Myra Knoesen | 20 November 2024
South Africa’s recent greylisting by the Financial Action Task Force (FATF) has had significant implications for the country’s regulatory landscape, particularly in the realm of corporate governance.
In response, the South African government has introduced amendments to the Companies Act, specifically aimed at enhancing transparency in company ownership structures. The key change is the introduction of beneficial ownership disclosure provisions, which are designed to assist in the fight against money laundering and the financing of terrorism.
FAnews spoke to Yaniv Kleitman, Director and Counsel in Cliffe Dekker Hofmeyr's Corporate and Commercial practice, and Roxanne Bain, Professional Support Lawyer in the same practice, to understand the implications of these amendments for South African businesses.
The key amendments to the Companies Act
The new provisions in the Companies Act require certain companies to disclose the identities of natural persons who ultimately own or control the company. This disclosure must be made to the Companies and Intellectual Property Commission (CIPC). The goal is to improve transparency regarding the true owners - referred to as the “beneficial owners” - of companies, even in cases where ownership is obscured through complex structures such as trusts or corporate entities.
The changes are particularly focused on companies with intricate ownership chains, where the company is controlled by another company or trust. In these cases, the company must trace ownership up the chain until it identifies a natural person who is the ultimate beneficial owner.
Kleitman explains, “These amendments are crucial for aligning South Africa with international anti-money laundering standards and addressing the concerns that led to the country’s greylisting by FATF.”
The complexity of beneficial ownership disclosure
The amendments to the Companies Act introduce complexities for companies trying to determine whether they are required to disclose beneficial owners. A company must first assess whether it is an “affected company”, which depends on its share transfer history. Affected companies are required to disclose the holders of a 5% or greater beneficial interest in their shares, while non-affected companies must disclose their ultimate controllers - concepts that are distinct but interconnected.
Bain adds, “The challenge lies in the fact that there is no clear-cut threshold for determining who is a beneficial owner. The Companies Act does not specify a percentage of ownership at which a person becomes a beneficial owner, leaving businesses in a grey area.”
Interpreting the definition of beneficial ownership
The ambiguity surrounding the definition of “beneficial owner” in the Companies Act poses significant risks for businesses. Although the CIPC has indicated that companies should apply a 5% threshold for disclosure, this is not explicitly stated in the legislation. This has created confusion, as the 5% threshold appears to conflate the concepts of a “beneficial owner” and a “5% beneficial interest holder,” which are not necessarily the same.
As Kleitman highlights, “Companies now find themselves in the unenviable position of trying to reconcile the technical definition of beneficial ownership with the 5% guideline provided by CIPC. Many companies are likely to err on the side of caution and simply comply with the 5% threshold to avoid potential complications.”
Practical implications of disclosure
From a compliance perspective, it is crucial for companies to disclose their beneficial owners to the CIPC. Failure to do so can result in severe consequences, including the inability to file annual returns, which may eventually lead to deregistration.
However, companies with complex ownership structures face a significant challenge in identifying and disclosing their beneficial owners. Bain notes, “In many cases, companies may not even be aware of who controls their ownership at higher levels, particularly where these structures involve offshore entities, trusts, or partnerships. This lack of transparency makes it difficult for companies to meet the disclosure requirements.”
Moreover, while companies are allowed to request information from shareholders about beneficial ownership, there is no legal obligation for shareholders to disclose such details. This lack of enforceability adds another layer of difficulty for businesses striving for compliance.
Balancing compliance with privacy concerns
The introduction of beneficial ownership disclosure raises important questions about privacy and data protection. Under the Protection of Personal Information Act (POPI), businesses must ensure that the personal information of beneficial owners is handled appropriately.
Fortunately, Kleitman explains, “In most cases, over-disclosure is not a concern, as the beneficial owner will generally consent to the disclosure of their personal details. However, companies must still navigate the fine line between compliance and protecting sensitive personal data.”
Consequences of non-compliance
Companies that fail to comply with the new beneficial ownership disclosure requirements face significant penalties. Bain clarifies, “If CIPC identifies an issue with a company’s disclosure, it must first investigate the matter and provide the company with an opportunity to rectify the situation. If the company fails to comply with the notice, CIPC can apply to the court for a fine to be imposed.”
This process ensures that companies are given a fair opportunity to correct their disclosures, but it also highlights the importance of timely and accurate compliance with the regulations.
Impact on corporate governance
The recent amendments to the Companies Act are likely to have a long-term impact on corporate governance practices in South Africa. The emphasis on transparency in company ownership is expected to drive more rigorous internal controls, particularly in terms of record-keeping and shareholder communications.
Kleitman suggests, “To ensure compliance, companies should BREAK maintain detailed organograms and regularly update their ownership structures. They should also encourage shareholders to notify the company of any changes in their ownership interests. This proactive approach will help companies stay on top of their obligations and avoid costly compliance issues.”
In conclusion, while the new beneficial ownership disclosure provisions are designed to combat money laundering and terrorism financing, they also pose significant challenges for South African businesses. The lack of clear thresholds, the complexity of identifying ultimate owners, and the need for companies to balance compliance with privacy concerns will require careful attention. However, these amendments are a necessary step in aligning South Africa’s corporate practices with international standards, and businesses that can navigate these changes successfully will contribute to improving the country’s global standing.
As Bain aptly puts it, “The regulatory landscape may be challenging, but it also presents an opportunity for businesses to strengthen their governance practices and demonstrate their commitment to transparency.”
‘Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER’.