Grey listing requires changes:
South Africa made headlines in Q1 2023 by being greylisted by the Financial Action Task Force (FATF). In response to this, to further fight money laundering and increase transparency, new beneficial ownership reporting requirement for South African trusts and companies have been introduced.
These changes are effective from April 1, 2023.
These changes have implications for BEE ownership via Trusts and via Companies, as we’ll discuss below. They’re to be taken seriously – with criminal sanction if non-compliant.
What is a Beneficial Owner?
There are 3 definitions established in South African law and they vary a little bit:
- The Trust Property Control Act definition of Beneficial Ownership includes “the founders, trustees, named beneficiaries, and any individuals who exercise effective control of any trust”.
- CIPC (The Companies and Intellectual Property Commission) regards Beneficial Owners to be “any natural person who holds 5% or more interest in a legal entity; or a person who exercises effective control of an entity. Beneficial interest, when used about a company’s shares, means the right or entitlement through ownership, agreement, relationship, or otherwise”.
- Lastly, the Companies Act goes broader to include “a person who, directly or indirectly, ultimately owns that company or exercises effective control of that company, including through various means such as the holding of beneficial interests in the securities of that company, exercising or controlling the exercise of voting rights associated with securities of that company, and the ability to otherwise materially influence the management of that company”.
You get the idea: Beneficial owners are natural persons who own shares/equivalents in underlying companies or are founders/trustees/beneficiaries of trusts.
Note that this would include people who have rights via options. Especially the BEE type options, where the option holders participate in the voting rights and dividends while they have options that have yet to be exercised.
What are the new disclosure requirements for Trusts?
- Trustees must lodge and keep up-to-date records of the beneficial ownership of the trusts…including information about direct/indirect individual beneficiaries of trusts, the founders, trustees, beneficiaries, and any individuals who exercise effective control of any trust.
- Trustees are responsible for collecting and reporting up-to-date information on the beneficial ownership of trusts under Section 11A of the Trust Property Control Act. The information must be recorded in the prescribed manner, kept up to date, and also be submitted to the Master’s Office.
- Non-compliance may result in a penalty of up to R10 million and/or five years imprisonment, and additional sanctions by the Master of the High Court.
What are the New Disclosure Requirements for Companies?
- Companies in South Africa must establish and maintain records of beneficial ownership and interest of the persons who hold a beneficial interest of more than 5 % of its issued securities. Beneficial ownership must be reported together with their annual return with the CIPC.
- In an overkill move, rather than just submission under oath/T&Cs, the return “must include a certified copy of the company’s securities register and the details of the beneficial interest holder”.
- For most companies, this will require printing out the excel sheet, getting it certified, and submitting it. We don’t understand why this ownership registry is not simply maintained on CIPC itself.
- Any changes in beneficial ownership must be reported by filing notices with CIPC within 10 business days after any changes in beneficial ownership have occurred.
- Unlike Trusts, the consequences for failure to comply with these requirements are not yet clear. Note though that Section 214(1)(b) of the Companies Act states it is an offense, if a person knowingly provides false or misleading information in any circumstance to the CIPC.
What does this mean for BEE deals?
BEE ownership comes in two forms:
- ‘Actual’ BEE ownership where a black person owns shares in a company, and
- ‘Deemed’ BEE ownership, where the company achieves BEE ownership via another qualifying means (e.g. options, flow-through, Trusts, ESOPs, Asset sales, equity equivalents, or private equity).
For the ‘Actual’ owners, there will be no change other than the reporting requirements.
For ‘Deemed’ ownership this is more problematic. Not in terms of legality, but in terms of optics/perceptions – it’s quite possible and legal ito BEE for the ownership and control of a business not to change yet for it to be regarded as black. Following a BEE transaction, the ultimate beneficial owners may not change at all (yet the company is legitimately empowering the economy via investment in black businesses etc). It will now be possible to see that a company has the same shareholders as before. This may create confusion or even anger for those who don’t understand BEE ownership legislation and will no doubt require extra vigilance around reporting, communication/messaging.
Bad news for bad deals:
An upside, directly related to the intentions of this legislation, is that those ‘dodgy’ BEE deals where ‘tenderpreneurs’ score huge contracts via related party-interests in govt contracts will be exposed. It means that it’s harder for the corrupt to argue that they don’t have an interest in the business getting the tender. It will be easier for CIPC/SARS/Whistleblowers/Journos to find out who is really getting the moola.
This is a good thing.
Reporting on beneficial ownership is a crucial step toward fostering transparency and combating money laundering and terrorist financing. Diligence is required to keep up with reporting requirements, and the consequences can be severe.
From a BEE angle, shareholders will not be able to hide behind obscure and opaque structures. They will be visible and exposed. This is no problem, as long as the ownership structure chosen is legitimate and compliant, but will require careful messaging and explanation…and it’s quite possible that pseudo-aggrieved political parties will use this to call for greater or different transformation approaches in future.
How we can help:
Tusker uses a variety of Deemed ownership structures to help clients from small, local entrepreneurs to gigantic foreign corporates legitimately achieve BEE ownership without losing control or actual ownership. Please contact us if you’d like help with your BEE ownership problem.