Opaque corporate structures that hide the ultimate beneficial owner have traditionally been used for many legitimate reasons, including the protection of privacy of high-net-worth individuals and their families. For example, an opaque corporate structure can be used to mitigate the risks that large family-owned businesses are typically exposed to, including fraud (think phishing attacks and identity theft), kidnapping, blackmail, violence and intimidation. There are also commercial reasons for anonymity and discretion, which include the protection of organisational autonomy.
The abuse of opaque corporate structures has, however, become prevalent in a global community where they are used to facilitate money laundering, terrorist financing, tax evasion and corruption. In South Africa, the use of “no-name brand” companies has become endemic in facilitating government tender fraud and corruption.
In 2021, the Financial Action Task Force (FATF) released its Mutual Evaluation Report of South Africa (report). The report summarised the effectiveness of South Africa’s anti-money laundering and counter-terrorism financing measures. The findings showed that law enforcement in South Africa faces challenges in readily obtaining accurate, updated and adequate beneficial ownership information about companies and trusts for effective investigation of money laundering and terrorism financing. The FATF recommended that South Africa should, amongst other things, revise and substantially improve its mechanisms for ensuring that accurate, up-to-date and verified beneficial information is available timeously to competent authorities, and it should also consider having a competent authority responsible for obtaining and maintaining beneficial ownership information.
In response to the findings contained in the report, the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022 (GLAA) was signed into law in December 2022. The GLAA amended the Companies Act to require companies to keep a record of natural persons who own or control the company and to provide for a comprehensive mechanism through which the Companies and Intellectual Property Commission (CIPC) can keep accurate and updated beneficial ownership information.
A beneficial owner in respect of a company is defined in the Companies Act as an individual who, directly or indirectly, ultimately “owns” or exercises “effective control” (both undefined terms) of that company. In terms of the amendments to the Companies Act, companies, other than “regulated” companies or companies controlled by a “regulated” company (a “regulated” company would include a company whose shares are listed on a securities exchange), will have to record in their securities registers information regarding the natural persons who are the beneficial owners of the company. As part of the process of filing their annual returns with the CIPC, companies will now also have to file a copy of their securities register reflecting this beneficial ownership information.
Of significance is the definition of beneficial ownership, which contemplates a person’s ability to exercise control, including a chain of ownership or control of a juristic person other than the holding company of that company. The beneficial owner of a company is therefore the natural person who ultimately owns or who can ultimately exercise effective control over a company. For example, in a company structure where Company A is a wholly owned subsidiary of Company B, which is in turn wholly owned by Mr T Ender Preneur, being a natural person, Mr T Ender Preneur would, for purposes of the Companies Act, be the beneficial owner of Company A. The facts will, however, not always be so simple and ascertaining the beneficial owner (if any) will be more nuanced in the context of, for instance, family or business trust structures (where the provisions of the trust deed would need to be considered), and scenarios of de facto control in less-than-majoritarian shareholding structures.
It remains to be determined, by regulations to be promulgated, which information regarding a beneficial owner will have to be disclosed and which persons will have access to the securities registers of companies. It is noteworthy that the FATF’s report recommends that legislation in South Africa should empower the CIPC to impose administrative penalties directly on companies for failure to comply with information requirements. Once the regulations to give effect to the provisions of the GLAA are promulgated, it will be important to note the nature of the administrative penalties that the CIPC will be able to impose. Nonetheless, companies should begin to prepare for the heightened disclosure requirements that will be implemented to give effect to the provisions of the GLAA.