A report issued by the Global Financial Integrity (GFI) 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.
As corporate is a legal entity that could be operated or manipulated by natural person(s) behind the scene, regardless by way of direct or indirect layers to hide links to sources of funds or the actual identity of the mastermind of the company. Therefore the regulator has implement a framework as illustrated below.
As part of the effort to combat money laundering, corruption and financial crimes, the Companies Commission of Malaysia (CCM) has issued the Guideline for the Reporting Framework for Beneficial Ownership of Legal Persons (“the Guidelines”) pursuant to Section 20C of the Companies Commission of Malaysia Act 2001. The Guidelines came into effect on 1 March 2020.
The rationale in enforcing the Guidelines is fairly simple and straightforward, which is to impose a duty on the directors (for incorporated entity), partners (limited liability partnership) and company secretaries to reveal and self-declare the beneficial ownership of a corporate entity.
1. What, and Who is “Beneficial Owner”?
Section 2 of the Companies Act (“CA”) 2016 defines a beneficial owner as “the ultimate owner of the shares and does not include a nominee of any description”. Such definition appears to be fairly loose and does not meet the standard imposed by the Financial Action Task Force (FATF).
Apparently, Section 2 of the CA 2016 does not illustrate and make provisions for person that have the ultimate control over a company or nominee(s), regardless whether the beneficial owner is a majority shareholder behind the scene, or otherwise.
It would essentially means that the beneficial owner need not be the ultimate owner of majority shares in a company, so long he or she could influence or exercise ultimate and effective control over a company, then he or she should fit the description of being a “Beneficial Owner”.
CCM has proposed an amendment to the CA 2016 to incorporate a new sub-section to make provision for the aforesaid definition.
Under the Guidelines, 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.
2. Company Shall Maintain a new Register of Beneficial Owner
Pursuant to the Guidelines, CCM has also sought to introduce to incorporate a new sub-section to require companies to maintain and record all information relating to beneficial owners. Under the proposed new amendment, it will impose a statutory duty on the company and company secretary to lodge the information of beneficial owners to CCM.
3. Requirement to Lodge Information of Beneficial Owner in Annual Return
Although there is no requirement under the existing CA 2016 to lodge the beneficial ownership information to CCM (or the Registrar) on annual basis, however CCM is seeking to propose the companies should be required to submit such information as part of annual return to ensure the information is up-to-date.
Pursuant to the Guidelines, it imposed a duty on the directors and shareholders of companies to provide and declare any information relating to beneficial owner to the Registrar, failing which it would be an offence under the CA 2016.
A simple illustration of beneficial ownership could be demonstrated by the Alibaba group corporate structure, where although the interests of those licensed entities within the jurisdiction of China are held by Jack Ma and his partners, but those licensed entities had surrendered ultimate and effective control to entities outside the China mainland. This is done via the Variable Interest Entity (VIE) structure through multiples agreements between the parties. Under such circumstances, the shareholders in the listed company that holds the licensed entities through multiple layers of corporate entities and legal agreements are the beneficial owners.
All companies in Malaysia should now start to prepare for the compliance with the Guidelines.
p/s: You may also view this article in Marcus’s Linkedin