Hong Kong’s new Register of Significant Controllers

The Hong Kong Companies Ordinance (Amendment) 2018, which introduces new requirements for registering people with significant control of companies, was brought into force on 1 March 2018.

A ‘significant controller’ is a person or legal entity that meets one or more of the following conditions:

• Holds, directly or indirectly, more than 25% of the company’s issued shares or a right to share more than 25% of the capital or profits of the company;
• Holds, directly or indirectly, more than 25% of the voting rights of the company;
• Holds, directly or indirectly, the right to appoint or remove the majority of the board of directors of the company;
• Has the right to exercise, or actually exercises, significant influence or control over the company;
• Has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or a firm that is not a legal person, but whose trustees or members satisfy any of the above four conditions in relation to the company.

To identify a significant controller, companies must review their register of members, articles of association, shareholders agreements, and other relevant agreements, or invite an evaluation from a third party organisation. If a company knows or has reasonable reason to believe that a person is a significant controller, the company must notify them within seven days of such knowledge.

The Ordinance requires Hong Kong companies to maintain additional details on their significant controllers. Some of the key requirements prescribed by the Ordinance are to:

• Identify the person/persons who has/have significant control over the company;
• Prepare and maintain a significant controllers register (SCR), which will be accessible by law enforcement officers upon demand;
• Designate a representative to provide assistance relating to the SCR to law enforcement officers;
• Keep the SCR at the company’s registered office or a prescribed place in Hong Kong; and
• Keep the SCR updated.

The Designated Representative must be one of the following:

• A member, director or an employee of the company who is a natural person resident in Hong Kong; or
• An accounting or legal professional, or the holder of a Trust and Company Service Providers’ (TCSP) licence.

If a Hong Kong company does not have an eligible Designated Representative, they can enlist a third party service provider to act as the Designated Representative.

The details of a company’s significant controller(s) and Designated Representative are recorded in the SCR, along with any changes to them. Companies must also record the steps they have taken to identify significant controllers.

Failure to comply with the requirements set forward in the Ordinance could qualify as a criminal offence. The company and every responsible person in breach of the Ordinance could liable for a fine levied at HK$25,000 (US$3,200) and, where applicable, a further daily fine. Hong Kong companies should therefore take measures to comply with the Ordinance immediately.

The new SCR requirements form part of the Hong Kong government’s reforms to bring its anti-money laundering (AML) legislation in line with the international standards set by the Financial Action Task Force (FATF), which is scheduled to commence an evaluation of Hong Kong’s regime towards the end of this year.

As part of this, from 1 March Designated Non-Financial Businesses and Professions (DNFBPs) in Hong Kong – accounting professionals, estate agents, legal professionals and TCSPs – will be subject to the same enhanced customer due diligence and record-keeping obligations as financial institutions under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Ordinance. The amendment also introduces a new licensing regime for TCSPs.

Sovereign welcomes this move. From 1 March 2018, any person who wishes to carry on a trust or company service business in Hong Kong will have to apply for a TCSP licence and comply with the relevant requirements of the AML Ordinance.

All international financial centres are now heavily regulated and Sovereign currently holds 33 regulatory authorisations worldwide in respect of its global office network. To obtain these licences we have had to satisfy the licensing authorities that every relevant person is ‘fit and proper’ to carry on or be associated with a trust or company service business. Client due diligence procedures and record-keeping requirements are also well entrenched within and across the group.

We do not therefore anticipate any problems in obtaining a licence, nor in the implementation of these changes. In fact Sovereign has been urging the Hong Kong authorities to regulate the TCSP sector for many years. Compliance with international AML standards has become a major business cost but we recognise it is also an essential element in building and maintaining trust and confidence in the sector. This move will introduce a level playing field for TCSPs in Hong Kong and will mean that we can now compete on a fair and even basis.

It is also to be hoped that these remedial actions will be sufficient to deal with the deficiencies previously identified by the FATF in the run-up to 2018. If Hong Kong receives adverse ratings, it will then have to face an ‘enhanced follow-up’ process. This would affect Hong Kong’s reputation as an international financial centre and as a safe and clean city for doing business.