Australia gears up for a public register of beneficial ownership

What you need to know

• Australia does not currently have a framework for systematic collection, verification or access to beneficial ownership information of unlisted companies or other unlisted legal vehicles.
• The Treasury published a consultation paper in November 2022 seeking submissions on the design features of the first phase of a publicly available beneficial ownership register.  A number of topics were raised for consultation, including mitigation of privacy risks and approaches to verification of information – topics which have presented significant challenges in other jurisdictions, as illustrated by recent litigation and reaction to proposed reforms in the US.
• The Government has proposed a phased approach to the register.  In the first phase, unlisted companies and other unlisted legal vehicles operating in Australia and regulated under the Corporations Act 2001 (Cth) would be required to verify their beneficial owners and maintain an accurate and current record of that information, with penalties for non-compliance, not only for the entities, but also their officers and ultimate beneficial owners.  Carveouts are proposed to avoid regulated entities being required to trace beneficial ownership through other regulated or listed entities (although the paper is silent about the expected approach for foreign entities).
• In future phases, the Government intends to explore approaches to disclosing beneficial ownership of property held through trusts and other entities, and to centralising all information in a single public registry.
• Entities listed on Australian financial markets are expected to continue identifying their beneficial ownership through existing substantial holding notice and tracing notice regimes under the Corporations Act.
• The public register, if introduced, is intended to assist in preventing money laundering, tax and sanctions evasion and other financial crime, and in facilitating enforcement where such activity is detected. 

What you need to do

• Australian corporations and other entities should familiarise themselves with the Treasury's consultation paper and keep a watching brief on the introduction of any proposed requirements around ascertaining and recording beneficial ownership.

The case for reform, and proposed thresholds for recording 'beneficial ownership'

The Financial Action Task Force (an intergovernmental organisation which develops policies to combat money laundering) has recommended that countries ensure there is adequate, accurate and current information on beneficial ownership that can be accessed efficiently by authorities through a register of beneficial ownership or another mechanism.  As Treasury indicates in its consultation paper, Australia is only partially compliant with this recommendation.

The Treasury consultation paper suggests that the Australian Government will adopt the United Kingdom's model of the threshold requirement for the registration of a beneficial ownership (albeit lowering the UK's threshold of at least a 25 per cent ownership share to a 20 per cent ownership share, to be consistent with existing Australian corporate control and takeover thresholds).  Under this approach, a regulated entity would include on its beneficial register, all entities and natural persons who either:

• directly or indirectly hold 20 per cent of the shares or units, or voting rights, in the regulated entity;
• directly or indirectly hold the right to appoint or remove the majority of the board of directors of the regulated entity (or, in the case of managed investment schemes or corporate collective investment vehicles, the responsible entity or corporate director, as applicable); or
• have the right to exercise or actually exercise significant influence or control over the regulated entity. The Government considers 'significant influence' to mean having decision-making rights over the operations of the regulated entity, such as having the right to arrange loans on behalf of the entity.

The thresholds for the proposed Australian regime are broader than that adopted by the US under the Anti-Money Laundering Act of 2020 (discussed in a previous Ashurst update, here).  Under the US regime, beneficial owners are individuals who directly or indirectly exercise 'substantial control' over an entity, or control not less than 25 per cent of the ownership interests of the entity.

Which entities are targeted?

 In the first phase of the Government's approach, entities regulated under the Corporations Act 2001 (Cth) would be required to maintain up to date and publicly accessible registers of their beneficial ownership.  These entities are Australian:

• proprietary companies;
• unlisted public companies;
• unlisted registered managed investment schemes; and
• unlisted corporate collective investment vehicles. 

Information proposed to be visible on each regulated entity’s beneficial ownership register includes the names of any natural person owners, their residential address, address for service and the "nature of their control or influence" (with only a subset of that information to be publicly available, for example only country of residence and not full address details, but full details to be available to the regulated entity, regulators and law enforcement agencies).

Various exemptions to the register obligations are proposed. For example, regulated entities would not be required to disclose beneficial owners of any other regulated entity, or listed entity, in its ownership chain; or trust beneficiaries of registrable superannuation entities.  The paper is silent on whether the obligations extend to listing foreign entities; in the absence of a carveout it would appear there is an expectation that beneficial ownership be traced through such entities.

The Government has flagged that future proposals will seek to address reporting beneficial ownership of property held through trusts and other legal vehicles, and will aim to centralise all information in a single public registry. 

Entities listed on Australian financial markets are not expected to maintain a beneficial ownership register, but would continue identifying their beneficial ownership through existing substantial holding notice and tracing notice regimes under the Corporations Act.  The Government has indicated its intention to expand and harmonise these regimes in the future. 

Proposed obligations for gathering, verifying and recording information; enforcement

Regulated entities would be required to be 'reasonably assured' of the identities of their beneficial owners, with the consultation paper referring to existing know your customer mechanisms through which some organisations verify identity as examples of how this could be achieved. 

In recognition of potential obstacles faced by regulated entities in gathering the required information, the proposals contemplate provisions that will allow regulated entities to issue a notice to and request information from a person it suspects to be a beneficial owner.  The regulated entity can restrict the person from dealing in their interest should the person not comply.

The proposal also contemplates obligations to update beneficial ownership registers within specified time periods of receiving relevant information.

Penalties would apply to regulated entities, their officers and beneficial owners for non-compliance with the beneficial ownership regime. 

The Government also proposes to strengthen existing enforcement with respect to listed entities and their compliance with substantial holding notice and tracing notice regimes, including by conferring powers on ASIC to make orders restraining the disposal, acquisition and exercise of rights attached to interests in listed companies or listed management investment schemes where a person has, without reasonable excuse, failed to comply.

Potential challenges in implementing a beneficial ownership regime

Implementation of an effective beneficial ownership regime has obvious benefits in facilitating regulatory actions and law enforcement efforts relating to tax evasion, money laundering and other financial crimes. However, there are a range of potential challenges in introducing such a regime, some involving opposing considerations, as evidenced by recent litigation and commentary in a number of different jurisdictions:

• In late November 2022, the European Court of Justice ruled that requirements under EU anti-money laundering directives, mandating public access to beneficial ownership registers, were invalid as contrary to fundamental rights to privacy and protection of personal data enshrined in the Charter of Fundamental Rights of the European Union (see Ashurst's discussion of that case here).
• In the US, FinCen's proposed public corporate register has faced significant criticism, with the American Bankers' Association calling for withdrawal of the current proposal, describing it as "fatally flawed". While supportive of the concept of the register, that association criticises the current proposal for (among other things) the limitations on bank access to the register, prohibitions on sharing ownership information outside the US, and insufficient mechanisms to verify the accuracy of the information provided.
• The existing UK register has also faced criticism for lacking verification mechanisms. Late last year, the UK government introduced the Economic Crime and Corporate Transparency (ECCT) Bill (discussed in this Ashurst update) to make it more difficult to register fictitious directors and beneficial owners, and to prevent fraudulent appointments from reaching the register.

The way forward for Australia

Following the lead of similar OECD countries, Australia will almost certainly introduce a system for capturing and enabling interrogation of beneficial ownership information in the next few years.  In doing so, Australia would be sending a clear signal both domestically and internationally that it will join with other countries in seeking to reduce incidents of tax evasion and money laundering.  However, overseas experience has shown that an Australian version of a beneficial ownership register will need to be alive to the privacy concerns of individuals, the need to ensure that information recorded is reliable while also avoiding the imposition of unworkable obligations on regulated entities, and the potential for the regime to be abused by bad actors.  Introducing a regime that effectively manages all those concerns will be no mean feat.

Authors: Rani John, Partner; Peter Richard, Expertise Counsel and Carla-Rose Brett, Lawyer.