Hong Kong Government publishes the Companies (Amendment) Bill 2017

Introduction

Further to the article titled “Proposals to enhance transparency of the beneficial ownership of Hong Kong-incorporated companies” dated 26 January 2017, the Hong Kong Government has published the Companies (Amendment) Bill 2017 (the Bill) in the Gazette.

The Bill, published on 23 June 2017, sets out proposed provisions that are largely in line with the plans detailed in the consultation paper issued by the Financial Services and the Treasury Bureau. In brief, the Bill will require all unlisted companies incorporated in Hong Kong to keep a register of “persons who have significant control” over the company (PSCs) for inspection by law enforcement officers upon demand, as well as related reforms, with criminal sanctions for non-compliance. The purpose of this amendment is the prevention, detection or investigation of money laundering or terrorist financing.

The First Reading of the Bill occurred on 28 June 2017. The dates of the Second Reading debate, committee stage and Third Reading are to be notified, but the Bill, as drafted, is set to come into operation on 01 March 2018.

Key elements of the Bill

Who will be affected?

All companies incorporated in Hong Kong, except companies listed on the Hong Kong Stock Exchange (which are subject to their own disclosure regime), will be required to keep and update a PSC register. Other classes of companies could also be exempted if a case can be made that they are bound by suitable disclosure and transparency rules in Hong Kong or elsewhere. PSCs, and those who know or may know PSCs, will need to respond to requests for information that they may receive from a Hong Kong company for inclusion on its register.

Whose details will be included on the PSC register?

Broadly, all individuals who directly or indirectly hold more than 25% of a company’s shares or voting rights or the right to appoint/remove a majority of a company’s directors, as well as anyone who otherwise has the right to exercise, or actually exercises, significant influence or control over a company. In corporate group structures, Hong Kong subsidiaries will need to disclose details of any individual PSCs with ultimate beneficial ownership, as well as any entity immediately above the Hong Kong subsidiary in the structure that meets the criteria for PSCs. Those who have the right to exercise, or actually exercise, significant influence or control over a trust or firm without legal personality will also be caught if their trustees/members (in their capacity as such) meet any of the criteria for PSCs.

A controversial point is that the details of the PSCs of a Hong Kong company may still need to be obtained even if a company listed on an overseas exchange is an intermediate entity between the Hong Kong company and the PSC. This is because the Bill, as drafted, does not exempt individuals holding rights or shares such a listed company from being a registrable person. It is, however, possible that this may change during the Second and Third Reading of the Bill, or that the Financial Secretary may make regulations exempting such individuals from being registrable.

What information on PSCs will need to be disclosed?

Their name, a correspondence/registered or principal office address, the date on which they became a PSC, the nature of their control over the company and their ID card or passport details (for individuals) or the legal form, governing law and company registration number (for registrable legal entities). A PSC will need to remain on the register for six years after they have ceased to be registrable.

The PSC register must also contain the name and contact details of at least one designated representative to provide assistance to officers from the Companies Registry and specified law enforcement agencies (see below).

Where will the PSC register be kept and who will be able to view it?

Companies will need to keep the PSC register in English or Chinese at a location in Hong Kong and notify the Companies Registry of such location (unless the PSC register is kept at the registered office of the company or at the place where the register of members is kept). Companies must also make the PSC register available for inspection to a PSC of the company free of charge, and such PSC may obtain a copy of the PSC register upon the payment of a prescribed fee.

Significantly, the Bill does not require the PSC register to be available for public inspection.

What will companies need to do to obtain and verify information about PSCs?

Companies will be required to take reasonable steps to ascertain whether there are any PSCs, and if so, identify each of them. This may involve reviewing relevant corporate documents and serving a notice requesting details of a PSC, or confirmation of such details, on any person (i) that the company knows or has reasonable cause to believe is a PSC, or (ii) who knows or may have reasonable cause to know the identity of a PSC of the company.

What obligations will beneficial owners have?

A recipient of a notice requesting information will be required to comply with the notice by providing or confirming the relevant details or any changes within one month. The Bill does not require PSCs to pro-actively identify themselves and provide their details to a company over which they have significant control. Instead, the Bill imposes an obligation on the company to investigate and obtain information, as well as to keep such information up to date.

Contact for law enforcement investigations

Companies will need to include in the PSC register details of a designated representative responsible for providing information and assistance to officers of the Companies Registry and specified law enforcement agencies in relation to the company’s beneficial owners if required. The designated representative must either be (i) a natural person resident in Hong Kong and a director, employee or member of the company; or (ii) a locally-based designated professional (such as an accountant, solicitor, or trust or company service provider) who will then also have a statutory duty to conduct customer due diligence and verify ownership information.

What are the proposed consequences of non-compliance?

The Bill sets outs criminal sanctions for non-compliance with the new regime. Failure to keep a PSC register, or make it available for a law enforcement officer’s inspection, or a failure to enter the particulars of a PSC within seven days after such information has been confirmed with such PSC, may cause the company and its responsible persons to be fined by up to $25,000 plus, for failure to keep the register, a further daily fine of up to $700. Similarly, failure to comply with a notice requesting information about beneficial ownership can attract a fine of up to $25,000 and, potentially, may entitle the company to restrict rights (eg voting rights or rights to dividends) held by the notice addressee. If anyone knowingly or recklessly makes in the PSC register, or in a document replying to a notice requesting information, a statement which is misleading, false or deceptive in any material particular, they may liable be for a maximum fine of $300,000 and up to two years’ imprisonment.

What are the proposed changes to the anti-money laundering and counter-terrorist financing regime?

The AMLO requires financial institutions to conduct due diligence on their customers’ beneficial owners in certain circumstances. A “beneficial owner” is currently defined in the AMLO as an individual who owns or controls, directly or indirectly, at least 10% of a corporation’s shares or voting rights, or who exercises ultimate control over the management of the corporation. The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017, if passed in its current form, will increase the relevant shareholding and voting rights threshold in the AMLO to 25% so that it is consistent with the proposed criteria for a PSC.

Timing

The Government appears keen to proceed quickly to implement the new statutory regime before Hong Kong’s next FATF evaluation, which is scheduled to begin in October 2018. The First Reading of the Bill occurred on 28 June 2017. The dates resumption of the Second Reading debate, committee stage and Third Reading are to be notified, but the Bill, as drafted, is set to come into operation on 01 March 2018.

Implications for senior managers and beneficial owners of Hong Kong companies

In our experience of assisting clients to comply with beneficial ownership disclosure requirements recently introduced in other jurisdictions, we have found that applying such rules can sometimes be complex and relatively time-consuming, particularly for groups with large or complicated corporate structures. While Bill has not yet come into effect, managers of Hong Kong companies will need to be aware of and prepare for the new regime to ensure that the requirements can be met by the deadline for compliance (once set), particularly given the Government’s short planned timetable for implementation. PSCs of Hong Kong companies should also be alert to the developments, which may require additional information about them to be submitted to the company.