Mandatory disclosure: Is there really closure?

It has been several months since the issuance of Securities and Exchange Commission (SEC) Memorandum Circular (MC) No. 15-2019, requiring all registered domestic corporations to disclose their beneficial owners in their General Information Sheet (GIS). The MC aims to assist in the implementation of the Anti-Money Laundering Act (AMLA) and the Terrorism Financing Prevention and Suppression Act (TFPSA).

Towards the end of 2019, however, reporting corporations with multiple layers of ownership were still seeking guidance on the extent of the disclosure requirements.

The MC introduced terminologies and definitions (e.g. Beneficial Ownership Information, Direct Ownership, Dominant Influence, Grandfather Rule, Indirect Ownership, Legal Owners, Multiple Layers, Reporting Corporation, Senior Managing Official, and Voting Rights) that were not in the predecessor MC No. 17-2018; some of which were adopted from AMLA Regulatory Issuance (ARI) A, B and C, No. 3 Series of 2018.

A notable addition is the expanded coverage of the term “Beneficial Owner,” which now includes nine (9) categories of natural persons, described as those who:

1. own at least 25% of the reporting corporation’s voting rights, voting shares or capital;
2. exercise control over the corporation through any contract, understanding relationship, intermediary or tiered entity;
3. have the ability to elect a majority of the corporation’s board of directors/trustees, or any similar body;
4. have the ability to exert a dominant influence over the corporation’s management or policies;
5. whose directions, instructions or wishes in conducting the corporation’s affairs are carried out by the majority of the members of its board of directors who are accustomed or under an obligation to act under such person’s directions, instructions or wishes;
6. acts as stewards of corporate properties where such properties are under the natural person’s care or administration;
7. actually own or control the reporting corporation through nominee shareholders or nominee directors acting for or on their behalf;
8. ultimately own, control or exercise ultimate effective control over the corporation through other means not falling under any of the foregoing categories; or
9. exercise control over the corporation through their positions as members of the corporation’s board of directors/trustees or similar body or through a senior management position.

Under the MC, beneficial owners are identified through a three-tiered approach based mainly on the natural person’s (a) ultimate ownership, (b) ultimate control, and (c) position in the reporting corporation. This aligns with the nine categories of beneficial owners. The ultimate ownership test covers individuals falling under Category 1; The ultimate control test covers Categories 2 to 8, and positions within the company cover Category 9.

Further, the MC elaborates that the ultimate ownership test covers 25% direct or indirect ownership of the corporation’s voting shares or capital determined through the Grandfather Rule, or indirect ownership or control of an estate, trust or partnership owning at least 25% of the corporation. In this regard, the illustration provided in the MC is instructive.

Once identified, the reporting corporations must provide the beneficial owners’ complete name, birth date, specific residential address, nationality, tax identification number (TIN), and percentage of ownership, if any, in their GIS. Any concern about data privacy is addressed by limiting the public’s access to the page/s covering the beneficial owners’ personal information since these won’t be uploaded to the SEC’s publicly accessible electronic database. This policy is without prejudice to access by competent authorities for law enforcement and lawful purposes.

Compliance difficulties

While the MC is silent as to the manner of applying the three tests of determining beneficial ownership, the SEC has verbally confirmed that it should be applied one after the other.

Based on that, if the reporting corporation manages to identify the beneficial owners under Category 1 on ultimate owner, that information should satisfy the requirements of the MC. However, in case the first test on ultimate ownership is undeterminable, the reporting corporation must determine their beneficial owners by identifying natural persons exercising control “through other means” as described in Categories 2 to 8.

In cases where no natural person can be identified using the first two approaches on ultimate ownership or ultimate control, reporting corporations may resort to the last one covering Category 9. Thus, they may report members of their Board of Directors/trustees or senior managing officials as their beneficial owners.

Moreover, the descriptions provided under Categories 2-8 for determining ownership based on ultimate control are especially difficult for subsidiaries with multiple layers of foreign ownership and those with numerous corporate shareholders given that countless individuals may fall under any of the categories provided. In light of this, it is highly likely that, for expediency, reporting corporations may directly apply the last approach and just report their Board of Directors/Trustees as their beneficial owners.

Notably, the MC imposes upon the reporting corporations’ directors/trustees the adoption of a written procedure for obtaining, updating, and recording the corporation’s beneficial ownership information. Failure to comply with the directive, among others, shall subject the directors to penalties.

How to achieve ease in identifying beneficial ownership remains a challenge with open issues, such as cross-border corporate ownership, among others, needing clarification and perhaps another circular to put to rest all related questions. For now, can we say there is closure in the mandate for disclosures?