It was the 1976 film All the President’s Men that popularised the now ubiquitous phrase “follow the money”.

This pithy saying captures the idea that political and other forms of corruption can be revealed by chasing a trail of payments, transfers and donations that ultimately will lead to “an oak-paneled door and behind it will be Mr Big”.

This is indeed what investigative journalists spend many hours meticulously doing by poring through financial records.

But the Mr Bigs and their corporate cousins are often hidden behind a bewildering crowd of intermediaries and fronts, meaning that it is hard, sometimes nigh impossible, to find out who actually owns the shares or securities of a company.

The quest for ultimate beneficial ownership disclosure is one that seeks to pierce through various mechanisms that cloud who really controls and/or benefits from companies – in other words, those who hold beneficial interests.

These mechanisms include the use of shell or front companies to create layers of ownership, nominee shareholdings, the ability to control voting rights and more.

Though “follow the beneficial interest” is perhaps less Hollywood script-worthy, conducting this exercise has led to exposures of high-profile cases where political office bearers have unduly benefited from companies – a potential conduit for kickbacks.

In addition, concealment of beneficial interest holdings from the eyes of authorities and the public is straight out of the playbook for money laundering, as well as the funding of terrorism and other criminal activities.

South Africa’s 2008 Companies Act currently only assists in this exercise to an extent.

For instance, it only requires public (listed) companies to find out information about beneficial interest holders. For context: there are only about 315 companies listed on the JSE.

The Act is therefore severely limited in its scope to require companies to gather and verify information about those who own beneficial interests in them. More importantly, it does not provide means to make this information public.

Sourcing this information has required painstaking, skilled, time-consuming work – something amaBhungane’s investigators will attest to.

Hopefully, this state of affairs will soon change.

On the cusp of progress

The Department of Trade, Industry and Competition (DTIC) published the latest iteration of the Companies Amendment Bill on 1 October for public comment.

The Bill seeks to bring about a host of long-overdue changes to the Companies Act, which came into effect a decade ago.

The Bill includes a potentially game-changing set of amendments to corporate transparency regimes. These include wage gap disclosures and, most excitingly for anti-corruption interest groups such as civil society and investigative journalists, beneficial ownership disclosures.

If enacted in the current form, the amendments will make a number of company records available for public inspection, including memoranda of incorporation, share registers, annual financial statements (with exemptions for companies below a certain size) and registers of beneficial ownership disclosure.

The drafters have introduced the concept of a “true owner” so as to capture relevant information on the registers of beneficial ownership disclosure. The true owner is a natural person possessing one or more of a variety of characteristics in relation to a security, such as ownership, being able to direct the registered holder of the securities (whether directly or indirectly), or being the person in whose benefit the securities enure.

In essence, it is the person – the “warm body” at the end of the chain – who benefits from the security.

There is also a proposed amendment that would require companies to file a copy of their latest financial statements, securities register and register of beneficial ownership with the Companies and Intellectual Property Commission (CIPC) together with their annual return – and (with some exceptions) the public can view these documents on request to the CIPC.

An important proposed change is the extension of criminal liability to directors and prescribed officers of a company for failing to accommodate any reasonable request for access, though it will be a defence for such persons to show that they took all reasonable steps to ensure compliance. It is hoped that this will spur companies into better compliance with such information requests.

These suggested amendments are certainly a step in the right direction. 

However, the Bill contains some drafting errors and is in need of refinement. This includes ensuring that the definition of “true owner” captures the widest possible scope of beneficial ownership, ensuring that disclosure obligations extend to non-profit companies as well, and clarifying certain obligations.

In addition, it doesn’t consider alternative means of disclosure that could make access easier for requesters, and reduce burdens on companies, such as allowing those seeking updated information on shareholding to make requests to the central securities depository, known as Strate.

It’s time for business to get on board

There seems to be some initial indication that organised business will resist these changes. 

Business Leadership SA CEO Busi Mavuso publicly denounced two of the bill’s main concerns – wage gap disclosure and beneficial disclosure – as too onerous, going so far as to say that these changes would “diminish the attractiveness of South Africa as a place for companies to do business”.

This is, with respect, a short-sighted, blinkered approach, especially as it relates to beneficial ownership disclosure.

There is a global shift towards enacting beneficial ownership disclosure laws: Open Ownership reports that 110 countries have committed to beneficial ownership transparency, South Africa among them. 

A number of countries with advanced economies have already implemented disclosure mechanisms. In Africa, South Africa lags behind Nigeria and Ghana, both of whom have extractives industries registers of beneficial ownership online.

It’s no secret that South Africa has a corruption problem. A very big one. 

It certainly can’t help our attractiveness as an investment destination that public funds intended for development and infrastructure, the operation of state-owned companies, and the upliftment of the people whose labour sustains our economy are frequently siphoned away into companies, going up and down chains of subsidiaries, until they wind up in the hands of the corrupt – a process facilitated and shielded by beneficial ownership secrecy.

Of course, this is not to suggest that organised business should not raise concerns about the Bill operating as a sledgehammer rather than a chisel. 

There is scope through this comment period, and as the Bill eventually works its way through parliament, to propose changes that adjust egregiously burdensome obligations appropriately.

But there is no scope to renege on the essential commitment to beneficial ownership transparency contained in the Bill, whether to ease compliance burdens on business or for any other reason. The stakes are just too high.

Business Leadership SA CEO Busi Mavuso. (Photo: Gallo Images / Masi Losi)

No place to hide

Out of context, the following statement may seem provocative: “The establishment of a company as a vehicle for conducting business on the basis of limited liability is not a private matter.”

But it is not. It is the first sentence of the oft-quoted paragraph 85 in Bernstein v Bester NO, a 1996 judgment of the Constitutional Court.

Ackermann J went on to explain that, when a company is formed, “it draws on a legal framework endorsed by the community and operates through the mobilisation of funds belonging to members of that community”.

The gist of the sentiment is that while companies may be formed to benefit certain individuals, they are a construct rooted in communities. They are imbued with limited legal liability, which gives people the freedom to use them as a means to test business ideas without necessarily risking personal ruin should they fail – risks that are, to some extent, borne by the community.

In exchange for this advantage, companies are not entitled to remain entirely private.

This important principle should not be forgotten when engaging with the Bill. While it may introduce new compliance burdens, these are necessary in service of a greater aim.

No time to lose

Earlier this month, the Financial Action Task Force (FATF, an intergovernmental organisation to combat money laundering) published the Mutual Evaluation Report in respect of South Africa’s anti-money laundering and counter-terrorist financial measures. 

While its findings are orientated towards the impact on law enforcement, it made some concerning findings regarding beneficial ownership transparency.

South Africa was found to be “partially compliant” with the requirements for transparency and beneficial ownership of legal persons. The report stated that:

“South Africa meets some of the requirements but there are moderate deficiencies which remain … [Beneficial ownership] information is not always timely available to competent authorities and there is still limited access to such information … Some powers available to access BO information cannot obtain such information as the information is not required to be kept.”

This outcome would not have been wholly surprising to the DTIC. The push for the proposed changes to enhance beneficial ownership transparency was no doubt influenced by our previous, equally poor, assessment against FATF requirements.

This latest report underscores the need to keep up the fight to ensure that the necessary amendments are enacted into law without further delay. 

Transparency that delivers not just to law enforcement agencies, but to the public generally, enables scrutiny by diverse stakeholders, increasing the chances of exposing dodgy deals.

The beneficial ownership transparency changes to the Companies Act have been gestating over many years. AmaBhungane, together with other concerned civil society and private sector actors, have been engaging with the department since 2016 on this issue.

We have read widely, researched comparative laws, made written submissions, attended workshops, had discussions with officials from the Financial Intelligence Centre and CIPC, made presentations to business and industry stakeholders, and consulted with civil society.

In all of this work, we have seen many stakeholders endorse the principle of corporate transparency in recognition of its role in creating a climate in which clean, corruption-free business can thrive.

Will you? DM

Thakur is amaBhungane’s advocacy coordinator.