As a Hong Kong company owner, you should be aware that, since 1 March 2018, all companies (except those listed on the Hong Kong Stock Exchange) incorporated in Hong Kong have been required to maintain a Significant Controllers Register (“SCR”). Hong Kong’s Companies Ordinance was amended to provide for greater transparency over corporate beneficial ownership and control, enabling Hong Kong to meet its commitments in the international arena in combating tax evasion, money laundering, and terrorist financing.
The Companies (Amendment) Ordinance 2018 (“Amendment Ordinance”) imposes strict compliance obligations on Hong Kong companies, such as taking certain prescribed reasonable steps to identify significant controllers, ensuring the ready accessibility of the SCR for inspection by law enforcement officers upon request, and keeping the SCR up to date. You are, therefore, well advised to study the requirements in detail to avoid falling foul of the law, which constitutes a criminal offence.
The article below details the various obligations demanded by the SCR regime, the method by which your Hong Kong company’s significant controllers should be identified, and other practical steps that you should take to ensure compliance with the Amendment Ordinance.
Table of Contents
Background
Prior to the amendment in 2018, the original Companies Ordinance did not provide for adequate transparency and sufficient scope for ascertaining the beneficial ownership of locally incorporated companies. Previously, Hong Kong companies were only obligated to disclose information relating to their direct shareholders, while the identities of their ultimate beneficial owners could remain veiled. The layer of opaqueness thrown over corporate structures and the hurdles in retrieving such information abetted the misuse of corporate vehicles for illicit purposes, such as money laundering, tax evasion, or terrorist financing.
Furthermore, the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, which came into force in July 2011, did not go far enough as a corrective to tackle this problem. Although financial institutions are mandated to obtain information on ultimate ownership and control from their customers under the ordinance, relevant court papers must be served to access this information. But a prerequisite for the issuance of a court order is knowing the identity of the addressee, which often poses considerable difficulties.
In light of the many practical difficulties in piercing the veil of secrecy shrouding corporate structures, the Amendment Ordinance essentially makes the information both physically and legally more easily accessible. It stipulates that the SCR containing information on the significant controllers be kept at a physical location and arrangements be made for inspections at any reasonable time by officers of the Companies Registry and law enforcement authorities, including the Police, Immigration Department, Inland Revenue Department, Insurance Authority, Securities and Futures Commission, Independent Commission Against Corruption, and Customs and Excise Department. The SCR is, however, not available for public inspection.
What are the requirements under the Amendment Ordinance?
According to the Amendment Ordinance, all unlisted companies incorporated in Hong Kong, including companies limited by shares, companies limited by guarantee, unlimited companies, and dormant companies, are required to:
- Keep the SCR at the registered office or a designated location in Hong Kong;
- Take reasonable steps to determine the identities of the company’s significant controllers, including issuing written notices to legal persons identified as significant controllers, and gathering the requisite information about them;
- Input the significant controllers’ relevant particulars into the SCR;
- Keep the SCR up to date;
- Allow law enforcement officers and significant controllers, whose names are recorded in the SCR, to inspect and obtain copies of the SCR.
The requirements above do not apply to foreign companies with branches registered in Hong Kong or listed companies.
What must be included in the SCR?
Your Hong Kong company’s SCR must contain the following details.
- The relevant particulars of all significant controllers
- For a registrable person, i.e., a natural person or a specified entity, including local authorities, governments, and corporations sole, (irrespective of their place of residence) who exercises significant control over your company: correspondence address, Hong Kong identity card number, or number and issuing country of passport;
- For a registrable legal entity, i.e., a company (irrespective of its place of incorporation) that exercises significant control over your company in the capacity of a shareholder: its legal form, registration number, place of incorporation and address of registered office;
- The date when the registrable person or legal entity became a significant controller;
- The nature of control exercised over the company.
- The details of any registrable change in respect of each significant controller, i.e., the cessation of a registrable person or legal entity’s role as a significant controller, or a change that renders the information recorded in the SCR inaccurate or incomplete.
- The name and contact details of a designated representative to provide assistance to officers of the Companies Registry and law enforcement agencies, who must be either:
- a natural person residing in Hong Kong and a member, director, or an employee of the company; or
- a certified public accountant, legal professional, or a trust or company service provider.
- Other matters as prescribed under Schedule 5C of the Companies Ordinance, which include, for example, stating that “the company knows, or has reasonable cause to believe, that it has no significant controller” where applicable.
Who is a significant controller?
As mentioned in the above section, a significant controller is defined as:
- A registrable person who is either a natural person or a specified entity*; or
- A registrable legal entity which is a shareholder of the company
that exercises significant control over the company.
*It should be noted that a natural person or specified entity exercising significant control will not be deemed registrable if they hold shares or rights via a company listed on the Hong Kong Stock Exchange.
Significant control is deemed to be exercised if one or more of the following conditions are met. The registrable person or legal entity holds:
- More than 25% of the issued shares (or capital or profits if share capital does not apply) directly or indirectly;
- More than 25% of the voting rights directly or indirectly;
- The right to appoint or dismiss the majority of the board of directors;
- The right to exercise, or actually exercises, significant influence or control over the company**; or
- The right to exercise, or actually exercises, significant influence or control over the activities of a trust or a firm (e.g., general partnerships and limited partnerships without a separate legal personality) that is not a legal person, but whose trustees or members fulfil one or more of the four conditions above.
**The fourth condition operates as a safeguarding provision to prevent significant controllers from purposefully avoiding triggering the applicability of the first three conditions by artificially rearranging their interests.
Where a person or entity falls outside the scope of the first three conditions, they will, nonetheless, be deemed a significant controller of the company if they exercise significant influence or control over the company.
“Significant influence” refers to a person or entity’s ability to ensure that a company by and large engages in the activities desired by them.
“Control” refers to a person or entity’s ability to direct the company’s activities.
The titles or positions assumed by the person or entity in the company have no bearing on establishing whether they exercise significant influence or control.
What reasonable steps should you take to identify significant controllers?
The Companies Registry prescribes certain reasonable steps that you should take to identify all significant controllers of your Hong Kong company. These include:
- Conducting a review of relevant documents, such as your company’s register of members, articles of association, statement of capital, shareholder agreements, or other covenants or agreements;
- Examining the interests in your company held by individuals, legal entities, trusts or firms;
- Taking into account any evidence indicating that rights held by different means are ultimately controlled by the same person or entity, e.g., through joint arrangements;
- Any other actions deemed necessary depending on the particular circumstances of your company.
It is recommended that you keep track and maintain a record of the steps taken in determining who the significant controllers are.
What other actions should you take to ensure compliance?
Issue notices to significant controllers and other relevant parties
You are required to give written notice to any person or entity whom you know or have reasonable cause to believe is a significant controller within seven days of acquiring that knowledge or belief. In addition, you have the power to issue a notice to a third party whom you know or have reasonable cause to believe knows of another person or entity who is a significant controller.
However, if you have already been informed of the person or entity’s role as a significant controller, and all necessary particulars have been supplied, you need not issue a notice.
Properly complete the SCR
The SCR should be duly prepared, containing all the required content as set out in section three of this article “What must be included in the SCR?”.
It is also important to stress that the SCR must never be left blank. Even where there are no significant controllers, this fact must be stated clearly using prescribed wording in the SCR. Below are examples of other scenarios where you are required to state the relevant fact in the SCR, adopting specific terminology provided in Annex C of the Company Registry’s Guideline on the Keeping of Significant Controllers Registers by Companies.
- Absence of significant controllers
- Failure to identify the significant controller despite having taken reasonable steps to do so
- Confirmation of the identified significant controller’s particulars is still pending
- Investigations into ascertaining whether the company has a significant controller are still ongoing
- Non-compliance with the requirements, as set out in the written notice, on the part of the addressee within the specified period
Further, you must enter the relevant particulars of the registrable person into the SCR within seven days after such particulars have been confirmed by the registrable person. In the case of a registrable legal entity, an amended particular must be inputted into the SCR within seven days after it has been brought to your attention.
Keep the SCR up to date
Making sure that your SCR contains up-to-date and correct information is vital to maintaining compliance. In respect of a change relating to a registrable person, you are required to amend the SCR accordingly within seven days after it has been verified by the registrable person. As for a change relating to a registrable entity, it must be entered into the SCR within seven days after it has been brought to your attention.
Keep the SCR in the right place
The SCR must be kept at your registered office or a designated location in Hong Kong in either hard copy or electronic form. If the SCR is not kept at your registered office, you must fill in and submit a Form NR2 to notify the Companies Registry of its place for safekeeping within 15 days after the SCR has been moved to that location.
What happens if you fail to comply?
It should be stressed that non-compliance with your obligations in respect of the SCR regime constitutes a criminal offence. An offending company and every responsible person of the company may be liable to a fine of HKD 25,000 and a further daily fine of HKD 700 so long as the wrongdoing persists.
In addition, any person who knowingly or recklessly makes a misleading, false, or deceptive statement in the SCR may be liable to a fine of HKD 300,000 and imprisonment for two years upon conviction.
For more information about the SCR regime, visit the Companies Registry’s dedicated website.
What can CW do for you?
At CW, we understand that your time and resources would be better spent on delivering value for your business. Needing to keep track of the constantly evolving and increasingly complex regulatory landscape only adds to your compliance burden.
As the SCR regime under the Amendment Ordinance imposes strict compliance obligations on your Hong Kong company, the violation of which is deemed a criminal offence, it is imperative to closely adhere to the requirements prescribed by the Companies Registry.
However, identifying the relevant significant controllers is not always a straightforward process, not to mention meeting the various regulatory demands, which takes up valuable time and resources. Our professional and experienced Corporate Secretarial team can help reduce your compliance burden by comprehensively assessing the implications of the SCR regime for your business, drawing up and keeping an accurate SCR, and ensuring ongoing compliance with your statutory obligations on your behalf.
Contact us today to prepare and maintain your Hong Kong company’s SCR with peace of mind.
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