Canadian Finance Ministers announced on December 11 that they would take measures to improve the transparency of beneficial ownership information (see press release and backgrounder). While not much detail is available yet, this announcement marks a very important development and should be welcomed. The announcement includes a commitment to amend corporate law statutes across the country to require corporations to hold accurate and up to date information on beneficial owners that will be available to law enforcement, and tax and other authorities. This is a necessary first step to addressing the abuse of corporate entities for the purposes of money-laundering, tax evasion and other crimes. The announcement also includes a commitment to eliminate the use of bearer shares and bearer share warrants or options and to replace existing ones with registered instruments. Both initiatives will help ensure that Canada is compliant with global anti-money-laundering and terrorist financing standards, as set out by the Financial Action Task Force (FATF).
What are the implications for corporations?
Currently, corporations in Canadian jurisdictions are generally required to maintain at their corporate offices a securities registry, which includes an up-to-date list of registered shareholders, their names, last known address, number of securities held, date issued, etc. However, any particular “registered security holder” is not necessarily the beneficial owner of the shares. Shares may be registered directly in the name of the beneficial owner or they may be held on behalf of others by another corporation, by a nominee shareholder, by a bank, pension fund, etc. and in these cases, the share registry per se may not be providing beneficial ownership information.
Provincial securities laws and regulations currently provide much greater beneficial ownership transparency regarding publicly-traded corporations, primarily through insider trading rules, which require insiders of publicly-traded corporations, among other entities, to publicly report all holdings, usually within 10 days of becoming an insider. In Ontario, an “insider” is defined in part as a director or officer of a reporting issuer; a company that is itself an insider or subsidiary of a reporting issuer; or any beneficial owner holding more than 10 per cent of the voting rights of a security holder. Insider holdings are publicly viewable at the System for Electronic Disclosure by Insiders (SEDI) website. Since 2002, National Instrument 54-101 “New Rules for Communicating with Beneficial Owners” also help to promote beneficial ownership transparency, although it allows beneficial owners to opt out so its effect is much less than the insider trading rules. For more information on beneficial ownership transparency in Canadian business, please see the report Secret Entities published on December 4. I also have a flow chart available on current beneficial ownership information availability in Canada.
Due to the degree of beneficial ownership transparency that already exists in publicly-traded corporations, it is expected the new measures announced by the Finance Ministers will impact privately-held corporations to a much greater extent, that is, those that do not issue securities on public exchanges.
Privately-held corporations will be required to collect and maintain up-to-date and accurate beneficial ownership information. There is a “control” arm and an “ownership” arm of beneficial ownership, for example, the FATF definition: “Beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.”
Therefore it will be important for private corporations, including family businesses, to consider de facto control along with a simple list of Directors. For example, is there a unanimous shareholder agreement that sets out decision-making? Are there individuals granted the power to appoint and remove directors? Beneficial owners of securities will naturally also be subject to the new rules. In other jurisdictions, ownership thresholds are generally set out at between 10 and 25%, and Canadian corporate statutes will undoubtedly set thresholds as well.
What are the Implications for Financial Institutions and others conducting Customer Due Diligence?
So far, the Finance Ministers have committed to changes that will make information on beneficial ownership available to law enforcement, tax and other authorities. However, there would likely be a strong interest by other actors in our economy in having access to this information. The Proceeds of Crime (Money-Laundering) and Terrorist Financing Act requires the following businesses and professions to collect beneficial ownership information about the entities with which they do business: the financial services sector (including banks, credit unions, trust and loan companies), securities dealers, life insurance companies, life insurance brokers and agents, and to money services businesses that enter into an ongoing service agreement with the customer. Currently, these parties are devoting vast resources to customer due diligence, including beneficial ownership research, whilst they lack reliable the information they need to cross-check what is provided to them by customers. Unfortunately, the costs of doing this due diligence is currently borne by the private sector in a highly inefficient manner, as multiple firms must conduct time-consuming due diligence on the same entities.
Many Member States of the European Union who have been implementing the 4th EU Money-Laundering Directive (AMD4)have found that making publicly available the registry of beneficial ownership information created pursuant to the AMD4 was a pragmatic and cost-effective solution to numerous demands for the information. They concluded that those with a legitimate interest in the beneficial ownership registries included not just government authorities, but numerous actors with statutory due diligence obligations, as well as others such as journalists and NGOs. For more information on lessons learned from mainly AMD4, please see, Building a Transparent, Effective Beneficial Ownership Registry; Lessons Learned and Emerging Best Practices from Other Jurisdictions.
However, it should be noted that Finance Ministers also committed to “…develop a joint outreach and consultation plan for coordinated engagement with the business community and other stakeholders.” Therefore, they may be receptive to ways to ensure broader access to the beneficial ownership information.
What are the Implications for those possessing bearer shares?
The Finance Ministers committed to statutory changes, as required, “to eliminate the use of bearer shares and bearer share warrants or options and to replace existing ones with registered instruments.” Depending on how the statutes are amended, this means that bearer shareholders and those with other bearer instruments such as stock options will have the opportunity to exchange their bearer instruments for registered equivalent instruments. In some jurisdictions, such exchange may become mandatory.
The Finance Ministers announced important changes on beneficial ownership on December 11, however without much detail. How exactly these changes are rolled out across all Canadian jurisdictions will become more clear in due course, and further analysis on these issues will follow.
Mora Johnson, December 12, 2017
Content is provided solely for informational purposes. It is not intended to be legal or other professional advice. You are advised to seek specific legal advice by contacting legal counsel in relation to your specific legal issues.