LAW ON DISCLOSURE OF THE COMPANIES BENEFICIAL OWNERSHIP: HOW THE SPIRIT OF THE LAW HAS BEEN STABBED BY THE IMPLEMENTATION SYSTEM

The rush to update the beneficial owners for many companies in Kenya as prescribed in Section 93A of the Companies Act, 2015, has been a crazy race in the month of January as many Kenyans worked against the January 31st deadline which has now been extended to 31st July 2021.

The notice by the registrar of companies notified Kenyans to comply with the law within the specified period and failure to which non-compliance would amount to an offence attracting penalties as high as Kshs. 500,000/= that would be levied on the company and its officers.

The Companies Act 2015 was amended by Statute Law (Miscellaneous Amendment) Act 2019 which provided that a company should keep a register of its members and the register of the beneficial owners with the Registrar of Companies. Thereafter the Companies (Beneficial Ownerships Information) Regulations 2020, were enacted to facilitate implementation of the said amendment to the Companies Act. See our blog http://jmkadvocates.co.ke/2020/05/14/the-companies-beneficial-ownership-information-regulations-2020-disclosure-of-beneficial-owners/ for more information on the genesis and development of the law on disclosure of beneficial owners of a company in Kenya.

A beneficial owner of a Company is defined in the aforesaid regulations as a natural person who ultimately owns or controls a legal person or arrangements or the natural person on whose behalf a transaction is conducted, and includes those persons who exercise ultimate effective control over a legal person or arrangement. As per the regulations, one meets the threshold of a beneficial owner if they hold at least 10% of the issued shares whether directly or indirectly; exercises at least 10% voting rights in the company whether directly or indirectly; holds a right whether directly or indirectly to remove a director of a company; or exercises significant influence or control either directly or indirectly over a company. Noteworthy, significant influence or control is defined as participation in the finances and financial policies of a company without necessarily having control over them. Whereas, ultimate effective control is defined as a situation in which ownership is exercised through a chain of ownership or by means of control other than direct control. Therefore, beneficial ownership captures both direct ownership and ownership through intermediaries.

Indirect ownership occurs when a person owning the company is not the registered legal shareholder. This therefore means the registered shareholder holds the shares on behalf of the beneficial owner either as a trustee, nominee or other legal creations.  This means that a person can own a significant part of company and hide behind another person who is a registered shareholder but holds the shares on behalf of the former.  The law on disclosure of beneficial owners was therefore enacted with the aim of creating greater transparency in ownership of companies in Kenya and to support the government in the fight against corruption, tax evasion, money laundering and financing of terrorism.

The process of updating beneficial owners for companies is being done electronically through the authorized person’s e-citizen account on the Business Registration Services (BRS) dashboard where you are required to input details and follow an automated process. We have however noted with great concern that there is a disconnect between the law and the system of implementation, specifically with the updating of the e-register of beneficial owners for existing companies.  Anyone who has interacted with the system will realize that the end result is that the automated process will auto-pick the existing registered members without giving an option to update beneficial owners who as explained above may or may not be a registered member. Additionally, where a shareholder of an existing company is a legal entity rather than a natural person, the BRS system is erred in design in the sense that it still auto-picks the legal entity and provides no opportunity for disclosure of natural persons/ultimate beneficial owners exercising control of the existing company through another legal entity. Thousands of existing companies must have complied with the January 31st deadline but in our opinion to what end? 

The implementation system developed by the Business Registration Service has not only defeated the spirit of the law but it has also costed the taxpayer heavily and has been an inconvenience to Kenyans generally. In conclusion this is negligence and it is high time the government officials are held accountable for such errors that are a clear indication that often are the instances where the law in action defeats the law in the books.