This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Summary and implications
In its continued effort to tackle financial crime and corruption, the UK government has introduced legislation requiring most UK companies and LLPs to investigate and disclose information about who ultimately owns them on a publicly available "persons of significant control" register (the PSC Register). Below is an outline of these changes and an insight into what they ultimately mean for UK companies and LLPs.
"The worst disease in the world today is corruption. And there is a cure: transparency."
A fervent opinion at the very least, but it seems that Mr Geldof has reason to believe in its verity. Just last month, the Prime Minister opined that corruption is the "cancer at the heart of so many of our problems". Recent statistics presented by the international NGO Transparency International suggest that corrupt activities cost developing countries around the globe US$1.26tn per year.
In the wake of the "Panama Papers" leak, the UK and its propensity to provide platforms in its Overseas Territories and Crown Dependencies, which enable corporations to benefit from more favourable (or non-existent) tax legislation whilst maintaining maximum secrecy of ownership, have been under intense scrutiny. It is often argued that this practice deprives economies of vital funds and instead ensures that these are kept by the wealthiest, recourse against whom is often difficult owing to complex and multi-layered systems of ownership.
What is changing?
What in terms of "transparency" is being done by the UK government to try to combat this so-called disease? The Small Business, Enterprise and Employment Act (the Act) received royal assent on 26 March 2015 and the legislation came into force on 6 April 2016. The Act introduced a brand new Part and Schedule into the Companies Act 2006 (CA 2006) which in turn placed an obligation upon certain UK companies, Societates Europaeae (SEs) and LLPs to provide information about who owns and controls them under a new PSC Register.
Under Part 21A of the CA 2006, UK companies other than those already subject to pre-existing transparency rules or otherwise exempt (as specified by the Secretary of State) are obliged to take "reasonable steps" to investigate and obtain information about any "registrable persons" (PSCs) or "registrable legal entities" (RLEs) that exist in their ownership chain. Essentially, this means that they must make enquiries about individuals, companies, LLPs or trusts that have control over them and detail this information on a register made available for public inspection for a small fee.
Any PSCs or RLEs that are aware they satisfy the criteria below will also be obliged to inform the company of their status, if they have not been approached by the company already.
What is a PSC?
In essence, a PSC is any individual that has 25% of the shares or voting rights of the company in question, or any individual that has the power to remove the majority of directors. The definition is far-reaching and also includes individuals that have the right to exercise significant influence or control.
In addition, if a trust or firm (without legal personality) that is significantly influenced or controlled by an individual satisfies the criteria set out above, that person’s details should be included as a PSC on the register. Separate statutory guidance has been issued which sets out the meaning of significant influence or control over the activities of a trust or firm.
What is an RLE?
An RLE is any legal entity that, for the purposes of the legislation, is considered both relevant and registrable.
A legal entity will be relevant if it satisfies the same criteria as listed for a PSC above and it either:
- keeps its own PSC register;
- is subject to the FCA’s Disclosure and Transparency Rules; or
- has voting shares admitted to trading on a regulated market in the UK or EEA (other than the UK) or on specified markets in Switzerland, the USA, Japan or Israel.
A RLE will be considered registrable if it is the first legal entity within the company’s ownership chain.
|Information required to be submitted on the PSC Register |
|PSCs* ||RLEs |
|Name ||Name of legal entity |
|Service address ||Registered or principal office |
|Country or state (or part of the UK) in which the individual is usually resident ||Legal form of the entity and the law by which it is governed |
|Nationality, date of birth and usual residential address ||The register of companies in which it is entered, including details of the state and any registration numbers |
|The date on which the individual became a registrable person in relation to the company in question ||The date on which the individual became a registrable relevant legal entity in relation to the company in question |
|Which of the conditions for being a PSC the individual meets, with quantification of the interest where relevant ||Which of the conditions for being a PSC the RLE meets, with quantification of its interest where relevant |
|Any restrictions on disclosing the PSC’s information that are in place || |
|* Unlike the situation for RLEs, information regarding PSCs must be confirmed before it is entered on the register || |
Failure to take "reasonable steps" to investigate and obtain information about PSCs or RLEs, provide the correct information on the PSC register, or ensure it is kept up to date will be a criminal offence.
From 30 June 2016, there will be an additional obligation on UK companies to deliver annual "confirmation statements" to Companies House (these will replace the current annual return) which set out the information above. Those wishing to incorporate a new company, SE or LLP after this date will also have to submit a statement of initial significant control with their application documents, and ensure that this information is updated if any "relevant change" takes place. These registers will be available for public inspection online.
Will these changes work?
The draftsmen will argue that Part 21A goes some way to deterring intentionally complex chains of ownership by forcing those with significant control to declare their interests and by making companies take steps to ascertain and publish ownership information. They may also argue that because of this, accountability is increased, providing a clear route of legal recourse against individuals or companies that carry out illegitimate activities. When the Act was at its consultation stage, Vince Cable predicted that such transparency would promote rather than deter investment in the UK because "honest, transparent transactions" will be acknowledged by businesses.
One of the key consequences of increased transparency is that bringing legal action against the true owner(s) of a company is made easier. However, the legislation as it stands has limitations in today's global market. If this is to work on an international level, such disclosure obligations must be placed upon foreign RLEs as well. Otherwise, we may just see a rise in the number of shell companies registered in the UK designed to provide a "gateway" into continuing the same practice, with the true beneficial owners still obfuscated by their offshore vehicles. As David Cameron pointed out, this depends on the "political will" of other countries. But how strong is this political will? As of now, only six countries – Britain, Afghanistan, Kenya, France, the Netherlands and Nigeria – have agreed to draw up publicly available registers of beneficial ownership.
The British Overseas Territories and Crown Dependencies are still hot topics of debate. Take the British Virgin Islands (BVI) for example – one of the most well-known and talked about "tax havens" and the star of the "Panama Papers" show – an overseas territory which has refused to sign up to a publicly available register of beneficial ownership. Until the same disclosure and investigatory obligations are adopted by territories such as the BVI, problems with identifying the true legal and beneficial owners of companies will persist.
Steps to be taken for companies and LLPs
- Ensure you take reasonable steps to find out who should be noted on your PSC register.
- Have procedures in place to ensure your PSC Register is adequately updated.
- Know how to utilise this information to enforce judgments against persons or companies who actually have control.
- Be aware of the exposure faced by those in your own chain of ownership.
- Stay on top of the significant administrative obligations imposed by the legislation.
This briefing was prepared by Nabarro paralegal Jay Whiting.