Business entities play an essential role in supporting the economic growth and driving economic stability of a country by providing valuable goods and services as well as contributing to nation building through direct and indirect taxes. However, on the other hand, businesses are also susceptible to being misused for carrying out illicit activities such as money laundering, terrorism financing and other serious crimes. Often the individual perpetrators hiding behind such businesses employ devious means to avoid their identity from being detected.[1]

One of the most fitting examples for such misuse can be observed from the infamous “Panama Papers” leak. In 2016, the said leak of approximately 11.5 million documents sent shock waves around the world and the loopholes in the global financial system that fuel inequality and impunity for corruption are exposed to the whole wide world. At the center of it all – a Panamanian law firm and corporate service provider, Mossack Fonseca. The documents, taken from the archives of Mossack Fonseca, show in detail the beneficial ownership of several thousands of offshore corporations. While many were used legally, it appears some beneficial ownership was hidden for nefarious or illegal motives. The modus operandi is by selling its shell firms in cities such as Zurich, London, and Hong Kong where clients can buy an anonymous “empty shell” company – and for an extra fee, with a package of getting a sham director and, if desired, to conceal the company’s true shareholder. The result is an offshore company whose true purpose and ownership structure is indecipherable from the outside.[2] It was found that Mossack Fonseca operated in at least 21 different jurisdictions, and all these jurisdictions had one thing in common – it was very easy to set up a company without having to disclose the identity of the real individuals behind it. This is because the authorities in these countries were neither recording information nor asking questions. The company providing the service was, in theory, the only one with the obligation to identify and keep records of clients – although the leak also shows that Mossack Fonseca often failed to do that.[3]

More than four years, countless scandals, and a controversial 2019 Netflix movie The Laundromat later – tax justice and corporate secrecy continue to be pressing problems across the globe, but there has been significant progress in curbing the same. Ever since the Panama Papers, the need for countries all over the world to collect information on true owners of anonymous companies has evidently been gaining momentum with more and more countries committing to do so. The United Kingdom has taken the lead in 2016, by becoming one of the first countries in the world to create a public register of the beneficial owners of companies as a measure to tackle corporate corruption and tax evasion, amongst other things. Closer to home, in 2017 Singapore has mandated that companies and limited liability partnerships are required to maintain beneficial ownership information, which is made available to public agencies upon request. The purpose of this is to make ownership and control of corporate entities more transparent and reduce opportunities for illicit, corrupt practices.[4]

In Malaysia, as part of a revamp of the Companies Act 2016 (“the CA 2016”), a new provision granting the power to a company to enquire into the beneficial owner of the shares in a company was inserted. This is supplemented by the power granted to the Companies Commission of Malaysia (“the CCM”), Bursa Malaysia Securities (“the stock exchange”) and the Securities Commission of Malaysia (“the Securities Commissions”) to direct that a company makes such an enquiry.[5] Further to that, the CCM had on 1 March 2020 issued the Guideline for the Reporting Framework for Beneficial Ownership of Legal Persons (“the Guideline”) for all legal persons registered under the respective laws governed by the CCM. In simple words, the CA 2016 provides that a company could ask its registered shareholders to advise whether they are a beneficial owner or not and if not, to declare the beneficial owner – the Guideline make this mandatory.

As at the date of this article, the Guideline has already come into force whereby during the transitional period of 1 March to 31 December 2020, companies are to obtain, keep and update the beneficial ownership information at the company level and commencing on 1 January 2021, the CCM will use the power under Section 56(6) of the CA 2016 to require all companies to provide the beneficial ownership information to the CCM.

The CA 2016 defines the term “beneficial owner” as the ultimate owner of the shares of a company and does not include a nominee of any description. Beneficial owners are natural persons who ultimately own or control an entity or arrangement. Under the Guideline, a natural person would be considered as a beneficial owner if he or she has direct or indirect interest in more than 20% shares of the company, or holds direct or indirect in more than 20% voting shares of the company, or has the right to exercise ultimate effective control over the company.[6]

Section 56 of the Companies Act 2016 provides companies with the necessary powers in order to achieve beneficial ownership transparency – under subsection (1), the company may issue a notice in writing to any client member of the company to provide confirmation whether the client member holds any voting shares as beneficial owner or as trustee. If the client member is holding shares as a trustee, then they are required to disclose the identity and particulars of the beneficiary. Under subsection (2) of the same section, the company may issue a notice in writing to any other person who has an interest in any of the voting shares in the company. The notice will require such persons to provide confirmation whether they hold the voting shares as a beneficial owner or as a trustee. Similarly, if this other person is holding shares as a trustee, they are required to disclose the identity and particulars of the beneficiary. It is important to note that pursuant to Section 56(6), authorities and regulators such as the CCM, the stock exchange and the Securities Commission may exercise powers under the section and issue a notice in writing to the company, for the company to invoke its powers under the aforementioned Sections 56(1) and (2) and to provide the authorities and regulators with the information obtained on beneficial ownership.[7]

The Guideline spells out a longer and wider list of the responsibilities of companies than what is stated in the CA 2016. According to paragraph 7 of the Guideline, under the beneficial ownership reporting framework, a company or a limited liability partnership is required to:-

  • Identify – take reasonable steps to identify the beneficial owner based on the criteria in the Guideline.
  • Obtain – obtain the beneficial ownership information through notices pursuant to Section 56 of the CA 2016;
  • Verify – receive and verify the beneficial ownership information;
  • Enter – enter the verified information into the register of beneficial owners;
  • Notify – notify the CCM of the beneficial ownership information;
  • Update – keep accurate and up-to-date beneficial ownership information in the register of beneficial owners and to update the CCM whenever there is a change to the information; and
  • Access – give access to the information to competent authorities, law enforcement agencies, the beneficial owner, and persons authorised by the beneficial owner.

Meanwhile, paragraph 13 of the Guideline further lists out the various roles and responsibilities of the Board of Directors, client members, and Company Secretary of a company:-

Board of Directors – ultimately responsible for ensuring that the company has obtained the beneficial ownership information through the issuance of the company notices under Section 56(1), (2) or (3) of the CA 2016, and to ensure that once the information is received, it is entered into a separate part of the register of members.
Client Members – under an obligation to inform the company upon receipt of a notice under Section 56(1) or (3) of the CA 2016 whether he is the beneficial owner as defined in the CA 2016 or has met at least one of the identifying criteria in the Guideline, and if applicable, to provide the particulars of the persons for whom the client member holds the voting shares or the parties to the agreements or arrangements, as the case may be.
Any Other Person Given Notice under Section 56(2) of the CA 2016 – to inform the company whether he is the beneficial owner as defined under the CA 2016 or has met at least one of the identifying criteria or as trustee, and to provide particulars of the persons for whom the person holds the voting shares in his capacity as trustee to the extent that such other persons can be identified.
Company Secretary – to ensure that the beneficial ownership information is entered and to lodge the beneficial ownership information with the CCM.

In addition to all the above, it should also be kept in mind that the Guideline does carry a legally binding effect. As with any new legal requirement set out under the CA 2016, there are penalties that companies should be aware of in the event of non-compliance. The potential penalties and sanctions are as follows:-

Under Section 56(7) of the CA 2016, there can be an offence by any person who contravenes a notice issued under the Section 56, or in purported compliance with such a notice, essentially, makes a false or reckless statement. The general penalty provision under Section 588 of the CA 2016 would then apply, whereby upon conviction, the penalty is a fine not exceeding RM50,000 or a maximum three-year jail term or both.
If there is a failure to comply with the Guideline, Section 20E of the Companies Commission of Malaysia Act 2001 can apply. The CCM can direct a person in breach to comply or to remedy the breach, impose an administrative penalty, or reprimand the person. The CCM can also take further legal proceedings to apply to the Court for orders of compliance or to recover the administrative penalty.
The beneficial ownership form to be lodged with the CCM contains an important declaration by the person preparing the form which states that the facts and information in the document are true and to the best of that person’s knowledge, and all due diligence and vetting processes have been performed on the beneficial owner. Making or authorizing the making of a false or misleading statement can be an offence under Section 593 of the CA 2016 which would carry a heavier penalty of a maximum 10-year jail term or a maximum RM3 million fine or both.

In ensuring strict compliance of the reporting policy, paragraph 24(e) of the Guideline suggested for companies to consider adopting an appropriate internal policy on beneficial ownership reporting in their constitution, requiring the shareholders to notify the company on the identity of the beneficial owner and of any changes thereof. Client Members of the company may come and go, but a clause in the constitution would ensure continuous compliance.

All in all, as everything we do has consequences, this matter at hand is definitely not an exception to the rules. It is believed that abuse of anonymous shell companies is among the many reasons why many countries are facing greater challenges today in the face of the unprecedented COVID-19 pandemic. This is because for years, these countries have, in a way, enabled corruption, fraud and tax evasion – which means that taxes and public resources that could have served to improve, inter alia, the countries’ healthcare systems, did not arrive or were embezzled from public coffers.[8] A little interesting albeit unfortunate fact – a report issued by the Global Financial Integrity in January 2019 shows that Malaysia is among the countries with greatest outflow of illicit money in the world, among others, where there was an outflow of $33.7 million from Malaysia and transferred out of the jurisdiction.[9] Therefore, it is vital that companies treat this matter with utmost importance to maintain higher standards of corporate governance in the years to come.

Even though these reporting obligations might be perceived as an exhaustive obligation to be fulfilled and not as an opportunity to add value to your company, staying up to date with your reporting requirements will ensure that you maintain strong corporate governance practices that are in line with not only the Malaysian laws on governance – but also on the same level with leading global standards.

[1] Companies Commission of Malaysia. (2020). Guideline for the Reporting Framework for Beneficial Ownership of Legal Persons. Retrieved from https://www.ssm.com.my/Pages/Legal_Framework/Document/Guideline%20for%20BO%20Reporting%20Framework%20(27022020).pdf

[2] Obermaier, et al. (n.d.). Süddeutsche Zeitung. About the Panama Papers. Retrieved from https://panamapapers.sueddeutsche.de/articles/56febff0a1bb8d3c3495adf4/

[3] Transparency International. Panama Papers Four Years On: Anonymous Companies and Global Wealth. (2020, April 9). Retrieved from https://www.transparency.org/en/news/panama-papers-four-years-on-anonymous-companies-and-global-wealth#

[4] Andrew Tan (November 2020). PwC Malaysia. Meeting the requirements of beneficial ownership reporting in Malaysia. Retrieved from https://www.pwc.com/my/en/perspective/corporate-services/201120-meeting-the-requirements-of-beneficial-ownership-reporting-in-malaysia.html

[5] Law.asia. Malaysian push to reveal beneficial ownership. (2020, January 17). Retrieved from https://law.asia/malaysian-reveal-beneficial-ownership/

[6] Tan Marcus (2020, November 7). Marcus Tan & Co. The New Companies Beneficial Ownership Framework in Malaysia. Retrieved from https://mtco.my/the-new-companies-beneficial-ownership-framework-in-malaysia/

[7] Andrew Tan (November 2020). PwC Malaysia. Meeting the requirements of beneficial ownership reporting in Malaysia. Retrieved from https://www.pwc.com/my/en/perspective/corporate-services/201120-meeting-the-requirements-of-beneficial-ownership-reporting-in-malaysia.html

[8] Transparency International. Panama Papers Four Years On: Anonymous Companies and Global Wealth. (2020, April 9). Retrieved from https://www.transparency.org/en/news/panama-papers-four-years-on-anonymous-companies-and-global-wealth#.

[9] Tan Marcus (2020, November 7). Marcus Tan & Co. The New Companies Beneficial Ownership Framework in Malaysia. Retrieved from https://mtco.my/the-new-companies-beneficial-ownership-framework-in-malaysia/

Mohamed Ridza & Co

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