13 February 2017

Beneficial Interests

The Treasury Department has released a consultation paper regarding the beneficial ownership and control of companies.
As part of Australia's first Open Government National Action Plan the Government committed to improve transparency of information on beneficial ownership and control of companies available to relevant authorities. A key milestone for this commitment was the release of a public consultation paper seeking views on the details, scope and implementation of a beneficial ownership register for companies.
The consultation paper states
Companies play an essential role in both the Australian and the global economy. They are a vehicle to facilitate private sector investment and growth.
At times these vehicles can be used to disguise the identity of those involved in illicit activities, including tax evasion, money laundering, bribery, corruption and terrorism financing. This is achieved through mechanisms such as the use of shell companies, the use of complex ownership and control structures, the use of bearer shares and share warrants and of nominee shareholders where the nominator is not disclosed. The exploitation of these vehicles results in gains for criminals and financial losses to the Australian economy. It may also affect public confidence and the perceived legitimacy and validity of business and company regulatory processes and requirements. It also risks confidence in the tax system.
To ensure compliance with the relevant laws against such illicit activities, relevant authorities (including law enforcement and prosecutorial authorities, supervisory authorities, tax authorities and financial intelligence unit) need to be able to identify the entities and individuals that can control and benefit from the financial activities of a company and how those individuals and entities are connected to each other. This objective is inhibited by deficient information collected on the beneficial ownership of companies, and as a result the individuals involved in such illicit activities are able to disguise the true source or use of funds or property behind company structures.
Improving the collection and utilisation of beneficial ownership information will significantly contribute to authorities’ efforts to combat and prevent these activities. This, in turn, will promote greater integrity and transparency within the domestic and global financial system. Internationally, there is a focus on increasing transparency of beneficial ownership information within the global financial system.
International bodies such as the G20 view transparency as playing a key role in combating illegal activities such as money laundering, bribery and corruption, insider dealings, tax fraud and terrorism financing. This was reflected in the G20 High-Level Principles on Beneficial Ownership Transparency (the G20 Principles), the development of which was a key outcome for the Australian G20 Presidency in 2014. Other international organisations such as, the Financial Action Task Force (FATF), the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes and the World Bank also have a strong interest in progressing work towards increasing beneficial ownership transparency.
In 2016, international focus on the availability of beneficial ownership information of entities and legal arrangements (for example, trusts) increased following the leaks of incriminating data in April from a large law firm. In May 2016 beneficial ownership transparency was a key issue for discussion at the Anti-Corruption Summit in London, where several countries including Australia made commitments to increase the transparency of beneficial ownership.
It goes on
Legal and Beneficial Ownership Information for Companies which is currently available 
Australian companies currently collect some legal and beneficial ownership information, with much of it provided to the Australian Securities and Investments Commission (ASIC). There is, however, scope to increase the transparency of beneficial ownership, because while shares are often held non-beneficially in Australia there is no legal obligation for all companies to collect and report shares held in this manner or the identity of the beneficial owners to ASIC. The following section discusses how information on legal ownership and beneficial ownership is currently recorded and disclosed in Australia.
A company’s share register
Under the Corporations Act 2001 (the Corporations Act), companies are required to establish and maintain a register of members. The register of company members must record for each member the member’s name and address, the date on which the entry of the member’s name in the register is made, and if a company has share capital, the specific details of the shares held by each member. All companies other than listed companies must record if shares are beneficially held or not. The identity of the beneficial owner is not required to be recorded.
The register must be kept within Australia – either at the company’s registered office, its principal place of business or another place approved by ASIC.
A member of the public can access this register either by:
• inspecting it at the company’s registered office (or other place it is kept); or  
• making an application to be given a copy of the register or part of the register.
A fee may apply for both types of access. In applying for a copy of the register the applicant must state each purpose for which they are accessing a copy and access will not be permitted where it is a for an improper purpose.
Information given to ASIC and kept on the ASIC register
Although the details of company members must be lodged with ASIC by all companies on registration of the company only proprietary companies must report to ASIC any subsequent changes to member details. If a proprietary company has more than 20 members the company must inform ASIC of changes affecting the top 20 members in each class of share, including any change as to whether the shares are held beneficially by the legal owner or not. If the shares are non-beneficially held, there is no requirement to disclose the beneficial owner to ASIC.
These documents which have been lodged with ASIC are then stored on the ASIC register. A company extract setting out current and historical information on membership, and each separate document notifying of changes, may be obtained by the public for a fee.
Listed Companies
Certain disclosure obligations apply to beneficial owners of shares in listed companies under Chapter 6C of the Corporations Act.
A person must notify a listed company if the person has, or ceases to have, a ‘substantial holding’ in the company, and any change in their substantial holding of more than 1 per cent. This means they or their associates have a relevant interest in 5 per cent or more of the total number of votes attached to voting shares in the body. The concept of ‘association’ is used to group together interests which are aligned and should be treated as forming a single voting bloc.
A person or their associates who holds a relevant interest can be:
• holders of securities; or 
• persons with the power to exercise, or control the exercise of, a right to vote attached to the securities; or 
• persons with the power to dispose of, or control the exercise of a power to dispose of, the securities.
For the purpose of identifying which persons have relevant interests, ‘power to exercise’ and ‘control the exercise of’ include where the power or control is indirect, or can be exercised as a result of a trust, agreement or practice. The concept is discussed in further detail in ASIC Regulatory Guide 5 Relevant interests and substantial holding notices (RG 5).
The person(s) with the substantial holding must also give the relevant information to each relevant financial market operator, such as the ASX. In the case of ASX, this form is made publicly available through the market announcements platform and can be accessed on the ASX’s public website. This information is also provided to ASIC and is available to the public from the ASIC register for a fee.
Under the ASX listing rules, companies must also include in an annual report which they provide to the ASX information about the substantial holdings of the company as disclosed in substantial holding notices given to the company. This provides an account of all of the substantial holders of the company as at the date of the annual report and is also available to the general public at no cost via the ASX website.
Operation of Tracing Provisions For Listed Companies 
For listed companies there is an additional process which can increase the transparency of ownership information. ASIC has the power to trace ownership information for listed companies by issuing a person with a tracing notice. Listed companies themselves can also issue tracing notices. This notice requires the person who receives it to disclose details about the ‘relevant interest’ they have in certain securities, the relevant interests of any other persons as well as details of persons who have given them instructions in relation to the holding. Notices can be issued either to a registered member of the company or a person who has been named in a prior tracing notice relating to those shares. The current tracing notice regime requires disclosure of all relevant interests, whether or not the beneficial owner has a holding of five per cent or more.
Disclosure in response to a tracing notice must be made within two days. Where a listed company receives beneficial ownership information in response to a tracing notice they are required to include those details in a register maintained by the company which is available and accessible to the general public (a fee may apply). A member of the public can either inspect the register where it is held or request a copy. This information is not stored on the ASIC register.
Other Requirements to Collect Beneficial Ownership Information
Anti-Money Laundering and Counter-Terrorism Rules
Under Australia’s Anti-Money Laundering and Counter-Terrorism Financing legal framework reporting entities must collect and take reasonable measures to verify beneficial ownership information in relation to certain customers as part of their customer due diligence obligations, unless certain exemptions apply. Reporting entities are financial, remittance, gaming and bullion businesses that provide designated services as prescribed in the legislation. These obligations could potentially apply to all types of Australian companies.
The beneficial owner of a customer is an individual who ultimately owns or controls (directly or indirectly) the customer. Ownership will only be made out where more than 25 per cent of that customer is owned by the individual. This information can be requested by AUSTRAC, law enforcement and regulatory agencies.
These requirements contribute towards Australia’s implementation of Principle 7 of the G20 Principles and FATF Recommendation 10 which relates to countries requiring financial institutions to identify and take reasonable measures to verify the beneficial ownership of their customers.
Common Reporting Standard (CRS)
The CRS is a single global standard for the automatic exchange of financial account information (including beneficial ownership information) on account holders who are foreign tax residents. It includes requirements for reporting of that information to the financial institution’s tax authorities and the exchange of that information with the foreign residents’ home tax authorities.
The beneficial ownership information required to be collected includes the name, address, jurisdiction(s) of residence, tax identification number (for jurisdictions that allow tax identification numbers to be collected) and date and place of birth of each foreign resident controlling person (beneficial owner).
Treasury asks the following questions
1. Should listed companies be exempt from any new requirements to report on its beneficial owners in light of existing obligations on such companies? If so, should an exemption apply to companies listed on all exchanges or only to specific exchanges? 
2. Does the existing ownership information collected for listed companies allow for timely access to adequate and accurate information by relevant authorities? 
3. How should a beneficial owner who has a controlling ownership interest in a company be defined? 
4. In light of these examples given by the FATF, the tests adopted by the UK (see Part 3.2 above) and the tests applied under the AML/CTF framework and the Corporations Act, what tests or threshold do you think Australia should adopt to determine which beneficial owners have controlling ownership interest in a company such that information needs to be collected to meet the Government’s objective? a. Should there be a test based on ownership of, or otherwise having (together with any associates) a ‘relevant interest’ in a certain percentage of shares? What percentage would be appropriate? b. Alternative to the percentage ownership test, or in addition to, should there be tests based on control that is exerted via means other than owning or having interests in shares, or by a position held in the company? If so, how would those types of control be defined? 
5. How would the natural persons exercising indirect control or ownership (that is, not through share ownership or voting rights) be identified (other than through self-reporting) and how could such an obligation be enforced? 
6. Should the process for identification of beneficial owners operate in such a way that reporting must occur on all entities through to and including the ultimate beneficial owner? 
7. Do there need to be special provisions regarding instances where the relevant information on a beneficial owner is held by an individual who is overseas or in the records of an overseas company and cannot be identified or obtained? 
8. Should there be exemptions from beneficial ownership requirements in some circumstances? What should those circumstances be and why? 
9. What details should be collected and reported for each natural person identified as a beneficial owner who has a controlling ownership interest in a company? 
10. What details should be collected and reported for each other legal persons identified as such beneficial owners? 
11. In the case of foreign individuals and bodies corporate, what information is necessary to enable these persons to be appropriately identified by users of the information? 
12. What obligations should there be on a company to make enquiries to ascertain who their beneficial owners are and collect the required information? What obligations should there be on the beneficial owners themselves? 
13. Should each company maintain their own register? 
14. How could individual registers being maintained by each company provide relevant authorities with timely access to adequate and accurate information? What would be an appropriate time period in which companies would have to comply with a request from a relevant authority to provide information? 
15. Should a central register of beneficial ownership information also be established? 
16. What do you see as the advantages and/or disadvantages of a central register compared with individual registers being maintained by companies? 
17. In particular, what do you see as the relative compliance impact costs of the two options? 
18. Who would be best placed to operate and maintain a central register of beneficial ownership? Why? 
19. What should the scope of the register operator’s role be (collect, verify, ensure information is up to date)? 
20. Who should have an obligation to report information to the central register? Should it be the company only or also the persons who meet the test of being a relevant ‘beneficial owner’? 
21. Should new companies provide this information to a central registry operator as part of their application to register their company? 
22. Through what mechanism should existing companies, and/or relevant beneficial owners, report? 
23. Within what time period (how many days) should any changes to previously submitted beneficial ownership information have to be reported to a company (where registers are maintained by each company) or the registry operator (where there is a central register)? 
24. If reporting to a central register is required, should this information be included in the annual statement which ASIC sends to companies for confirmation with an obligation to review and update it annually? 
25. What steps should be undertaken to verify the information provided to a central register by companies or their relevant beneficial owners? Who should have responsibility for undertaking such steps? 
26. Should beneficial ownership information be provided to one relevant domestic authority and then shared with any other relevant domestic authorities? Please explain why you agree or disagree. 
27. Should beneficial ownership information be automatically exchanged with relevant authorities in other jurisdictions? Please explain why you agree or disagree. 
28. What sanctions should apply to companies or beneficial owners which fail to comply with any new requirements to disclose and keep up to date beneficial ownership information? 
29. How long should existing companies have from when the legislation commences to report on their beneficial owners? What would be an appropriate transition period? 
30. Do you foresee any practical implementation issues which companies or beneficial owners may face in collecting and reporting additional information? 
31. What types of compliance costs would your business incur in meeting any new requirements for record-keeping and reporting of beneficial ownership information? 
32. If you are already required to comply with AML/CTF obligations, how do you see any new requirements to collect beneficial ownership interacting with those existing obligations? 
33. If companies had access to the additional beneficial ownership information collected, could this reduce companies’ compliance costs by making it easier for them to comply with other existing reporting obligations such as those under the AML/CTF legal framework? 
34. Could any changes be made to streamline or merge existing reporting requirements in order to reduce the compliance costs for businesses? 
35. In order to improve and incentivise compliance with the tracing notice regime should ASIC have the ability to make an order imposing restrictions on shares the subject of a notice until the notice has been complied with? 
36. What other changes could be made to improve the operation of these provisions? 
37. Who uses nominee shareholding arrangements, and for what purpose? 
38. How often are nominee shareholding arrangements used?  
39. What do you see as the benefits of nominee shareholding arrangements? Are there any negative aspects of their use? 
40. Should further obligations be introduced in order to increase the transparency of the beneficial owners of shares held by nominee shareholders? 
41. Are you aware of practical obstacles which would make increased reporting in respect of shares held by nominee shareholders problematic? 
42. Who uses bearers share warrants, and for what purpose? 
43. How often are bearer share warrants used? 
44. What do you see as the benefits of bearer share warrants? Are there any negative aspects of their use? 
45. Should a ban be introduced on bearer share warrants?