Beneficial Ownership Reporting Framework in Malaysia
In recent years, there has been a spotlight on corruption issues and money laundering where opaque or anonymous company ownership structures are used to hide links to sources of funds, giving an appearance of legitimacy.
There has also been more focus on “know-your-customer” (KYC), particularly for financial institutions, to verify the identity of the ultimate person that they are doing business with.
In light of this, there has been an urgent call for regulators to put in place a framework that promotes transparency on beneficial ownership, including more robust reporting and disclosure requirements.
The Guideline for the Reporting Framework for Beneficial Ownership of Legal Persons (“Guidelines”) issued by the Companies Commission of Malaysia (“CCM”) came into effect on 1 March 2020.
Since then, CCM has conducted an in-depth study on the framework following feedback received from the Financial Action Task Force (“FATF”) and based on legislative improvements made by other jurisdictions. The study identified gaps in the framework. In order to enhance the beneficial ownership framework and to strengthen its anti-money laundering and counter terrorism financing measures, CCM has proposed amendments to the Companies Act 2016 (“CA 2016”) in the Consultative Document on the Proposed Companies (Amendment) Bill 2020.
Key aspects of the proposed amendments and consultative document in relation to the beneficial ownership legal framework are set out below.
1. Exempted Companies
The beneficial ownership reporting framework applies to all companies incorporated and registered under the CA 2016, unless they are exempted.
Under the proposed new section 56A of the CA 2016, companies that are regulated or licensed by Bank Negara Malaysia, Securities Commission or traded on a stock exchange would be exempted from the framework. This is as these companies are already subject to an extensive disclosure of interest and obligations. Nonetheless, this exemption does not excuse these companies from providing beneficial ownership information to relevant authorities in accordance with other written laws.
2. Definition of Beneficial Owner
Section 2 of the CA 2016 defines beneficial owner as “the ultimate owner of the shares and does not include a nominee of any description”. This definition has been criticised by the FATF as it does not go beyond the holding of voting shares.
The proposed definition introduced under the new section 56B of the CA 2106 defines beneficial owner as “a natural person who ultimately owns or controls a company and includes an individual who exercises ultimate effective control over a company”.
This proposed revised definition will provide guidance to the industry on how to determine a beneficial owner either for companies limited by shares or by guarantee. It provides clarity in line with the FATF’s recommendation as the definition will cover from the perspective of both ownership based on shares and/or control over a company.
3. Beneficial Owner Information
Some companies have been reluctant to comply with the Guidelines. This may be as there are currently no strict legal requirements on reporting. The current section 56 of the CA 2016 also does not make it mandatory for companies to obtain beneficial ownership information from their shareholders.
In order to resolve this issue, the new proposed section 56E of the CA 2106 seeks to introduce a requirement for individuals who are beneficial owners of a company, to notify the company of their status. Through this provision, the onus is on the beneficial owner to submit the beneficial ownership information to the company with or without notices issued by the company.
Furthermore, as the current framework does not include beneficial owners who exercise ultimate control over a company, a proposed new section 56D of the CA 2016 will allow the company to issue a notice to obtain beneficial ownership information from its members and from any persons believed to be a beneficial owner or believed to have information of a beneficial owner. Such information will then be recorded in the register of beneficial owners.
4. Introduction of New Register
With the introduction of the proposed section 56C of the CA 2016, companies are required to record and maintain all information relating to beneficial owners. Such mandatory reporting will ensure that information is up-to-date, accurate and obtained in a timely manner.
Under the same provision, companies are required to lodge changes to the beneficial ownership information within 14 days from the date of the change of the information pursuant to section 51 of the CA 2016.
5. Register of Members of Foreign Companies
The current section 568 of the CA 2016 requires foreign companies to keep a branch register in Malaysia containing only the information of members with local shareholding for the purpose of registration. FATF has identified an information gap whereby there is no obligation to record information of foreign shareholding. As such, FATF recommended that foreign companies should record the information of both local and foreign shareholdings, similar to the policy of register of members under section 50 of the CA 2016.
Therefore, a proposed new section 568 of the CA 2016 is to be introduced to substitute the current provision wherein foreign companies will have to keep and maintain a “register of members of foreign companies” in Malaysia for the purpose of recording information of local and foreign shareholders.
It is also proposed that beneficial ownership information be submitted during the registration process for foreign companies.
6. Annual Return
There is no requirement under the current CA 2016 for companies to submit the beneficial ownership information to the Registrar on an annual basis. It has been proposed that companies should be required to provide for the particulars on beneficial ownership information as part of the annual return. This is to ensure that such information is lodged at least once a year and that such information is updated annually.
7. Access to Beneficial Ownership Information
It is proposed that beneficial ownership information in the register of beneficial owners shall only be made available to:
- specified competent authorities (such as the Royal Malaysian Police, Malaysian Anti-Corruption Commission, Bank Negara Malaysia and Securities Commission);
- beneficial owner whose name is recorded in the register of beneficial owners; and
- persons authorised by the beneficial owner.
This is to ensure that such information will be kept confidential and not be publicly available.
The proposed amendments to CA 2016 is currently in the review stage and aligns the beneficial ownership framework with international best practices. It provides clarity and guidance to the beneficial ownership framework as well as clear structure to the framework.
Moving forward, it is advisable for companies to start preparing for the eventual implementation of the framework. The board and management should work with the company secretary to set out appropriate internal policies to regulate the collection, verification, reporting and maintenance of beneficial ownership information.
If you have any questions or require any additional information, you may contact Idahani Ismas Ismail or the ZICO Law partner you usually deal with.
This alert is for general information only and is not a substitute for legal advice.