Responses to the Consultation on The

Responses to the Consultation on the

Proposed Introduction of Beneficial Ownership

Provisions Within the

Companies Acts 1931-2004

7 June 2011 to 5 August 2011

Issued by:

The Treasury

Isle of Man Government

Bucks Road

Douglas

IM1 3PX

Introduction

A total of 27 responses were submitted to the Treasury in respect of the Consultation on the Proposed introduction of Beneficial Ownership Provisions within the Companies Acts 1931 – 2004.

These can be broken down into responses received from:

CSPs and other licensed entities18

Individuals7

Professional Bodies1

Statutory Boards1

Most respondents recognised the need for the Isle of Man to continue to demonstrate that it is a well regulated jurisdiction and were generally supportive of the proposals. That notwithstanding, a number of points were raised by respondents and it became evident that clarification of the need for the proposals was required in some areas and the detail of the proposed legislation may need to reflect some of the points raised . The detailed responses are set out below at Section 2, although some may have been paraphrased and/or précied to manage the volume of detail provided.

Section 1 addresses matters that were identified as areas of concern and those that have emerged as themes.

Further comments and queries should be directed to:

Miss Gillian Prestwich

Policy Adviser – Corporate Strategy Division

The Treasury

Isle of Man Government

Government Offices

Bucks Road

Douglas

Isle of Man

IM1 3PX

Email:

Tel:(01624) 687067

Section 1

Analysis of the application of the FATF’s Recommendation 33

It has become apparent from some responses that there may be confusion as to why it is necessary to consider introducing provisions to address a perceived deficiency in the Isle of Man’s legislation, under the FATF’s Recommendation 33. The paragraph below encapsulates concerns raised by a small number of respondents:

“The suggestion that our current regime falls foul of FATF Recommendation 33 as stated in your consultation document does not, under further scrutiny, actually seem to be the case. FATFA Recommendation 33 refers specifically to financial institutions and not to private businesses. I would therefore again contend that because all financial institutions on the Island are covered by suitable regulatory and AML provisions the scope of FATFA Recommendation 33 is adequately covered in existing legislation and there is no need to extend this to private businesses. FATFA Recommendation 33 does not mention private businesses at all and it is certainly the case that in the UK, USA and in other full OECD member states that there is no such provision for the identification of beneficial owners of private businesses carrying on their trade or business from within the jurisdiction and not seeking services from a financial institution.”

The key to understanding what the Isle of Man’s obligations are under Recommendation 33 (and the other FATF 40+9 Recommendations) is to be found in the FATF Reference Document, Methodology for Assessing Compliance with the FATF 40 Recommendations and the FATF 9 Special Recommendations(“the Methodology”). This can be found using the link

It may be helpful to consider the FATF’s definition of legal person - “legal personsrefers to bodies corporate, foundations, anstalt, partnerships, or associations, or any similar bodies that can establish a permanent customer relationship with a financial institution or otherwise own property.”

The full text of FATF Recommendation 33 appears below. This includes an obligation to ensure that there is “adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities”. Financial institutions have additional obligations under Recommendation 5.

“Transparency of legal persons and arrangements

33. Countries should take measures to prevent the unlawful use of legal persons by money launderers. Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities. In particular, countries that have legal persons that are able to issue bearer shares should take appropriate measures to ensure that they are not misused for money laundering and be able to demonstrate the adequacy of those measures.

Countries could consider measures to facilitate access to beneficial ownership and control information to financial institutions undertaking the requirements set out in Recommendation 5.”

The Methodology sets out the criteria applied during assessment of a jurisdiction. The definition of legal persons, in conjunction with the Methodology clearly considers thatRecommendation 33 should apply to all 1931 Act companies as these meet the definition of legal person,regardless of whether they are financial institutions or private businesses.

Essential Criterion 33.1 of the FATF Methodology states “Countries should take measures to prevent the unlawful use of legal persons in relation to money laundering and terrorist financing by ensuring that their commercial, corporate and other laws require adequate transparency concerning the beneficial ownership and control of legal persons.”

This requirement is not restricted to financial institutions only, but extends to all legal persons as defined.

Recommendation 33 also states “Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities".

Essential Criterion 33.2 of the FATF Methodology states “Competent authorities should be able to obtain or have access in a timely fashion to adequate, accurate and current information on the beneficial ownership and control of legal persons.”

Again, this requirement is not restricted to legal persons that are financial institutions, but covers all legal persons as defined.

The FATF Methodology provides examples of mechanisms that countries could use in seeking to ensure that there is adequate transparency. These examples include:

1.A system of central registration where a national registry records ownership and control information for all companies and other legal persons. Information could be publicly available or only available to competent authorities. The information would be required to be kept up to date.

2.Requiring company service providers to obtain, verify and retain beneficial ownership records.

3.Rely on the investigative and other powers of competent authorities to obtain or have access to the information.

These examples are not restricted to legal persons which are financial institutions only.

It is noted that FATF Recommendation 33 contains the sentence “Countries could consider measures to facilitate access to beneficial ownership and control information to financial institutions undertaking the requirements set out in Recommendation 5”, and further that this is supplemented by the Additional Element 33.4 within the FATF Methodology which asks “Are measures in place to facilitate access by financial institutions to beneficial ownership and control information, so as to allow them to more easily verify the customer identification data?” However, it must be recognised that these are the only specific references to financial institutions within FATF Recommendation 33 and the FATF Methodology accompanying that Recommendation. This does not restrict the FATF Recommendation 33 requirements for beneficial ownership and control information to be available only to or for financial institutions. In fact, these sentences recognise that financial institutions are themselves a type of entity or organisation that needs access to beneficial ownership and control information on legal persons generally.

The IMF’s Report on the Isle of Man directly reflected FATF Recommendation 33 and its related Methodology Essential Criteria when it stated that the FATF Recommendations “required that countries have measures in place to ensure adequate transparency concerning the beneficial ownership and control of legal persons and that the competent authorities can obtain and have access to adequate, accurate, and current beneficial ownership information on all legal entities” (paragraph 896).

The IMF’s Report noted that for 1931 Act companies not serviced by a corporate service provider, the authorities may rely on law enforcement powers to obtain beneficial ownership information. However, the IMF Report also noted that “it is questionable how complete, accurate, and current any beneficial ownership information would really be”. Thus, based on the IMF’s interpretation of the FATF Recommendations and the FATF Methodology, the IMF advised at paragraph 898 that “The authorities are advised to put in place measures to ensure that accurate, complete and current beneficial ownership information is available for all 1931 Companies. One approach would be to require the filing of beneficial ownership information with the Company Registry in cases where a licensed corporate services provider is not utilized.”

The Treasury and Companies Registry do not consider it to be appropriate for the Companies Registry to be the holder of this information. The FSC, while considering that this could be a viable option, do not consider this to be the preferred solution.

The starting point of the preferred solution for ensuring that the Isle of Man fully complies with its obligations under Recommendation 33 is the proposal outlined in the consultation document. As stated above, in the Introduction to this document, the precise detail of what is included in any solution introduced under the proposed new legislation will need to take account of the comments that emerged during the initial consultation.

The current position under the Isle of Man’s anti-money laundering legislation

Part 3 of the Proceeds of Crime Act 2008 currently makes money laundering an offence in the Isle of Man. This applies to all persons (both legal and natural) without exception.

The Proceeds of Crime (Money Laundering ) Code 2010 (“the Code”) currently only applies to “relevant persons” conducting “relevant business” as defined in Schedule 1 to the Code.

The proposed legislative changes do not consider extending the provisions of the Code to companies that are not conducting “relevant business”.

Effect of the proposals under consultation

The proposed legislation does not introduce a new power for law enforcement bodies to obtain beneficial owner information, only a new power requiring a specific person within companies to know that information.

The proposed legislation does not introduce any new power for law enforcement bodies to obtain beneficial owner information. The proposed legislation will ensure that information is known but will only be able to be accessed under existing powers which have been in place for a number of years now and contain robust measures to prevent fishing expeditions.

The practical implications for companies not engaged in relevant business

The Code applies only to “relevant persons” conducting “relevant business” and sets out what level of proof of beneficial ownership is required in these circumstances.

There is an existing requirement under the Companies Act 1931 for every company to keep a register of its members. An extract follows below:

“96Register of members

(1)Every company shall keep a register of its members, and enter therein the following particulars-

(a)The full names and addresses of the members, and in the case of a company having a share capital a statement of the shares held by each member, distinguishing each share by its number, and of the amount paid or agreed to be considered as paid on the shares of each member;

(b)The date at which each person was entered in the register as a member;

(c)The date at which any person ceased to be a member:......

(2)If default is made in complying with this section, the company and every officer of the company who is in default shall be liable to a default fine.”

A company that complies with section 96 of the Companies Act 1931 is assumed to have knowledge of the beneficial ownership of the company. This applies to companies with guarantee members such as the local golf club, closely-held private companies that have beneficial owners and directors in common and to Plcs that offer shares to the general public, even in cases where these are not subject to the oversight of a recognised stock exchange.

A company that fails to comply with section 96 of the Companies Act 1931 commits an offence and is liable to prosecution under section 330 of this Act:

“330Provision with respect to default fines and meaning of 'officer in default'

(1)Where any provision of this Act provides that a company or officer of a company (or both) shall be liable to a default fine, the company or officer (or both) shall be liable-

(a)if the said provision specifies the amount of a fine, to a fine not exceeding that amount; or

(b)if the said provision specifies the amount of a fine in respect of continued default, refusal or contravention, to a fine not exceeding that amount for every day during which such default, refusal or contravention continues; or

(c)if the amount of the fine is not so specified-

(i)on information, to a fine;

(ii)on summary trial, to a fine not exceeding £5,000.

.....

(2)For the purpose of any enactment in this Act which provides that an officer of a company who is in default shall be liable to a fine or penalty, the expression 'officer who is in default' means any director, manager, secretary or other officer of the company, who knowingly and wilfully authorises or permits the default, refusal or contravention mentioned in the enactment.”

Why the proposed beneficial ownership provisions are considered necessary

The current position in respect of the requirement for knowledge of beneficial ownership of companies is that it is only required to be known by persons undertaking relevant business in respect of their clients.

The proposal considers introducing a requirement for all companies to ensure that they have knowledge of their own beneficial ownership. This will ensure that beneficial ownership information to be available to the authorities, where appropriate, for all companies whether or not they receive services from a relevant business.

Companies where shares are held by nominees

The provision of nominee services is not subject to a deminimis exemption. Any person holding shares as the nominee of another is currently conducting relevant business and is already within the scope of the Financial Services Act 2008 and the Code.

Consideration is currently being given as to whether it would be feasible to place an obligation on a nominee shareholder to declare nominee shareholdings to the company and to ensure that they have full knowledge of the persons for whom they hold shares as nominee.

Registered office only services

There is no deminimis exemption where this is done by way of business. This again meets the definition of conducting relevant business.

Those persons that currently engage in the relevant business activity of providing registered office services should already have knowledge of the beneficial owners of companies to which they provide these services.

The potential impact of the proposed provisions

It is extremely unlikely that a request to produce membership information will ever be received in circumstances where a company:

is not committing the offence of money laundering under Part 3 of the Proceeds of Crime Act 2008;
maintains a register of members under section 96 of the Companies Act 1931; and
does not conduct relevant business.

The proposal does not seek to criminalise the lawful activities of the Isle of Man’s citizens. It does however seek to ensure that there are robust powers available to the relevant authorities to take action against those who do not act within the law. It is these people that place the IOM’s good reputation in jeopardy.

Section 2
Question 1
Do you agree that it is important for the Isle of Man to maintain its reputation as a jurisdiction that conducts its affairs in an open and transparent manner?
Please give reasons for your answer where possible.

Five respondents gave an unqualified yes.

No problems if no new "official" role created.

Yes. It is important for the IOM to maintain its international reputation to protect its finance sector, deter unwanted business while maintaining a competitive edge.

Broadly supportive as long as provisions not unduly onerous.

Supportive as no negative effects foreseen.

Compliance with "level playing field" standards is not optional but the IOM should always be wary of leading the field.

Yes. The IOM must maintain its international reputation to protect its finance sector and deter unwanted business.

IOM must maintain high standards of compliance, transparency and public protection.

The IOM should maintain its reputation. No matter how much we tighten up our laws and regulations, we will still be viewed with suspicion by some countries and supra-national organisations. We regulate because it is morally right to do so.

No problem in principle but concerned that similar levels of transparency are not necessarily evident in immediate neighbouring jurisdictions.

In order that the IOM can continue to access international markets the IOM must maintain its reputation. This entails meeting the standards of supra-national bodies. Recognition that the IOM meets these standards will mitigate risk and should engender local economic development.

Potential to be viewed as the IOM trying to be a good corporate citizen which may be interpreted as surrendering the supra-national pressures.

Yes. However the playing field must be level. If other larger jurisdictions fail to implement similar provisions, the IOM should question the wisdom of implementing such measures.

In a highly competitive world market-place, it is important that the IOM maintains its reputation for conducting its affairs in an open and transparent manner.

Yes. It is also important to discourage those who continually invent schemes that aid UK residents to avoid UK tax.

Reasonable openness and transparency are important but are not absolute and must be a matter of degree. There is a point at which the right to information and the right to privacy clash. The IOM must also consider the need to protect the privacy of individuals. Unnecessary action that might damage the IOM economy should be avoided.

Yes. The IOM must remain its reputation as a place in which people can do business and one on which they can rely. The IOM must not single itself out as an over-regulated jurisdiction or one that seeks to follow the pack. It is important that the legislation already in place is appropriately monitored and enforced.

Yes. It is vital that the Island is seen to conduct its affairs in an open and transparent manner.

Yes. Transparency is very important as trust is the foundation of every jurisdiction - without trust there would be no industry. Openness and transparency enables the IOM to be commended by supra-national bodies which helps build our reputation and enables us to build networks across the world.

Yes, the IOM should maintain its reputation but needs to avoid excessive red tape resulting in us becoming uncompetitive. It should not be forgotten that there is an element of competition involved and larger countries may be exerting pressure on supra-national bodies to squeeze smaller jurisdictions out of the market.