Wednesday Nov 06, 2024
FT
Wednesday Nov 06, 2024
Friday, 20 September 2024 00:26 - - {{hitsCtrl.values.hits}}
The Transparency International Sri Lanka (TISL) has filed legal action in the Supreme Court challenging the Bill issued on 6 August 2024 to amend the Companies Act No. 07 of 2007. The case was taken up on Wednesday and Thursday.
The amendment introduced a much-needed anti-corruption tool to Sri Lanka’s legal framework – a beneficial ownership register.
A publicly accessible beneficial ownership register creates a legal requirement for companies to disclose the identities of individuals who ultimately own or effectively control them and benefit from their returns.
This transparency is crucial in combating corruption, conflicts of interest for public officials, money laundering and terrorist-financing, as it enables to trace and expose hidden financial activities and illicit enrichment.
Beneficial ownership registries are also vital for the effective implementation of crucial laws such as the upcoming Proceeds of Crime Act.
Despite this welcome introduction, there are serious concerns over the efficacy of such a register, given the manner in which the Bill is drafted. It is vital that the beneficial ownership register is effective and transparent and not merely superficial. Without universal applicability, loopholes are created that undermine the entire purpose of the register. If certain companies are exempt or vital information is hidden, the register loses its effectiveness, allowing illegal activities to continue unchecked, thereby defeating the purpose of the objectives of the introduction of beneficial ownership law.
Challenging the said serious concerns, TISL’s petition points out that Section 130A (10) of the Bill exempts Offshore Companies incorporated outside Sri Lanka and registered under the Companies Act or overseas companies registered under the Companies Act from disclosing beneficial ownership information, where such companies are required to comply with the beneficial ownership registration in the respective countries of incorporation.
TISL said exempting offshore and overseas companies from disclosing beneficial ownership information enables and encourages the establishment of shell companies (inactive companies created for fraudulent purposes such as money laundering), which are used as vehicles for corruption and illicit gain. Furthermore, this does not necessarily ensure that such overseas companies have registered in compliance with the beneficial ownership registration requirements in the respective countries. Moreover, such an exemption undermines transparency and increases the risk of conflicts of interest as beneficial ownership information is not widely available through the Registrar of Companies. Additionally, it requires less information from companies where the beneficial and legal owners differ, a distinction that has no reasonable connection to the internationally accepted purpose of beneficial ownership registration.
TISL noted that this provision, not only undermines transparency and accountability but limits legal avenues available to prevent and deter corrupt business practices.
The petition states that this exemption creates a discriminatory classification between offshore companies, overseas companies, and other local companies, violating the fundamental right to equal protection of the law Article 12(1) of the Constitution, as only domestic companies are subjected to disclosure requirements.
TISL further noted in the petition that Section 130D allows details of the beneficial owners of a company to be made available to the public, only upon a request for inspection by a member of the public, and the details of the beneficial owners of the company have been limited to their full names and the nature and extent of beneficial ownership of the company.
Information relating to beneficial owners of a company should be publicly accessible to ensure the effective implementation of the registry. Proactive disclosure of the beneficial owners of companies will not only reduce the risk of corruption but will also promote fair competition by revealing connections between companies that might otherwise be hidden. Beneficial ownership transparency aids citizens, journalists and civil society to identify true owners of companies whereby the risk of exposure deters illegal activities. Additionally, it helps improve investor confidence by ensuring that companies are operating transparently and helps licit businesses avoid unknowingly engaging in fraudulent activity.
In its petition, TISL also raised the concern that Article 14A of the Constitution – the Right to Access Information is hindered by this Bill. By limiting the disclosure of beneficial ownership details to only names and ownership extent, Section 130D fails to provide the public with sufficient information to exercise their right to access meaningful information.
Both the Civil Society Governance Diagnostic Report of Sri Lanka and the IMF-supported Governance Diagnostic Assessment of Sri Lanka recommend to the government to implement a publicly accessible beneficial ownership registry. The IMF Governance Diagnostic recommendation to finalise and implement regulations to support the provision of beneficial ownership information as required by the Companies Act and to establish a public beneficial ownership registry is now converted to an actionable point in a Government Action Plan mandated in the most recent IMF review agreement that was signed in June 2024.
The petition requests the Supreme Court to determine that Clause 7 of the Bill is inconsistent with, and/or violates, Article 12(1) and Article 14A of the Constitution that enshrines the Right to Equal Protection of the Law and Right of Access to Information, and therefore, for it to be passed into law only if approved by a two-thirds majority vote of all members of Parliament, as required by Article 84(2) of the Constitution. TISL has filed this petition in the public interest, naming the Attorney General as the respondent.
