THE COMPANIES (BENEFICIAL OWNERSHIP INFORMATION) REGULATIONS, 2020: DISCLOSURE OF BENEFICIAL OWNERS

Attempts to enforce the disclosure of beneficial owners of a company began in 2017 through the amendment of the Companies Act, 2015. The amendment was to the effect that companies should record on their register of members, information relating to beneficial owners. However, this amendment was contradictory because there were pre-existing provisions in the Companies Act, 2015 restricting companies from recording any trust arrangements in the register of members. Therefore, it was not possible to enforce the amendment especially in instances where beneficial ownership was through a trustee or nominee.

Later on, the Statute Law (Miscellaneous Amendment) Act, 2019 cleared the confusion by amending the Companies Act, 2015. The amendment provided that a company should keep a register of members and a register of beneficial owners.

The Companies (Beneficial Ownership Information) Regulations, 2020 was enacted to facilitate the implementation of the above introduced 2019 amendment to the Companies Act, 2015.

A beneficial owner to a company is defined as a natural person who: holds at least 10 percent of the issued shares in the company whether directly or indirectly; exercises at least 10 percent of the voting rights in the company either directly or indirectly; holds a right, whether directly or indirectly, to remove a director of the company; or exercises significant influence or control, directly or indirectly, over the company. Therefore, beneficial ownership captures both direct ownership and ownership through intermediaries.

The regulation provides that companies have the exclusive obligation to take all the prescribed reasonable steps to investigate and identify their beneficial owners. Upon identification, a company shall fill the prescribed particulars of the owners in a register of beneficial owners and lodge a copy with the Registrar of Companies within thirty (30) days of its preparation. A company which after exercise of all the prescribed reasonable steps does not succeed in identifying its beneficial owners, shall indicate in its register of beneficial owners that it has reasonable cause to believe there is a beneficial owner but has not managed to identify him or her. Companies shall also notify the Registrar of Companies in case of any changes on particulars of beneficial owners.

If a company fails to comply with the disclosure requirement, the company and each of its officers who are in default shall each be liable to pay a fine not exceeding Kenya Shillings Five Hundred Thousand (Kshs. 500,000.00).

The regulation notes to protect information of beneficial owners obtained by a company by restricting its disclosure. Disclosure of such information shall not be made available to the public and will only be disclosed in the following circumstances:

1. With the written consent of the beneficial owner;
2. A company can use the information to communicate with the beneficial owner;
3. A company can disclose the information to comply with a court order;
4. The Registrar of Companies may use the information for communicating with the beneficial owner; and
5. The information may be disclosed to a competent authority, for example, Kenya Revenue Authority, the authority may obtain the information through writing a request to the Registrar of Companies.

A person who discloses the information about beneficial owners other than in the manner allowed in the regulation, commits an offence and shall be liable upon conviction to a fine not exceeding Kenya Shillings Twenty Thousand (Kshs. 20,000.00) or to imprisonment for a term not exceeding six months, or to both.

The adoption of the provisions of this regulation will be important in the following sense:

1. It will curb money laundering activities. The disclosure will ensure to capture beneficial owners who use trust or nominee arrangements to conceal their suspicious activities.
2. It will help to reveal individuals that often conceal their wealth by holding shares in a company through a nominee or trustee as well as make secret profits through intermediaries. In the long run, it will curb tax evasion by such individuals.
3. Investment in local companies will be encouraged. Due to the transparency on the ownership of a company, investors will be at a better position to make investment decisions.

However, as much as the regulation has its own advantages, it poses the following challenges:

1. Breach of fiduciary relationship, especially where the beneficial ownership is through a trust or nominee arrangement.
2. In instances where the beneficial ownership is by another corporate structure, it will be difficult for a company to identify the actual beneficiaries.

In conclusion, though the adoption of the regulation will have its own challenges, the regulation will enable promotion of corporate governance, encourage investments and help the government to curb tax evasions and money laundering activities. The advantages outweigh the challenges, and it is therefore important for the regulators to see to the enforcement of the regulations in order to realize its advantages.

This alert is for informational purposes only and should not be taken to be or construed as a legal opinion. For further clarification, please do not hesitate to contact Jane Makena Kirimi (jkirimi@jmkadvocates.co.ke) or Jacklyne Kanu (jkanu@jmkadvocates.co.ke).