The CIPC’s new beneficial owner registry: An effective mechanism to combat illicit flow of funds or another wasted opportunity?
By Jemma Muller and Nicola Taljaard
On 1 March 2023, the South African Companies and Intellectual Property Commission (“CIPC”) announced its plan to establish a register of beneficial ownership (“BO”), which would be implemented upon the publication of the relevant Regulations. The BO register has been introduced following the finding by Financial Action Task Force’s (“FATF”) in its Mutual Evaluation Report of South Africa that South Africa has not addressed the issue of beneficial ownership.
The rationale behind the FATF’s recommendation to introduce BO rules is to prevent criminals from concealing their illegal activities through the use of intricate and veiled corporate structures. The FATF has recommended that the use of BO rules will assist in preventing and tackling financial crime, deter corruption and tax evasion.
The establishment of a BO register has brought about substantial debates concerning the balance between privacy, transparency and openness. The Companies Act previously mandated the CIPC to collect and store basic information pertaining to corporations such as the company name, type of incorporation, legal status, address and a list of its directors (in the public domain). Following a number of amendments to the General Laws Amendment Act 22 of 2022, which in turn amended the Companies Act 71 of 2008 (“Companies Act”), the CIPC is now additionally mandated to collect and store information on beneficial ownership. To the extent that this information only remains accessible to law enforcement agencies, the BO registry system aims to maintain a clear balance between privacy and transparency.
While the CIPC’s BO register no doubt has the potential to provide useful information for anti-money laundering and other regulatory functions, it remains to be seen whether the information will be effectively verified, enforced and monitored. Allied to this, the CIPC has motivated for a criminal sanction to be introduced for failing to disclose or disclosing incorrect BO information. In this regard, it is vital to remain cognisant of South Africa’s unique landscape, which exhibits characteristics of a weakened state that enables criminal activity to continue almost unabatedly, together with a legitimate financial sector, which enables illicit and other funds to pass through its economic sector.
Given this unique environment, the need to reform financial and state institutions with a view to ensuring decreased illicit fund flows is becoming increasingly dire. As private institutions will not have access to the information stored in the BO register, the current access membership is unlikely to assist financial institutions in conducting due diligence exercises. Consequently, whether the current access membership will prove useful in allowing the information to reach the entities that will be able to use it to the country’s benefit remains to be seen.
The debate concerning access to BO information has recently been ventilated in the European Union, which debate is analogous to the BO information developments in South Africa. In the EU, continued and increasing misuse of anonymous companies heeded the calls for its BO registries to become public information. As a result, the EU subsequently established publicly available BO registries. Following this development, however, the European Court of Justice (“ECJ”) recently held that publicly accessible registers containing the person details of beneficial owners of companies constitutes a “serious interference with the fundamental rights of respect for private life and the protection of personal data”. It also noted that the information contained on the registers “enables a potentially unlimited number of persons to find out about the material and financial situation of a beneficial owner” and referred to the risk of abuse of the personal data.
The ECJ further concluded that public access to a BO registry is “neither limited to what is strictly necessary nor proportionate to the objective” of preventing crime. In light of this finding, the South African position tends to be largely representative of the EU approach. Whether mirroring the EU position is feasible in South Africa, however, is unlikely, predominantly due to the fact that South Africa largely has ineffective public authorities and institutions that are tasked with putting the BO information to use. In the EU, on the other hand, the BO registry system would fall under the auspices of much more competent authorities, and the trade off between accountability and privacy is differently slanted.