The Financial Action Task Force on Money Laundering (FATF) through its Recommendation 24 on transparency and beneficial ownership of legal persons, calls on its member states to take measures to prevent the misuse of legal persons for money laundering or terrorist financing. It provides that countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons.
Following the initiative of FATF, countries like Argentina, Brazil, Costa Rica, France, Germany, Italy, Jamaica, Jordan, Pakistan, Singapore, South Africa, Sweden and the United Kingdom (UK) have amended their laws to provide for a beneficial ownership registry, including through their company laws and anti-money laundering legislation.
Kenya is a member of FATF by virtue of its membership to the Eastern and Southern African Anti-Money Laundering Group (ESAAMLG), an associate member of the FATF, whose main purpose is to combat money laundering and terrorism in the region by implementing the FAFT recommendations.
The Companies Act, 2015 (“the Act”) has now been amended by the Companies (Amendment) Act, 2017, in what can be surmised as an attempt to promote transparency in the ownership of companies in Kenya.
The Act now includes a definition of a beneficial owner, being “ the natural person who ultimately owns or controls a legal person or arrangements or the natural person on whose behalf a transaction is conducted, and includes those persons who exercise ultimate effective control over a legal person or arrangement”.
At section 93, the Act now requires that every company keep a register of its members which shall include information relating to the beneficial owners of the company and must be lodged with the Registrar of Companies within 30 days after its preparation, and within 14 days in case of amendment(s). The time requirement in case of amendment(s) does not apply to public companies.
The penalty on conviction for failure of the company to comply with the section is a fine not exceeding Kshs. 500,000/- payable by the company and each officer of the company in default, and a further Kshs. 50,000/- for every day that the offence continues.
In support of the new statutory requirement, the Registrar of Companies has prepared draft “The Registrar of Companies (Forms) Rules, 2017” which provides the forms to be used as notification to the Registrar of the beneficial ownership. The relevant form, BOF 1, requires that a company must indicate the name, postal address, ID/Passport details, nationality, date of birth, telephone number, and email address of the beneficial owner. Most importantly, the form requires that the company disclose the nature of control the beneficial owner has in the company.
Currently, the abovementioned rules have been circulated to the public with the Registrar calling for comments before the final versions are published; they are however, a sign of what is likely to come.
The new provisions will make it easier for authorities and the public to identify the actual owners of companies especially those with complex ownership structures. On the other hand, the provisions are likely to be a nightmare to companies and their shareholders as they seek to comply. Entities that need to begin thinking through compliance include private equity (PE) firms.
PE investment structures will be affected by this statutory requirement, as they are now required as shareholders in various Kenyan investee companies to disclose their beneficial owners.
Three aspects of a PE investment cycle  are relevant:
- Setting up of a fund: A fund is a collective investment scheme set up by a PE firm to allow it to raise funds and make certain equity investments. A PE firm can run more than one fund at the same time and funds can be registered either as separate limited liability partnerships (LLP) or as private companies limited by shares with a fixed term.
- Raising capital: Following the setting up of the fund, is the raising of capital. PE firms often raise funds from institutions, pension schemes, banks, insurance companies and individuals who in most instances have no control over the management of the funds following their commitment. Typically where the investing entity is structured as an LLP, there is a distinction between the partner with an active role in the management of the fund (general partner) and other partners who only invest (limited partners).
- Investing: Typically, a fund acquires an equity stake in a company. The fund thus appears in the company’s list of shareholders.
In light of the above, questions arise as to who the beneficial owners of a fund are given that the statutory definition includes natural persons either owning or controlling the fund. This may include the investment management firm, shareholders and fund investors. Where it is a partnership, does this extend to both the general partner and the limited partners? This may depend on how the partnership arrangements address issues of control and ownership between the partners. In relation to the fund investors, is the expectation that the natural persons behind say a pension scheme (the pensioners) be disclosed? Where does one stop in identifying the natural person who ultimately owns or controls a legal person?
In our opinion, Kenya can use UK law as a guide in formulating regulation to answer the questions above. The UK equivalent to Kenya’s beneficial ownership disclosure obligation is provided for in Part 21A read together with Schedule 1A of the UK Companies Act, 2006.
In the UK, a company duty is bound to investigate, identify and confirm natural persons with significant control over the company and thereafter enter the details of such person in the register of persons with significant control.
Unlike Kenya, whose provisions on beneficial ownership are open-ended and not limited to control, the UK’s Companies Act, 2006 stipulates conditions at Schedule 1A that natural persons must meet before they should be disclosed as persons with significant control over the company. Under Schedule 1A, the person must directly or indirectly hold more than 25% of the shares in company; or directly or indirectly hold more than 25% of the voting rights in company; or directly or indirectly hold a right to appoint or remove a majority of the board of directors of company; or has the right to exercise, or actually exercises significant influence or control over company.
The UK approach indicates that further refining of the beneficial owner disclosure obligation in the Kenyan Companies Act, 2015 may be needed for it to be a practical, clear and less onerous aspect of our law.
 Gatobu E. Mwirigi (2014): ‘Role of Private Equity in the Emerging Markets to the Economy: Case Study of Kenya’, University of Nairobi.
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