‘Beneficial owners’ now unveiled?
By Penina Mbogoro
The concept of a veil is a familiar one, namely an article of clothing or hanging cloth that is intended to cover some part of the head or face - or cover an object of some significance. Less familiar is the legal concept of the ‘corporate veil,’ which is a metaphoric veil used to explain the separate legal personality of the company on the one side and its directors and shareholders on the other, whereby liability does not pass from one party to the other. Incorporation for a company is like birth for a human being; on incorporation, a company acquires its own legal personality separate from its members, and so is capable of acting independently - whether suing or being sued, owning properties, entering into contracts in its own name, etc.
The essence of the doctrine of the corporate veil is to restrict liability for a corporation’s acts or omissions to the corporation so that liability is not extended to the members or directors. The introduction of the limited liability company and this accompanying corporate veil principle was foundational in encouraging business activities by ring fencing the risks for the investors in the business to the capital invested. The corporate veil principle was cemented in 1897 in the landmark UK House of Lords decision in the case of Salomon vs. Salomon, which upheld the doctrine of corporate personality, so that creditors of an insolvent company could not sue the company’s shareholders for payment of outstanding debts.
However, the sanctity of the corporate veil doctrine is not absolute. There are scenarios which prompt courts (or legislation) to look behind the corporate personality and identify the true nature of a transaction so that liability can be extended to the directors or members. Circumstances where the corporate veil may be lifted include when there is fraud, tax evasion, avoidance of corporate legal obligations, determination of the character or the company, etc.
Another “legal veil” that is less familiar is the veil between a legal owner of an asset (namely, the person in whose name an asset (shares, building) is registered) and the beneficial owner (the person who has the economic interest in the asset, but who has decided to register the asset in the name of someone else who holds the asset on his behalf). Recently, Tanzania has introduced a number of legislative amendments to bring more transparency to such arrangements including the introduction of the requirement to submit beneficial owners information to the Registrar of Companies (for companies) and the Administrator General (for trusts).
For these purposes a “beneficial owner” is defined as a natural person who directly or indirectly ultimately owns or exercises substantial control over an entity or an arrangement, who has a substantial economic interest in or receives substantial economic benefit from an entity or an arrangement directly or indirectly whether acting alone or together with other persons, on whose behalf an “arrangement” (a defined term) is conducted and who exercises significant control or influence over a person or arrangement through a formal or informal agreement. This definition is very broad and has no share-holding threshold and does not define what constitutes significant control or influence unlike some other jurisdictions with similar regulations. For example, the Companies (Beneficial Ownership Information) Regulations, 2020 of Kenya provides that to qualify one as a beneficial owner there is a threshold of at least ten percent (10 percent) of the issued shares of and voting rights in the company. Furthermore, these regulations define significant influence or control to mean participation in the finances or financial policies of the company.
The open ended nature of the definition of “beneficial owner” is likely to cause practical challenges in relation to the obligations now imposed on a company, which include the requirement to take reasonable steps to identify its beneficial owners, enter their names in the relevant register, and submit particulars of its beneficial owners (including changes) to the Registrar.
The information on beneficial owners will be accessible to authorities such as the Financial Intelligence Unit, the Tanzania Revenue Authority, government institutions responsible for implementing economic empowerment of Tanzanian nationals and any other national competent authority responsible for the prevention of money laundering and funding of terrorism.
There are indeed legitimate reasons for governments to have beneficial owners records which includes control of tax evasion practices, anti-money laundering and terrorism financing. However, as a developing country which still strives to build investors’ confidence in the investment environment in the country, we must be mindful to ensure appropriate legal and non-prejudiced procedures and grounds to warrant disclosure of beneficial owners’ information to the relevant authorities.
The sanctity of the corporate veil promotes the playing field for taking commercial risks, without it investors are exposed and there is no yardstick to determine the limit of that exposure. Equally there can be valid reasons for the veil between legal and beneficial ownership, and care will need to be taken to preserve the confidentiality of the data disclosed. Whatever the case, any company with a “beneficial owner” needs to take note that the new reporting requirements are now in effect and they have to comply by 31 December 2021.
Penina Mbogoro is a Senior Associate, Company Secretarial Services at PwC Tanzania.
