Abstract

Keywords

Companies; money laundering; shell companies; Financial Action Task Force; Companies Act 71 of 2008; beneficial ownership.

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1 Introduction

Companies are capable of being used by bad actors for illicit activities like money laundering and terrorism financing. 1

 Etienne Olivier. LLB LLM (cum laude) LLD (UWC). Senior Law Lecturer, University of the Western Cape, South Africa. E-mail: eaolivier@uwc.ac.za. ORCiD: https://orcid.org/0000-0002-8030-4885.

 Windell Nortje. LLB (NWU) LLM LLD (UWC). Senior Law Lecturer, University of the Western Cape, South Africa. E-mail: wnortje@uwc.ac.za. ORCID: https://orcid.org/0000-0001-8033-5537.

1 See FATF 2010 https://www.fatf-gafi.org/en/publications/Methodsandtrends/Money launderingusingtrustandcompanyserviceproviders.html 4-5. Also see Duri and Matasane 2017 Journal of Anti-Corruption Law 175. Dhana explains that "[v]arious methods, such as complex company structures and simulated transactions, are employed to conceal and move unlawful proceeds." See Dhana 2022 JCCLP 30. ..

advantage of company ownership structures to conceal their association with a company that conducts illegal activities. 7

7 Duri and Matasane 2017 Journal of Anti-Corruption Law 176; Chandra 2020 Mich J Int'l L 179-180; Bieler 2022 Fordham Journal of Corporate and Financial Law 193-196.

Money laundering is a global crime, as illicit proceeds of crime are often moved between countries in the money laundering process. 8

8 Hatchard 2018 Denning LJ 200.

The AML Act amends several statutes, including the Companies Act 71 of 2008 (the Companies Act 2008). On 24 May 2023 Parliament enacted amendments to the Companies Regulations, 2011 to confer a mandate on the Companies and Intellectual Properties Commission (CIPC) to collect and maintain BO information. 11

11 The Companies and Intellectual Property Commission (CIPC) is probably the most important regulatory institution for companies in South Africa: its functions include the registration and deregistration of companies, and the receipt and storage of statutorily required company documents. See ss 186(1) and 187(4) of the Companies Act 71 of 2008 (Companies Act 2008).

that the amendments would prevent South Africa’s being placed on the FATFs "grey list" of jurisdictions under increased monitoring. 13

13 See FATF 2023 https://www.fatf-gafi.org/en/publications/High-risk-and-other-monitored-jurisdictions/Increased-monitoring-june-2023.html 11.

The FATF has identified several weaknesses in South Africa's AML and countering the financing of terrorism (CFT) legislation and has consequently placed South Africa on its "grey list". Inter alia the FATF determined that in South Africa "[t]he proactive identification and investigation of ML networks and professional enablers is not really occurring"; 14

14 FATF 2023 https://www.fatf-gafi.org/en/publications/High-risk-and-other-monitored-jurisdictions/Increased-monitoring-june-2023.html 11.

Nominee asset-holding structures are a common phenomenon world-wide. 19

19 FATF 2023 https://www.fatf-gafi.org/en/publications/Fatfrecommendations/ Guidance-Beneficial-Ownership-Legal-Persons.html 49.

with the company. 23

23 FATF 2023 https://www.fatf-gafi.org/en/publications/Fatfrecommendations/

Guidance-Beneficial-Ownership-Legal-Persons.html 51. The DTIC is of the view that "authorities and the public need to know not only who the registered shareholders of a company are, but also whether they hold those shares on behalf of others, and, in the case of owners that are companies or trusts, who ultimately own the beneficial interest in those shares." See 4.9 of Background Note and Explanatory Memorandum on the Draft Companies Amendment Bill, 2021.

As part of the move towards transparency in respect of nominee holdings, nominees holding securities in public companies must disclose the number and class of securities held for other persons, the extent of those holdings, the identity of the person on whose behalf the securities are held, and the identity of all persons that hold beneficial interests in securities held by the nominee. 26

26 Section 56(3) of the Companies Act 2008. See Cassim et al Contemporary Company Law 327-328.

Prior to the AML Act South African law did not compel companies to disclose the identity of the human beings that could be said to be "owners" of a company. Certain reporting obligations, such as director, shareholder, and beneficial interest-holder disclosures, have been in place for certain companies for some time, but the information gathered thereby was limited. In complex structures the CIPC and law enforcement agencies would not know outright whether a particular company has a beneficial owner, and if so, who such a beneficial owner is.

This article will analyse the AML amendments and the accompanying disclosure obligations now applicable to private companies, close corporations and non-profit companies, to gauge whether the extra compliance burden on small to medium enterprises (SMEs) is worth it. In other words, the article seeks to establish whether the AML amendments could help to reduce the amount of money laundering conducted through shell companies. This article describes how companies are used for money laundering, discusses the importance of adequate BO disclosure regulation in the fight against money laundering, critically analyses the relevant AML amendments to the Companies Act 2008, discusses whether and to what extent the amendments contribute to the fulfilment or frustration of South Africa's company law objectives, and analyses whether and to what extent the amendments comply with the expectations of the FATF. This article makes a significant contribution to the field of company law and anti-money laundering law by analysing one of the most recent AML amendments and its potential impact on the prevention of money laundering offences committed by shell companies.

2 Money laundering and shell companies

Money laundering and corruption are secret crimes. 29

29 Stojanovski "Crime and Corruption Cases" 122.

2.1 Defining and regulating money laundering

Money laundering is a scourge in South African society which enables corruption to flourish. Money launderers, however, are left with a dilemma: how do they prove their money has not been obtained from illegal proceeds, once they want to reintegrate it into the legitimate banking system? In order to be able to spend money openly and legitimately criminals will seek to ensure that there is no nexus between the illegal activity and the proceeds of their crime. 30

30 OECD 2009 https://www.oecd.org/ctp/crime/money-laundering-awareness-handbook-for-tax-examiners-and-tax-auditors.pdf 9.

seek to launder dirty or black money before investing it or spending it in the legal economy. 32

32 OECD 2009 https://www.oecd.org/ctp/crime/money-laundering-awareness-handbook-for-tax-examiners-and-tax-auditors.pdf 9.

Money laundering is facilitated by way of a three-stage process known as placement, layering and integration. 35

35 See generally Weismann Money Laundering.

Secondly, layering refers to hiding or concealing the illegal origin of the money by way of a series of transactions to render the proceeds accessible in a legitimate market. 41

41 Burchell Principles of Criminal Law 911.

facilitate layering include shell companies, electronic transfers, false invoicing, offshore placements and other methods. 42

42 Burchell Principles of Criminal Law 911.

Besides billionaires, celebrities and criminals, the names of 143 politicians and their associates from around 50 countries are mentioned in the documents as having used offshores for tax avoidance and tax evasion purposes. Even though legitimate ways of using tax havens exist, offshore jurisdictions are known for the creation of shell companies hiding the real beneficial owners. Such practices are common for aggressive tax avoidance, hiding illicit wealth and for the concealment of financing of terrorists, drug cartels, criminals and corrupt politicians. 44

44 See Council of Europe 2016 https://assembly.coe.int/nw/xml/XRef/Xref-XML2HTML-en.asp?fileid=23018&lang=en.

Thirdly, integration encourages the criminal to "regain control over the proceeds of the underlying criminal activities without fear of detection." 45

45 Smit Clean Money, Suspect Source 12. Also see Burchell Principles of Criminal Law 911; S v Van der Linde 2016 2 SACR 377 (GJ) (hereafter S v Van der Linde) para 113.

Money laundering is a global problem and is well planned, as is illustrated by the above description of the stages of money laundering. This raises the question whether money launderers should at all be bothered by legislation and law enforcement, including the new amendments included in the General Laws Amendment Act. The South African AML legislative regime is comprehensive but lacks implementation and the state lacks the necessary investigative skills largely due to the lack of expertise in money

laundering detection within law enforcement agencies. 48

48 See FATF 2021 https://www.fatf-gafi.org/content/fatf-gafi/en/publications/ Mutualevaluations/Mer-south-africa-2021.html.

South Africa's fight against money laundering is largely indebted to the efforts conducted by the global AML regime, which is spearheaded by the United Nations (UN) and the FATF. Money laundering is regulated globally by the UN Convention against Transnational Organised Crime, 51

51 United Nations Convention against Transnational Organised Crime (2000).

offences, and will be discussed in detail in the next section in so far as they relate to companies. South Africa has signed and ratified all the above conventions and has domesticated these provisions in its laws as provided for in section 231 of the Constitution of the Republic of South Africa, 1996. 55

55 Section 231 of the Constitution of the Republic of South Africa, 1996 states that "(2) An international agreement binds the Republic only after it has been approved by resolution in both the National Assembly and the National Council of Provinces, unless it is an agreement referred to in subsection (3). (3) An international agreement of a technical, administrative or executive nature, or an agreement which does not require either ratification or accession, entered into by the national executive, binds the Republic without approval by the National Assembly and the National Council of Provinces, but must be tabled in the Assembly and the Council within a reasonable time. (4) Any international agreement becomes law in the Republic when it is enacted into law by national legislation."

Money laundering is regulated by section 4 of POCA. Money laundering is committed when certain acts such as bribery, racketeering or any other predicated offences are performed in respect of unlawful activities, which results in the concealment of illegal proceeds or property. 58

58 De Koker "Money Laundering" 84.

the AML legislative requirements, then it cannot be thought to commit money laundering, except if it is used as an ML (money-laundering) shell company.

2.2 Shell companies

A shell company may act as a tool for the money launderer to clean dirty money. Transparency International defines a shell company as:

a limited liability entity having no physical presence in their jurisdiction, no employees and no commercial activity. It is usually formed in a tax haven or secrecy jurisdiction and its main or sole purpose is to insulate the real beneficial owner from taxes, disclosure or both. Shell companies are also referred to as international business companies, personal investment companies, front companies, or ‘mailbox’/‘letterbox’ companies. 64

64 Transparency International 2023 https://www.transparency.org/en/corruptionary/ shell-company.

Shell companies can be publicly traded or privately held. 65

65 US Department of Treasury, Financial Crimes Enforcement Network 2006 https://www.fincen.gov/sites/default/files/shared/LLCAssessment_FINAL.pdf 4.

the vulnerability of the shell company is greatly compounded when it is privately held and beneficial ownership can more easily be obscured or hidden. Lack of transparency of beneficial ownership can be a desirable characteristic for some legitimate uses of shell companies, but it is also a serious vulnerability that can make some shell companies ideal vehicles for money laundering and other illicit financial activity. 67

67 US Department of Treasury, Financial Crimes Enforcement Network 2006 https://www.fincen.gov/sites/default/files/shared/LLCAssessment_FINAL.pdf 4.

A shell company is effective for the owner because he can circumvent domestic and international regulations due to the obscurity of the identity of the owner and the entire enterprise. 68

68 Gilles 2019 MJIL 5.

the recipient of the bribe creates a corporate vehicle to hide the assets and any connection that he may have to them. In cases in which the official is given a concealed stake in the venture or the company offering the bribe, these corporate vehicles become the opaque link between the corrupted party and the wealth acquired. 69

69 World Bank 2011 https://star.worldbank.org/sites/default/files/puppetmastersv1.pdf 39.

The use of shell companies is rife and presents a major problem for law enforcement agencies. In 2011 the World Bank reported that out of 213 grand corruption investigations, 150 of these investigations were related to the use of companies and resulted in the money laundering of approximately US$56.4 billion. 70

70 See World Bank 2011 https://star.worldbank.org/sites/default/files/ puppetmastersv1.pdf 117; Gilles 2019 MJIL 5.

3 The FATF AML/CFT beneficial ownership recommendations

The FATF is an international inter-governmental body established in 1989 by countries to set standards and promote the effective implementation of measures aimed at combatting money laundering and terrorist financing. 72

72 FATF 2023 https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Fatf-recommendations.html.

Recommendation 24 provides guidance and standards promoting disclosure, record-keeping and the transparency of beneficial ownership of companies as an AML/CFT measure:

Countries should ensure that there is adequate, accurate and up-to-date information on the beneficial ownership and control of legal persons that can be obtained or accessed rapidly and efficiently by competent authorities, through either a register of beneficial ownership or an alternative mechanism… [c]ountries should take effective measures to ensure that nominee shareholders and directors are not misused for money laundering or terrorist financing. Countries should consider facilitating access to beneficial ownership and control information. 74

74 FATF 2023 https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Fatf-recommendations.html 22.

The FATF defines "beneficial owners" as

[T]he 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 natural persons who exercise ultimate effective control over a legal person or arrangement. Only a natural person can be an ultimate beneficial owner, and more than one natural person can be the ultimate beneficial owner of a given legal person or arrangement. 75

75 FATF 2023 https://www.fatf-gafi.org/en/publications/Fatfrecommendations/ Guidance-Beneficial-Ownership-Legal-Persons.html 15. The FATF explains that reference to "ultimate" ownership or control refers to situations where ownership or control is exercised through a chain or by means of indirect control.

The FATF recommends that reasonable measures should be taken to verify the identity of beneficial owners and their status as beneficial owners. In other words, the FATF recommends that countries should implement verification measures to ensure accurate data in BO records/registers. 76

76 FATF 2023 https://www.fatf-gafi.org/en/publications/Fatfrecommendations/ Guidance-Beneficial-Ownership-Legal-Persons.html 16. According to Bieler, "verification is partially about ensuring accurate data, but on the assumption that the data of bad actors is likely inaccurate, it is predominately about unearthing suspicious information that might signal foul play." Bieler 2022 Fordham Journal of Corporate and Financial Law 214.

The FATF also recommends that countries use an ownership threshold to determine whether a person is a BO. Such a threshold could even consider combined ownership interests. 80

80 FATF 2023 https://www.fatf-gafi.org/en/publications/Fatfrecommendations/ Guidance-Beneficial-Ownership-Legal-Persons.html 16.

The revised Recommendation 24 expressly requires countries to use a multi-pronged approach (i.e. an approach that utilises various mechanisms)

to BO ownership information collection and record-keeping. 82

82 FATF 2023 https://www.fatf-gafi.org/en/publications/Fatfrecommendations/ Guidance-Beneficial-Ownership-Legal-Persons.html 5.

A register holding beneficial ownership information can be an effective mechanism because it allows competent authorities to access such information from a direct source in a rapid and efficient manner (often in real time). Such effectiveness is generally conditional upon the register having sufficient resources to perform its tasks and on its ability to request additional information when it has doubts on the information it receives. 84

84 FATF 2023 https://www.fatf-gafi.org/en/publications/Fatfrecommendations/ Guidance-Beneficial-Ownership-Legal-Persons.html 30.

The FATF identifies two important challenges for the effective implementation of a BO register: the application and enforcement of adequate sanctions for non-compliance with BO disclosure requirements, and the capacity of the body responsible for maintaining the register to perform its role. 85

85 FATF 2023 https://www.fatf-gafi.org/en/publications/Fatfrecommendations/

Guidance-Beneficial-Ownership-Legal-Persons.html 30.

4 New BO disclosure obligations introduced by the AML Act

4.1 The definition of "affected company"

The definition of "affected company" introduced by the AML Act is key to establishing whether a particular company is obliged to disclose BO information. In terms of the amendment to section 1 of the Companies Act 2008 "affected company" means a regulated company as set out in section 117(1)(i) and a private company that is controlled by or a subsidiary of a regulated company because of any circumstances contemplated in sections 2(2)(a) or 3(1)(a) of the Companies Act 2008. In terms of s 117(1)(i) of the Companies Act 2008, a "regulated company" is defined as a company to which the Takeover Regulations and Part C of the Companies Act 2008 apply, in accordance with section 118(1) and (2) of the Companies Act 2008. In terms of section 118(1) of the Companies Act 2008 the Takeover Regulations and Part C of the Companies Act 2008 will apply "with respect to an affected transaction or offer involving a profit company or its securities" if the company is a public company, a state-owned company (unless

exempted in terms of section 9 of the Companies Act 2008), or a private company where:

(i) the percentage of the issued securities of that company that have been transferred, other than by transfer between or among related or inter-related persons, within the period of 24 months immediately before the date of a particular affected transaction or offer exceeds 10%; or

(ii) the Memorandum of Incorporation of that company expressly provides that the company and its securities are subject to this Part, Part C and the Takeover Regulations, irrespective of whether the company falls within the criteria set out in subparagraph (i). 87

87 Section 118(1)(c)(i) of the Companies Act 2008.

Regulated companies, and hence affected companies, are defined in relation to an affected transaction. Affected transactions are defined by section 117 of the Companies Act 2008 as transactions that amount to:

(i) the disposal of all or the greater part of a regulated company's assets;

(ii) mergers and amalgamations involving regulated companies;

(iii) schemes of arrangement of regulated companies;

(iv) the acquisition of, or announced intention to acquire, a beneficial interest in any voting securities to the extent mentioned in section 122(1), namely the 5% and multiples of 5% thresholds;

(v) mandatory offers in terms of s 123 of the Companies Act 2008; and

(vi) compulsory acquisitions in terms of s 124 of the Companies Act 2008.

It seems that a company can be an affected company only in relation to an affected transaction. Does this mean that a company not contemplating an affected transaction is not an affected company? What if a private company sells shares to outsiders every three years? Will it sometimes be a regulated company (and hence an affected company) and sometimes not?

It is not clear why the definition of an "affected company", a concept that regulates what company ownership disclosures a company must make to the CIPC, was drafted in alignment with a definition that establishes which companies and transactions are subject to Takeover Regulations and the jurisdiction of the Takeover Regulation Panel (TRP). Surely the purpose of company ownership disclosure is not the same as the rationale for takeover regulation. From a practical perspective, the way that the definition of "affected company" has been crafted is not ideal for the purpose of the mandatory compliance obligations, because in several conceivable scenarios it may not be easy to say whether the company is an affected company or not. It should be noted that the Companies Amendment Bill B27-2023 intends to make a change to the determination of when a private

company becomes a regulated company. This amendment will be important for BO disclosure purposes because, as discussed above, it will affect which companies are affected companies. Once the Amendment Bill is passed, a private company will be a regulated company if it has ten or more direct or indirect shareholders and meets or exceeds the turnover or asset value threshold to be determined by the Minister of Trade, Industry and Competition in consultation with the TRP. 88

88 See s 16 of the Companies Amendment Bill B27-2023.

Contestations on interpretation aside, it is at least clear that "affected companies" are public companies, state owned companies, and some private companies, 89

89 That is, private companies that fall under the definition of "regulated company" in terms of section 118(1) of the Companies Act 2008.

4.2 The disclosure obligations of non-affected companies

In terms of the amended section 33 of the Companies Act 2008 the mandatory annual return filing must now be accompanied by a securities register or members register (for non-affected companies). 93

93 Section 33(1)(aA) of the Companies Act 2008, as amended by s56 of the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act, No. 22 of 2022, Gazette No. 47815, Notice 1535.

the identity and personal details of the holders of beneficial interests. 94

94 In terms of the amended Regulation 32(3) of GN R351 in GG 34239 of 26 April 2011 (Companies Regulations, 2011) as amended.

Section 58(d) of the AML Act introduces section 56(12) into the Companies Act 2008, in terms of which companies that do not qualify as "affected companies" must file with the CIPC a record of the individuals who are beneficial owners of the company, and must ensure that this record is updated after any changes in their beneficial ownership. 96

96 Also see Regulation 32(B) of the amended Companies Regulations, 2011.

4.2.1 Who is a beneficial owner of a company?

Section 55 of the AML Act introduces into section 1 of the Companies Act 2008 the definition of "beneficial owner" in respect of a company to mean "an individual who, directly or indirectly, ultimately owns that company or exercises effective control of that company, including through—"

(a) The holding of beneficial interests in the securities of that company;

(b) The exercise of, or control of the exercise of the voting rights associated with securities of that company;

(c) The exercise of, or control of the exercise of the right to appoint or remove members of the board of directors of that company;

(d) The holding of beneficial interests in the securities, or the ability to exercise control, including through a chain of ownership or control, of a holding company of that company;

(e) The ability to exercise control, including through a chain of ownership or control of:

(i) A juristic person other than a holding company of that company;

(ii) A body of persons corporate or unincorporate;

(iii) A person acting on behalf of a partnership;

(iv) A person acting in pursuance of the provisions of a trust agreement; or

(f) The ability to otherwise materially influence the management of that company.

A conceptual difficulty with the BO definition is that, strictly speaking, it is not possible to own a company. A company is a juristic person and as such cannot be owned by another person. 99

99 According to s 19(1) of the Companies Act 2008, a company is a juristic person that "has all the legal powers and capacity of an individual." The Companies Act 2008, before the AML amendments, refers in several sections to "ownership", but only in respect of securities or property, not in respect of a company.

It seems that non-affected companies are obliged to investigate whether there is an identifiable, human, ultimate owner, beneficiary or controller of a company. The examples through which beneficial ownership can be established are not a closed list and must ultimately be read in conjunction with the key elements of the definition that speaks of an individual that "ultimately owns" or effectively controls a company. However, no definitions of "ultimately owns" or of "effective control" are provided.

The instances of beneficial ownership in terms of the definition are merely indicators of beneficial ownership. If one of those scenarios is present, then it is possible that there is a BO. A company with a straightforward ownership and control structure that has been disclosed to the CIPC via its securities

register and director information filings would probably not have to submit any BO information. However, the wording of the Companies Act 2008 is not clear in this regard. It is not explicitly provided that every company must have a BO. 100

100 The first author has reached out to the CIPC via its eServices platform to ask whether every company has a BO, but no meaningful response has been received.

In its guidelines regarding BO filings the CIPC advises that a natural person that has 5% ownership of a company should be recorded as a BO of the company. 102

102 CIPC 2023 https://www.cipc.co.za/wp-content/uploads/2023/05/USER-GUIDELINES-BO-LEGISLATIVE-REQUIREMENTS.pdf 2, 8. According to the DTIC, several of the early implementers of public beneficial ownership registers, including the United Kingdom and Ukraine, adopted a 25% threshold. This has been criticised as being too high. There appears to be increasing recognition internationally that the 25% threshold leaves many relevant beneficial owners outside of the disclosures net. According to ownership transparency advocacy groups, a lower threshold for the publication of information is in line with current international trends. A number of countries have applied lower thresholds, recently including Argentina (1 share or above), Senegal (2%), Nigeria (5%), Paraguay (10%), Kenya (10%) and the Cayman Islands (10%). See 4.16 and 4.17 of Background Note and Explanatory Memorandum on the Draft Companies Amendment Bill, 2021.

The inclusion of beneficial interest holdings as an indicator of beneficial ownership means that the beneficial interest concept can be used to assist in the identification of a BO. Section 56(1) reiterates the common law position by providing that, except to the extent that a company's Memorandum of Incorporation provides otherwise, a company's securities may be held by one person for the beneficial interest of another person. Section 1 of the Companies Act 2008 defines "beneficial interest" in a company's securities as

the right or entitlement of a person, through ownership, agreement, relationship or otherwise, alone or together with another person, to:

(a) receive or participate in any distribution in respect of the company's securities;

(b) exercise or cause to be exercised, in the ordinary course, any or all of the rights attaching to the company's securities; or

(c) dispose or direct the disposition of the company's securities, or any part of a distribution in respect of the securities,

but does not include any interest held by a person in a unit trust or collective investment scheme in terms of the Collective Investment Schemes Act, 2002 (Act No. 45 of 2002).

Depending on the extent of the securities held, the holders of beneficial interests in a company's securities can easily fit the definition of BO of a company, especially read with the CIPCs 5% ownership threshold guideline. Since share rights may be severed among more than one person, it is possible to have more than one holder of beneficial interests in respect of the same security. CIPC has indicated that it is also possible to have more than one BO of a company. 103

103 CIPC 2023 https://www.cipc.co.za/wp-content/uploads/2023/05/USER-GUIDELINES-BO-LEGISLATIVE-REQUIREMENTS.pdf 10.

It can be noted that there are now two definitions of "beneficial person" in the Companies Act 2008: beneficial interest holders and beneficial owners. Both have different but related reasons for existing: the former is about the disclosure of the ownership of any holder of a beneficial interest in a company's securities for the purpose of transparency in respect of security ownership, while the latter is about uncovering the natural persons that ultimately benefit from or control a company. One important difference between these two concepts is that the holder of a beneficial interest in a company's securities may be a natural person or a juristic person, while a beneficial owner can only be a natural person.

There is a substantial body of case law wherein South African courts have reflected on the meaning of "beneficial owner" in company law. In Oakland Nominees (Pty) Ltd v Gelria Mining and Investment Co (Pty) Ltd 104

104 Oakland Nominees (Pty) Ltd v Gelria Mining and Investment Co (Pty) Ltd 1976 1 SA 441 (A).

A nominee is an agent with limited authority: he holds shares in name only. He does this on behalf of his nominator or principal, from who he takes his instructions. The principal, whose name does not appear on the register, is usually described as the ‘beneficial owner’. This is not, juristically speaking, wholly accurate; but it is a convenient and well-understood label. 105

105 Oakland Nominees (Pty) Ltd v Gelria Mining and Investment Co (Pty) Ltd 1976 1 SA 441 (A) 453.

Similarly, in Standard Bank of South Africa Ltd v Ocean Commodities Inc, 106

106 Standard Bank of South Africa Ltd v Ocean Commodities Inc 1983 1 SA 276 (A).

In some instances, however, the registered shareholder may hold the shares as the nominee, i.e. agent, of another, generally described as the ‘owner’ or ‘beneficial owner’ of the shares. This fact does not appear on the company's register, as it is the policy of the law that a company should concern itself only with the registered owner of the shares…The term ‘beneficial owner’ is, juristically speaking, not wholly accurate, but it is a convenient and well-used label to denote the person in whom, as between himself and the registered shareholder, the benefit of the bundle of rights constituting the share vests. 107

107 Standard Bank of South Africa Ltd v Ocean Commodities Inc 1983 1 SA 276 (A) 289.

In Independent Community Pharmacy Association v Clicks Group Ltd 108

108 Independent Community Pharmacy Association v Clicks Group Ltd 2023 6 BCLR 617 (CC).

unless a person is in law the owner, to call them a ‘beneficial owner’ merely conveys that they have personal rights against the owner entitling them to some or all of the benefits which accrue to the actual owner. 110

110 See Independent Community Pharmacy Association v Clicks Group Ltd 2023 6 BCLR 617 (CC) para 236.

In a minority judgment, Majiedt J remarked that:

[T]he terms ‘beneficial ownership’, ‘beneficial interest’ and ‘beneficial enjoyment’ have been used interchangeably by our courts to describe a situation where there is a severance of interests (legal rights, entitlements or powers) that comprise ownership… 111

111 Independent Community Pharmacy Association v Clicks Group Ltd 2023 6 BCLR 617 (CC) para 161. The word interchangeably is underlined for the purpose of emphasis only.

Majiedt J's observations are correct. At common law, it was recognised that the term "beneficial owner" in the company law context referred to the person legally entitled to shares and share rights through his nominee in whose name the shares are registered. The Department of Trade, Industry and Competition (the DTIC) also seems to use the two terms interchangeably. 112

112 See part 4.1 of Background Note and Explanatory Memorandum to the Draft Companies Amendment Bill, 2021 where the DTIC makes the following observations in this respect: "Transparency in respect of beneficial ownership reporting is becoming a matter of concern internationally. In both the United States and the European Union, efforts have been made to address the matter of the identity of the holders of the beneficial interests in a company."

"beneficial owner" is found in the definition of "beneficial interest" in terms of section 1 and 57(1) of the Companies Act, 2008. This distinction in terminology will hopefully not be lost on practitioners. Although the courts have often referred to a holder of a beneficial interest (in the words of the Companies Act 2008) as a "beneficial owner", this is not the same "beneficial owner" introduced into s 1 of the Companies Act 2008. Under the Companies Act 2008 not every holder of a beneficial interest (while such a person would qualify as a beneficial owner at common law) will be a beneficial owner in terms of the Companies Act 2008, and not every beneficial owner of a company necessarily holds beneficial interests in a company's securities.

If the securities of a non-affected company are held in nominee capacity for the benefit of a holder of a beneficial interest, this may indicate that there is a beneficial owner. If the holder of beneficial interests is a human being that holds 5% of the company's issued shares, then it is easier to determine the beneficial ownership. But if such a holder is another company in a foreign jurisdiction, for instance, the obligation of the company to investigate its beneficial ownership can become quite challenging. Companies do have some investigative power in this regard. In terms of section 56(5) of the Companies Act 2008, a company that knows or has reasonable cause to believe that any of its securities are held by one person for the beneficial interest of another may by notice in writing require either of those persons to:

(a) confirm or deny that fact;

(b) provide particulars of the extent of the beneficial interest held during the three years preceding the date of the notice; and

(c) disclose the identity of each person with a beneficial interest in the securities held by that person.

Such information must then be provided to the company within 10 business days after receipt of the notice requiring disclosure. 113

113 Section 56(6) of the Companies Act 2008.

4.2.2 Penalties for non-compliance

Sanctions are an important component of a country's response to the FATF Recommendation 24's requirements. The FATF encourages the creation and enforcement of appropriate criminal, civil and administrative sanctions

and liability for breaching the BO disclosure requirements. 114

114 FATF 2023 https://www.fatf-gafi.org/en/publications/Fatfrecommendations/ Guidance-Beneficial-Ownership-Legal-Persons.html 53.

The CIPC aims to enforce and promote compliance with the Companies Act 2008 and other applicable legislation. 116

116 Section 186(1)(d) and (e) of the Companies Act 2008.

The CIPC may also choose to issue a compliance notice to a person that has violated a provision in the Companies Act 2008. 120

120 Section 170(1)(g)(i) of the Companies Act 2008.

The Companies Act 2008 contains criminal penalties that are applicable to the falsification of BO information. In terms of section 214(1) of the Companies Act 2008, "A person is guilty of an offence if the person—"

(b) with a fraudulent purpose, knowingly provided false or misleading information in any circumstances in which this Act requires the person to provide information or give notice to another person;

This offence must be read in the light of the broad definition of "knowingly" in section 1 of the Companies Act 2008.

Any person who was in a position in which he reasonably ought to have known of the false or misleading nature of information submitted, or to have investigated the correctness of the information, can "knowingly" provide false information in terms of section 214(1)(b) of the Companies Act 2008. However, the reach of this offence is limited by the fact that it requires a fraudulent purpose. Innocent errors will not fall foul of section 214(1)(b) of the Companies Act 2008.

One potential area of weakness in this framework is that there is no direct criminal offence for failing to provide accurate BO information where there was a duty to disclose, despite CIPC calling for such an offence. 125

125 See Ensor 2023 https://www.businesslive.co.za/bd/national/2023-05-15-cipc-wants-criminal-sanction-for-non-disclosure-of-beneficial-ownership/.

5 Conclusion

The BO amendments to the Companies Act 2008 were introduced in response to AML requirements set by the FATF. These amendments aim to provide useful information to law enforcement agencies about the natural persons that are the beneficial owners of companies as part of its broader AML framework. The amendments must be viewed in context, however, as part of a broader regulatory framework tasked with identifying and punishing the offence of money laundering and related economic crime offences.

The reporting of suspicious transactions will likely remain a key avenue of ML detection. Therefore, banks and other financial institutions should be proactive when they deal with suspicious transactions. The BO disclosure of companies could be very useful to complement KYC and suspicious transaction reporting practices, as a complete and accurate BO registry might assist in tracing the source and beneficiaries of money laundering and terrorist financing. However, establishing a complete and accurate BO

register might prove to be impossible in the light of criminals' desire to remain hidden.

The AML Act introduced confusing and burdensome compliance obligations into the Companies Act 2008. The authors have identified the definition of "affected company" and the failure to define the "effective control" and "ownership" of a company as areas that require refinement. It is submitted that the CIPC should continue raising awareness of the BO disclosure requirements, 127

127 The CIPC has hosted several webinars on this point and has issued Guidance Documents on BO filings.

A clear and obvious cost of the BO disclosure regulations is an increase in compliance costs for companies. 128

128 Rutledge 2010 Journal of Passthrough Entities 50.

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List of Abbreviations