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Why State search for shadowy firm owners could be tall order

By Macharia Kamau | December 1st 2020
By Macharia Kamau | December 1st 2020

The government may find it difficult to unmask the wealthy individuals holding substantial stakes in companies, but who prefer to remain in the shadows.

This is despite the Business Registration Service recently rolling out regulations that would require all firms operating in the country to prepare a register of their key shareholders, and lodge it with the Registrar of Companies by January 31.

BRS – which is housed by the Attorney General’s office – expects the Companies (Beneficial Ownership Information) Regulations, 2020 to help in the fight against corruption, money laundering and other illicit financial undertakings.

BRS Director General Kenneth Gathuma noted that with anonymity, one can access funds from suspect sources and use Kenyan systems to clean it up.

This risk is, however, significantly reduced when the government knows who the owners of businesses operating in the country are.

Creating transparency

“This is simply about creating transparency of who the real owners of these particular companies trading within the Kenyan regulated environment are. We have international obligations and local aspirations that guide the need to have these beneficial ownership register,” said Gathuma.

“It is critical that whoever is gaining any form of benefit from the trading of a company is known. One key issue we are trying to address is the funding of illicit activities. If you do not know who is the ultimate beneficiary, you end up with a situation where one is able to obtain funds and do illegal activities, and these have been quite detrimental to the welfare of Kenyans.”

Analysts, however, reckon it may be quite difficult to smoke out some shadowy shareholders.

Juliet Mazera, a commercial lawyer, said with the coming into force of the new regulations, wealthy individuals are likely to look for crafty ways to beat the system to remain anonymous.

Others might not feel comfortable about their data falling into the hands of the government.

“One of the challenges that the AG will face will be resistance from wealthy individuals who want to remain anonymous for various reasons. This may be especially so due to concerns relating to confidentiality and data protection. Just how safe will information relating to beneficial ownership be? Will such individuals be willing to take the disclosure risks? It’s highly doubtful,” said Mazera.

She acknowledged that while some rich individuals have used anonymity that comes with shell companies for legitimate purposes, such as to create special purpose vehicles for business transactions, they have also been used for illegal transactions.

“Sometimes, however, these shell companies are used for tax evasion, tax avoidance and money laundering, or to achieve a specific goal, such as anonymity, said Mazera.

“The lack of beneficial ownership requirements feeds anonymity. Anonymity has been argued to facilitate money laundering by concealing corrupt wealth as it enables money launderers to store, move and access their illicit funds. And anonymity inhibits law enforcement.”  

Mazera added that the absence of beneficial ownership requirements is a global problem, not just a Kenyan one, which presents a significant vulnerability to the global financial system.

Data protection

Many jurisdictions, however, are now moving to put in place laws that enhance beneficial ownership transparency. 

The saving grace is that details that companies have filed with the Registrar of Companies on their beneficial owners will not be available to the public.

BRS boss Gathuma noted that in as much as the government needs to know who is behind these companies, it also has the obligations of protecting the data of private investors.

According to the regulations, law enforcement and other competent authorities will have access to the information that may assist them in solving cases involving such companies.

“It is a question of balancing between access to information and protecting privacy. We benchmarked with many progressive jurisdictions … confidentiality and data protection are things that need to be balanced out,” he said.

“This is principally aimed at helping law enforcement and when they have this line of sight, we trust that they are capable of assessing the information and making proper use of it as it can point them to a certain direction or to who they should be pursuing in terms of the matter they are handling at any one time.”

Vincent Kimosop, a policy and governance expert, noted that among the tactics that some beneficial owners might employ are lowering their stakes so that they own less than the 10 per cent that the regulations put as the threshold for a shareholder’s details to be lodged with the Registrar of Companies.

“Disclosing beneficial ownership is a great deterrent of illicit financial flows. Transparency makes it possible to determine if a company is linked to politically correct persons,” Kimosop told a recent conference on illicit financial flows by the Tax Justice Network Africa (TJNA).

“The beneficial owners might, however, restructure their shareholding such that it falls below the threshold required for a company to lodge details of their beneficial owners,” he added.

BRS, however, insisted the regulations are near watertight and the wealthy individuals who own companies anonymously, as well as their companies, will find it difficult to find roundabout mechanisms to beat the law.

Other than the 10 per cent shareholding threshold, the subsidiary law also requires details of shareholders who have significant powers, such as a right to appoint directors as beneficial owners.

“When you look at the definition of the requirements for beneficial ownership, it is not just about the shareholding threshold. If someone has 10 per cent voting rights or they have a right to appoint or remove a director, they qualify as a beneficial owner,” said Shigadi Mwakio of BRS.

Failure to lodge the details of a company’s beneficial owners with the Registrar of Companies will attract a penalty of Sh500,000.

Law firm Bowmans Kenya noted that the regulations and the setting up of the e-register would improve transparency in the ownership of companies in Kenya, but added that only time would tell it can achieve the goal of fighting corruption and illicit financial flows.

“More time is needed to assess the implications of the disclosure obligations on companies in Kenya and the overall effect on anti-money laundering efforts,” said the firm in a recent review of the regulations.  

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