Identification of real owners & shareholders: Companies, LLPs bound to provide additional info to SECP

To identify real owners and shareholders of corporate entities, the companies and Limited Liability Partnerships (LLPs) would now be required to provide additional information to the Securities and Exchange Commission of Pakistan (SECP) where ownership and control structure of such entities is obscured through a chain of multiple entities.

In this regard, the SECP has issued a set of notifications, soliciting public consultation on drafts of amendments to the Companies (Incorporation) Regulations, 2017, Companies (General Provisions and Forms) Regulations, 2018, Foreign Companies Regulations, 2018, and Limited Liability Partnership Regulations, 2018.

The proposed amendments collectively make disclosures regarding the ownership and control structure of the companies and limited liability partnerships more transparent.

The commission has proposed certain amendments to the laws and regulations in an attempt to improve the standards of transparency, and to prevent misuse of corporate entities for money laundering.

These amendments, issued in line with the recommendations on transparency of legal persons issued by the Financial Action Task Force (FATF), will help in identifying the real owners of such entities.

The amendments also propose to explicitly prohibit the issuance or transfer of equity and debt securities of a bearer nature as well as to increase the period for retention of records of dissolved companies.

The amendments will address the deficiencies highlighted in the country's mutual evaluation report published by the Asia Pacific Group on Money Laundering in October 2019.

With the effect of propose amendments, companies and LLPs would have to provide additional information to the SECP, if the ownership and control structure of such entities is concealed using chain of multiple entities, whether registered in Pakistan or abroad.

The draft regulations define an ultimate beneficial owner as a person who exercises ownership or control rights over a company or LLP indirectly through multiple layers of corporate entities or other legal persons or any other arrangements.

Amendments suggested specifying a threshold of a minimum of 25 percent of ownership or control rights of the ultimate beneficial owner in the reporting entity, which would be owned through multiple layers of intermediate corporate entities.

In order to give effect to the proposed amendments, the commission has also publicised the substantive provisions being added to the enabling laws, i.e. the Companies Act, 2017 and the Limited Liability Partnership Act, 2017.

The proposed amendments are placed on SECP's website for public consultation.

Official sources told Business Recorder that the Recommendation 24 of the FATF deals with the transparency of legal persons, which included companies and LLPs.

As a best practice, the FATF suggests development of a well-resourced and proactive company registry holding beneficial ownership information, which can prove to be an effective transparency initiative by serving a useful basis for competent authorities to access such information.

Basic ownership information is already publicly available at the company registry.

The requirement to maintain ultimate beneficial owners (UBOs)' information is aimed at determining the true owners of a company.

Under normal circumstances, a company's corporate ownership structure comprises a few individuals or natural persons holding shares in the share capital of the company, called as shareholders or members.

The particulars of such members are already required to be maintained in a "register of members" under Section 119 of the Companies Act, 2017.

Detailed particulars to be maintained in the said register are specified in terms of Regulation 19 of the Companies (General Provisions & Forms) Regulations, 2018 (the "Regulations").

However, there might be certain cases where legal persons or corporate entities are appearing as members of the company in which case the required particulars as to the true owners, being the ultimate shareholders, would not be available.

Information about the actual (ultimate) owners and shareholders is the most significant information for a large number of stakeholders of a company, who may comprise creditors, tax authorities, corporate registry, major suppliers, major customers, financial institutions, etc.

For instance, a financial institution before establishing a banking relationship with a company would be interested in knowing the material particulars of a company including its shareholders, members and directors, as part of its KYC/CDD obligations.

This information is obtained through the corporate registry in the form of statutory returns, financial statements and other documents of the company.

However, in certain cases, the members appearing on the returns are themselves companies or other legal persons whose shareholders and members are not apparent from the said documents.

In such a case, the financial institution would be interested in knowing the ultimate individual owners who are natural persons exercising the ownership and control rights, and enjoying the cash flow rights in the company with whom the financial institution is contemplating to establish a business relationship, they explained.

The SECP had issued circulars no. 16 and 20 requiring companies to maintain information about their UBOs with them.

The UBOs were defined as natural persons holding not less than 10 percent of their ownership or control rights in the companies.

However, based on best practices being adopted by a number of countries as well as to ensure enhanced transparency regarding the true owners of corporate entities, the SECP has proposed certain amendments in the relevant laws and regulations, the officials said.