LAW ON DISCLOSURE OF THE COMPANIES BENEFICIAL OWNERSHIP: HOW THE SPIRIT OF THE LAW HAS BEEN STABBED BY THE IMPLEMENTATION SYSTEM

by Regulations

The rush to update the beneficial owners for many companies in Kenya as prescribed in Section 93A of the Companies Act, 2015, has been a crazy race in the month of January as many Kenyans worked against the January 31st deadline which has now been extended to 31st July 2021.

The notice by the registrar of companies notified Kenyans to comply with the law within the specified period and failure to which non-compliance would amount to an offence attracting penalties as high as Kshs. 500,000/= that would be levied on the company and its officers.

The Companies Act 2015 was amended by Statute Law (Miscellaneous Amendment) Act 2019 which provided that a company should keep a register of its members and the register of the beneficial owners with the Registrar of Companies. Thereafter the Companies (Beneficial Ownerships Information) Regulations 2020, were enacted to facilitate implementation of the said amendment to the Companies Act. See our blog http://jmkadvocates.co.ke/2020/05/14/the-companies-beneficial-ownership-information-regulations-2020-disclosure-of-beneficial-owners/ for more information on the genesis and development of the law on disclosure of beneficial owners of a company in Kenya.

A beneficial owner of a Company is defined in the aforesaid regulations as a natural person who ultimately owns or controls a legal person or arrangements or the natural person on whose behalf a transaction is conducted, and includes those persons who exercise ultimate effective control over a legal person or arrangement. As per the regulations, one meets the threshold of a beneficial owner if they hold at least 10% of the issued shares whether directly or indirectly; exercises at least 10% voting rights in the company whether directly or indirectly; holds a right whether directly or indirectly to remove a director of a company; or exercises significant influence or control either directly or indirectly over a company. Noteworthy, significant influence or control is defined as participation in the finances and financial policies of a company without necessarily having control over them. Whereas, ultimate effective control is defined as a situation in which ownership is exercised through a chain of ownership or by means of control other than direct control. Therefore, beneficial ownership captures both direct ownership and ownership through intermediaries.

Indirect ownership occurs when a person owning the company is not the registered legal shareholder. This therefore means the registered shareholder holds the shares on behalf of the beneficial owner either as a trustee, nominee or other legal creations.  This means that a person can own a significant part of company and hide behind another person who is a registered shareholder but holds the shares on behalf of the former.  The law on disclosure of beneficial owners was therefore enacted with the aim of creating greater transparency in ownership of companies in Kenya and to support the government in the fight against corruption, tax evasion, money laundering and financing of terrorism.

The process of updating beneficial owners for companies is being done electronically through the authorized person’s e-citizen account on the Business Registration Services (BRS) dashboard where you are required to input details and follow an automated process. We have however noted with great concern that there is a disconnect between the law and the system of implementation, specifically with the updating of the e-register of beneficial owners for existing companies.  Anyone who has interacted with the system will realize that the end result is that the automated process will auto-pick the existing registered members without giving an option to update beneficial owners who as explained above may or may not be a registered member. Additionally, where a shareholder of an existing company is a legal entity rather than a natural person, the BRS system is erred in design in the sense that it still auto-picks the legal entity and provides no opportunity for disclosure of natural persons/ultimate beneficial owners exercising control of the existing company through another legal entity. Thousands of existing companies must have complied with the January 31st deadline but in our opinion to what end? 

The implementation system developed by the Business Registration Service has not only defeated the spirit of the law but it has also costed the taxpayer heavily and has been an inconvenience to Kenyans generally. In conclusion this is negligence and it is high time the government officials are held accountable for such errors that are a clear indication that often are the instances where the law in action defeats the law in the books.

THE SHIFT FROM MANUAL TO ELECTRONIC LAND TRANSACTIONS

by Regulations

Introduction

The intent to conduct conveyancing transactions electronically, dates back to mid-2019 when the Cabinet Secretary responsible for Lands and Physical Planning (the Cabinet Secretary) published, on 28th June, 2019, the Land Registration (Electronic Transactions) Regulations 2019. However, the said Regulations were later annulled by the National Assembly on the grounds that the Cabinet Secretary did not consult the public, prior to the publishing of the Regulations, as per the requirement of Section 5 of the Statutory Instruments Act, 2013.

With the annulment of the Regulations, the players of the conveyancing world regressed to the usual manual conduct of conveyancing transactions. It is not until the outbreak of the Covid-19 pandemic and the restrictions that have been unswervingly issued to contain the spread of the virus, that the conversation for the conduct of land transactions through the electronic platform was revisited. Consequently, the fruits of this conversation was the publication, by the Cabinet Secretary; the Land Registration (Electronic Transactions) Regulations, 2020, the Land (Amendment) Regulations, 2020, the Survey (Electronic Cadastre Transactions) Regulations, 2020 and the Survey (Amendment) Regulations, 2020 all with the objective to create an enabling environment for conduct of land transactions electronically.

Key to note, the electronic conveyancing transactions are intended to, in the first instance, be executed in the Nairobi Land Registry.

The following is an analysis of the main provisions of the above-mentioned regulations.

  1. Development and Implementation of a National Land Information system

 The regulations provide that as per the provisions of Section 6(h) of the Land Act, 2012, the Cabinet Secretary shall coordinate for the development and implementation of a National Land Information System.

  1. Establishment of an Electronic Land Registry

The Chief Land Registrar shall maintain an Electronic Land Registry in accordance with section 7 of the Land Act, 2012, which shall be part of the National Land Information System (NLIS). In the electronic land registry, there shall be:

  • A land register that shall contain the property section, proprietorship section, encumbrance section, and user of land;
  • A cadastral map;
  • An index of names of proprietors;
  • A presentation book in which there shall be kept a record of all applications numbered in the order in which they are presented to the registry; and
  • Parcel files containing the instruments and documents that support subsisting entries in the land register.
  1. Establishment of an Electronic Cadastre

The Director of Surveys shall maintain an electronic cadastre which shall be a module of the National Land Information System. Consequently, the Director may by electronic means send a duly issued or certified map, plan, form, document or extract of a map to a user who has requested for the same through the system.

  1. Registration of User/ Authorized User on the National Land Information System

In essence, for persons to be able to conduct the land transactions electronically, they shall be required to register on the National Land Information System as a user or an authorized user using their credentials as is appropriate.

A user shall be a person registered in an individual capacity for example as the Vendor or Purchaser in a conveyancing transaction. On the other hand, an authorized user shall be a qualified advocate granted permission by a Vendor or Purchaser to access, query any information, or submit any application, instrument or document in relation to a transaction on behalf of that person

  1. Conveyancing Services to be Electronically Accessible Through the System

The regulations are structured to facilitate online accessibility of pre-registration, registration and post-registration conveyancing services.

Following are the specific services that will be available through the system:

5.1 Searches

A user or an authorized user who intends to conduct an official search in the electronic register shall apply to conduct the official search through the system and pay the prescribed fees.

The user may specifically undertake to conduct either:

a. Current status search – this is a search on the particulars of the subsisting entries in the electronic register, including request for certified copies of any document, the cadastral map or plan filed in the register; or 

b. Historical search – this search shall provide a history of all transactions over a specific property, in a chronological order and stating the status and date of entry of each transaction.

5.2 Electronic Lodging and Registration of Conveyancing Related Applications, Instruments and Documents

The regulations provide that registered users shall electronically lodge: applications for change of user, consents to transfer, sub-lease or charge, valuation and payment of stamp duty, payment and issuance of a land rent clearance certificate and extension and renewal of leases; conveyancing instruments and documents to the National Land Information System. The lodging of the aforementioned applications, instruments and documents shall be accompanied with the prescribed fees and shall be deemed to be received when the system generates a notice of electronic filing with a tracking number for the electronically filed application, instrument or document.

In order to facilitate the electronic lodging of the applications, instruments or documents, the regulations provide for the use of e-signatures and e-forms, specifically, the Chief Land Registrar may make modifications to the prescribed forms set out in the Sixth Schedule to the Land Registration (General) Regulations, 2017. Additionally, where a transaction cannot be carried out using the electronic registration system, the person seeking to carry out the transaction shall carry out the transaction through such other means as the Chief Land Registrar may determine including manually as is/has been the case. Noteworthy, users of the system will still manually present documents which the Registrar requires the production of an original.

The Registrar may reject an application, instrument or document that appears to be substantially defective or have been submitted without the requisite supporting documents under the Land Registration (General) Regulations, 2017. A user or an authorized user whose application has been rejected shall be required to lodge the application afresh or in the alternative appeal to the Registrar.

The registrar shall handle a lodged application, instrument or document in the order of the tracking number assigned at the time of lodging and shall rely on documentation and data available within the system and where necessary may refer to manual records.

Upon successful registration of an application, instrument or document there shall be an electronically generated notice to that effect. The registered instrument, document or electronic Certificate of Title or Lease shall be available for download by the authorized user.

Noteworthy, the electronically generated certificate of title or lease shall contain unique serial number and security features that can be used to verify the authenticity of the certificate.  

  1. Security of information in the National Land Information System

The regulations provide for obligations of both the Users of the system and the Ministry of Lands and Physical Planning to ensure that they observe security measures in exchanging, handling and storing information in the National Land Information System.

Foreseeable Challenges

It is likely that the implementation of the regulations will face some challenges that need to be addressed for electronic conveyancing transactions to be undertaken seamlessly. Such challenges include:

  • susceptibility of the NLIS to emerging trends in cyber-crimes and hacking;
  • authentication issues as a result of fraudulent creation/use of user accounts, e-forms/documents and digital signatures;
  • technological illiteracy that may necessitate laymen to engage experts and hence costly;
  • lack of accessibility to (stable and fast) internet;
  • general mistrust of the use of technology and disclosure of personal information (and documentation such as title documents) which may hinder transactions; and
  • lack of capacity to adapt to the ever-changing technology.

Conclusion

The main objective of the Regulations is to give effect to the provisions of the Land Act, 2012, the Land Registration Act, 2012, with regard to the development and implementation of an efficient and effective National Land Information System as well as see to the maintenance of an electronic land registry and electronic cadastre  in a secure, accessible and reliable format. The implementation of the Regulations will undoubtedly foster e-commerce though the conduct of conveyancing transactions electronically which will ultimately ease the doing business by cutting time and costs for property registration, see to a reduction of the usual paper work and manual records and establish an electronic payment system.

The ball is on the Ministry of Lands and Physical Planning court to liaise with other key stakeholders to ensure a score in the implementation of the Regulations and thus sow the intended benefits.

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).

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

by Regulations

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).