Earlier this year, significant amendments to the Companies Act were implemented to promote heightened transparency within the corporate world. These changes encompass the addition of a beneficial owner definition and the introduction of mandatory reporting requirements. In this article, we explore the impact of these amendments on companies and closed corporations and stress the importance of full compliance with these obligations.
Keeping up with global compliance standards
These amendments align South Africa with global standards set by the Financial Action Task Force (FATF), an international organisation that plays a crucial role in combating money laundering, terrorist financing and the proliferation of weapons of mass destruction.
In March 2022, the FATF introduced more stringent standards, requiring countries to maintain accurate and up-to-date information on the true owners of companies. This is to prevent the use of anonymous shell companies and businesses for illegal activities. These measures also help countries assess and mitigate the money laundering and terrorist financing risks associated with foreign companies operating within their borders.
In addition, South Africa has taken various steps since last year to address deficiencies in its anti-money laundering and combating the financing of terrorism (AML/CFT) legislation, aiming to avoid being placed on the FATF’s greylist. However, despite multiple legislative updates intended to strengthen the country’s laws that combat financial crimes, South Africa was added to the greylist in February of this year. Subsequently, the government has continued to amend its financial crime legislation as it tries to get South Africa off the greylist.
Additional definitions and obligations
An important change to the Companies Act was the addition of the definition for “beneficial owner”. According to the amendment, which came into effect on 1 April 2023, a beneficial owner in terms of a company is an individual who directly or indirectly owns the company or exerts effective control over it. This control can manifest through various means, for instance holding interests in company securities, exercising voting rights or influencing management decisions.
Another pivotal change is the mandate for all companies and closed corporations, irrespective of their size or nature, to file their securities register or beneficial interest register with the Companies and Intellectual Property Commission (CIPC) as part of their annual returns filing process. This obligation came into effect on 24 May 2023. This return must include a copy of the company’s securities register and information about all the beneficial owners of the company. Companies that are classified as non-affected, for example they have no beneficial ownership information to declare, must still file their securities registers, which should include beneficial interest holders of the securities of that company if they are held by one person on behalf of another. These securities registers must also include prescribed information of its beneficial owners.
The CIPC is responsible for maintaining a register of beneficial ownership for companies and close corporations, and any individual with more than a 5% beneficial ownership stake in one of these entities must register with the CIPC. The register contains personal information about beneficial owners, their level of ownership or control, and the dates they became or ceased to be beneficial owners.
This register serves three primary purposes:
- Establishing a register of natural persons who own or control legal entities.
- Assisting law enforcement by providing them with information on who the ultimate owner of an entity under investigation is.
- Mitigating the risks identified in the FATF’s national risk assessment where legal persons were identified as vehicles prone to abuse for money laundering and terrorist financing activities.
In terms of the amended regulations, pre-existing entities (those who were incorporated before 24 May 2023) must file their beneficial ownership information in line with the annual return anniversary date. New entities must file beneficial ownership information within 10 business days after the date of incorporation. Whenever there are changes to beneficial ownership records, they must be updated within 10 days.
The consequences of non-compliance
It’s crucial for companies and closed corporations to adopt these amendments if they haven’t done so yet. In July of this year, the CIPC issued a media release urging all companies (including external and non-profit companies) and close corporations to file their annual returns to avoid deregistration, adding that they’ve observed a decline in companies fulfilling this requirement.
“Failure to submit annual returns will result in the Commission assuming that the company and/or close corporation is not doing business or is not intending on doing business in the foreseeable future and will therefore result in the company/close corporation being deregistered,” the Commission warned.
“Companies and close corporations that are non-compliant with annual returns will experience a penalty fee to their standard filing fee, and if non-compliance continues, will be deregistered. Once deregistered, the company or close corporation ceases to exist and the directors or members may be held personally liable for the debt of the company or close corporation,” the media release reads.
In September 2023, the CIPC issued a notice, stating that from 1 October 2023, they will rigorously enforce beneficial ownership filings and securities registers. The notice also mentioned the CIPC’s intention to work with non-compliant entities to ensure the filing of beneficial ownership information and to conduct inspections for record verification.
Once again, the Commission noted that several entities still haven’t filed their beneficial ownership information, and this notice is a reminder to those entities, encouraging them to fulfil their filing requirements.