholders such as South African Reserve Bank and National Treasury, the CIPC plans to have the register ready in April this year and believes that it will greatly assist in the prevention of abuse of corporate vehicles. Further, these steps will help South Africa meet its objectives of complying with the FATF’s recommendations with a view to exiting the grey list during the course of 2024.

As is evident from the above, the amendments to the Companies Act in relation to beneficial ownership aim to regulate the disclosure by companies of those who are ultimately (directly or indirectly) in control of the company, a move which bodes well for the future of financial crime-fighting in this country.

Eric Jordaan is an admitted attorney, and a director and shareholder at Crue Invest.