Why new business owner disclosure rules are timely

By CAROL MUASYA
More by this Author

Summary

• Prior to the coming into effect of the Companies Act, 2015, Kenyan firms were not required to disclose the details of any person who beneficially owns shares.
• The Companies (Beneficial Ownership Information) Regulations, 2020 (“the Beneficial Ownership Regulations”) were published with effect from February 28, 2020.
• Based on a public notice issued by the office of the Attorney-General, the Beneficial Ownership E-Register was operationalised with effect from October 13.

Prior to the coming into effect of the Companies Act, 2015, Kenyan firms were not required to disclose the details of any person who beneficially owns shares. In an attempt to promote transparency in ownership of Kenyan companies and to comply with international standards on transparency, the Companies (Amendment) Act, 2017 and, subsequently, the Statute Law (Miscellaneous Amendments) Act, No. 12 of 2019, have now put in place a requirement for companies incorporated or registered in Kenya to keep a register of beneficial owners.

The Companies (Beneficial Ownership Information) Regulations, 2020 (“the Beneficial Ownership Regulations”) were published with effect from February 28, 2020. According to these regulations, a company is required to lodge with the Registrar of Companies a copy of its register of beneficial owners within 30 days after its preparation, any changes in the particulars of the beneficial owner of a company, and at any instance when a beneficial owner ceases to be.

Based on a public notice issued by the office of the Attorney-General, the Beneficial Ownership E-Register was operationalised with effect from October 13.

Under the Bregulations, a company’s beneficial owner is any natural person who; either directly or indirectly holds at least 10 per cent of the issued shares of the company; exercises at least 10 per cent of the voting rights in the company; holds a right to appoint or remove a director of the company; or exercises “significant influence or control” over the company. Significant influence means participation in the finances and financial policies of a company without necessarily having full control over them.

The details of the beneficial owners to be included in the register include the full name, birth certificate number, national identity card number or passport number, PIN, nationality, date of birth, postal address, business address, residential address, telephone number, email address, occupation or profession, nature of ownership or control, the date on which any person became and/ or ceased to be a beneficial owner; and any other relevant detail that the Registrar of Companies may from time to time require.

The Beneficial Ownership Regulations, however state that a company should not use or disclose any information about its beneficial owners except for purposes of communicating with the concerned owner or in compliance with a court order. This information may only be disclosed to the public in case of request by a competent authority.

Further, a company has the authority to notify a person whom the company believes to be a beneficial owner and require them to provide the particulars to be entered in the register of members. First, the company is required to serve a notice to a person who it believes is a beneficial owner, requiring him/ her to provide the beneficial ownership particulars. Secondly, where the person does not respond within 21 days, the company is permitted to issue a warning notice to such person, and, finally, where the person does not respond to the warning notice within 14 days, then the company can restrict the relevant shares, voting rights or right to appoint or remove a board member.

STIFF FINE

Should a company fail to comply with the requirements to disclose its beneficial owners, the company and every officer who is in default would each be liable to fines of up to Sh500,000 for a first offense and an additional fine of Sh50,000 for each day of continuing non-compliance.

These regulations requiring companies to disclose beneficial owners will definitely have a significant impact on existing trust and shareholding arrangements. Going forward, it is important that companies are cautious on how these arrangements are structured. For instance, where a Kenyan entity is beneficially controlled by a non-resident person, there are various tax implications, including thin capitalisation rules, deemed interest and transfer pricing rules that may need to be considered.

Once implemented, these regulations are expected to promote transparency since it will now be easier for authorities to identify the actual owners of Kenyan companies. However, it would be interesting to see whether compliance will be achieved in cases where companies have complex ownership structures like in the “Panama Papers” case where companies were set up in offshore tax havens with complex structures to purposefully make it difficult to establish their beneficial owners, all in a bid to avoid tax. Nevertheless, these efforts to match international standards in Kenya must be applauded and should go a long way in increasing transparency.