The Malaysian Lawyer

The Companies Commission of Malaysia (SSM) has issued the Guideline for the Reporting Framework for Beneficial Ownership of Legal Persons. This guideline has already come into force. Companies, limited liability partnerships and businesses have up to 31 December 2020 to obtain and update their beneficial ownership information.

I had earlier written about the global trends on disclosure of beneficial ownership and also the existing Malaysian position in the Companies Act 2016 (CA 2016). I had also made some comments on the consultation document on the proposed beneficial ownership guidelines.

I now write on 10 things on the beneficial ownership framework to Malaysian companies and the responsibilities that follow.

#1: Exempted Companies

The following 4 types of companies are excluded from this reporting framework (see paragraph 17 of the guideline):

1. Companies which are licensed by Bank Negara Malaysia under the Financial Services Act 2013, Islamic Financial Services Act 2013, a prescribed development financial institution under the Development Financial Institutions Act 2002 or a licensed money services business under the Money Services Business Act 2001.
2. Certain entities regulated under the securities laws. The exempted entities are an entity licensed or registered under the Capital Markets and Services Act 2007 (CMSA). A stock exchange, derivatives exchange, clearing house and central depository. A recognised self-regulatory organisation under the CMSA. A private scheme administrator approved under the CMSA.
3. Companies whose shares are quoted in a local or foreign stock exchange.
4. Companies whose shares are deposited in the central depository pursuant to the Securities Industry (Central Depositories) Act 1991.

These exempted companies must still make a declaration of their exempted status (see paragraph 20 of the guideline).

#2: Identifying Criteria for Beneficial Owner of Companies

There is different identifying criteria for a company limited by shares and that of a company limited by guarantee.

The individual who is the beneficial ownership would meet one or more of the following criteria (see paragraphs 27 to 30 of the guideline).

Companies Limited By Shares

• Has interest, directly or indirectly, of not less than 20% of the shares of the company.
• Holds, directly or indirectly, not less than 20% of the voting shares of the company.
• Has the right to exercise ultimate effective control whether formal or informal over the company, or the directors or the management of the company.
• Has the right or power to directly or indirectly appoint or remove a director(s) who holds a majority of the voting rights at the meeting of directors.
• Is a member of the company and, under an agreement with another member of the company, controls alone or through the cumulative effect of the agreement a majority of the voting rights in the company.

Companies Limited by Guarantee

• Has the right to exercise ultimate effective control, whether formal or informal, over the company, the directors or the management of the company.
• Has the right or power to directly or indirectly appoint or remove a director.
• Has the right to exercise, or actually exercises ultimate effective control over the company.

#3: Transitional and Post Transitional Period

For the transitional period of 1 March to 31 December 2020, companies are to utilise this period to obtain, keep and update the beneficial ownership information at the company level.

From 1 January 2021 onwards, SSM will utilise the power under section 56(6) of the CA 2016 to then require all companies to provide the beneficial ownership information to SSM.

#4: Seven Steps Companies Need to Take

The reporting framework spells out a longer and wider list of responsibilities on companies than what is stated in the CA 2016.

Seven steps are required (see paragraph 7 of the guideline):

1. Identify: Take reasonable steps to identify the beneficial owner based on the criteria in the guideline.
2. Obtain: Obtain the beneficial ownership information through notices pursuant to section 56 of the CA 2016.
3. Verification: Receiver and verify the beneficial ownership information.
4. Enter: Enter the verified information into the register of beneficial owners.
5. Notify: Notify SSM of the beneficial ownership information.
6. Update: Keep accurate and up-to-date beneficial ownership information in the register of beneficial owners and to update SSM.
7. Access: Give access to the information to competition authorities, law enforcement agencies, the beneficial owner, and persons authorised by the beneficial owner.

#5: Responsibilities of the Board, Members, and Company Secretary

There are various roles and responsibilities by these different persons (see paragraph 13 of the guideline):

Board of Directors

The board of directors is ultimately responsible for ensuring that the company has obtained the beneficial ownership information. This is through the issuance of the company notices under section 56(1), (2) or (3) of the CA 2016.

Next, the board is also responsible to ensure that once that information is received, that the information is entered into a separate part of the register of members.

Members of the Company

First, if a member of the company receives a notice under section 56(1) or (3) of the CA 2016, the member is under an obligation to inform the company 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.

Second, the member must also provide the particulars of the persons for whom the member holds the voting shares or the parties to the agreements or arrangements, as the case may be.

I note that these obligations under the guideline are drafted wider and contain wording than that of section 56(1) and (3) of the CA 2016.

Any Other Person Given Notice under Section 56(2) of the CA 2016

First, this person has 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.

Second, this person also has 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

The company secretary must ensure that the beneficial ownership information is entered and to lodge the beneficial ownership information with SSM.

#6: Need to Take Reasonable Measures

Companies must take reasonable measures to identify the beneficial owners. Companies must take one or more of the following actions (see paragraph 24 of the guideline).

• Consider all interests in the company which are held by individuals, corporate entities and/or trusts.
• Review all documents and information available at the company level (e.g. register of members, shareholders’ agreements, the constitution, certificates of incorporation, etc).
• Send out notices pursuant to section 56(1), (2) or (3) of the CA 2016. Further, companies must send out a notice under section 56(1) at least once in a calendar year for the submission of the annual return.
• Consider any evidence that may show interests or rights held through a variety of means that may ultimately be controlled by the same person.
• Have an appropriate internal policy on beneficial ownership reporting. I expand on this more below.
• Any other actions that may be taken depending on the circumstances of each company.

#7: Must Have Appropriate Internal Policy on Reporting

As stated in paragraph 24(e) of the guideline, the company must consider adopting an appropriate internal policy on beneficial ownership reporting. This is to require shareholders to notify the company on the identify of the beneficial owner and of any changes.

The guideline sets out a suggestion that the constitution of the company can reflect this reporting policy.

It may be that setting out a clause in the constitution is the only way to ensure strict compliance. Members of the company may come and go, and a clause in the constitution would ensure continuous compliance.

#8: Verifying and Keeping the Beneficial Ownership Information

In identifying and verifying a beneficial owner, a company must rely on sufficient information or documentation. See paragraphs 45 to 48 of the guideline.

Such supporting documents may include but are not limited to: certified copies of a national identification card, passport or similar documents, founding documents and agreements regulating the power to bind the company.

The company must keep the beneficial ownership information and the supporting documents at the registered office or at the same place the register of members is kept.

The company must keep this information and documents for at least 7 years from the date a person ceases to be a beneficial owner.

The information can be in the national or English language, and either in the physical or electronic form.

#9: Beneficial Ownership Information to be Lodged

Set out below is the example of the form containing all the necessary beneficial ownership information.

#10: Penalties

This guideline does carry a legally binding effect. Section 20C of the Companies Commission of Malaysia Act 2001 allows SSM to issue such guidelines and the person to whom the guidelines applies shall comply and give effect to such guidelines.

Here, the guideline is already expressed as applying to the board of directors, the members, any person who receives the notice under section 56 of the CA 2016, and to the company secretary.

The potential penalties and sanctions are as follows.

First, under section 56(7) of the CA 2016. There can be an offence by any person who contravenes a notice issued under 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. Upon conviction, the penalty is a fine not exceeding RM50,000 or a maximum three-year jail term or both.

Second, if there is a failure to comply with this guideline, section 20E of the Companies Commission of Malaysia Act 2001 can apply. SSM can direct a person in breach to comply or to remedy the breach, impose an administrative penalty, or reprimand the person. SSM can also take further legal proceedings to apply to the Court for orders of compliance or to recover the administrative penalty.

Third, the beneficial ownership form that is lodged with SSM. The form contains an important declaration. The person preparing the form 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.

I have set out this important declaration below.

This can amount to a false or misleading statement under section 593 of the CA 2016. This would carry a heavier penalty of a maximum 10-year jail term or a maximum RM3 million fine or both.