Mandatory disclosure: Is there really closure?

Taxwise Or Otherwise
By Maxencio A. Rios, Jr.

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.
In practice, however, reporting corporations may find it difficult to follow the
above. For instance, determining beneficial owners under Category 1 may prove
challenging for publicly listed companies where owners can change daily.
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?

The views or opinions expressed in this article are solely those of the author and
do not necessarily represent those of Isla Lipana & Co. The content is for general
information purposes only and should not be used as a substitute for specific
advice.