In the 2017 Canadian federal budget the Government of Canada included various measures in connection with providing a financial sector that functions well and promotes financial stability in Canada. One area they have targeted for improvement is corporate and beneficial ownership transparency, which is intended to protect the integrity of the tax and financial systems by providing safeguards against money laundering, terrorist financing, and tax evasion and avoidance. The Government is intending to put a national strategy in place, through collaboration with the provinces and territories which will improve the availability of beneficial ownership information.
An ongoing international concern
Transparency has been an ongoing topic of conversation and review in Canada, as well as in other global markets. For a number of years, international bodies have promoted the importance of transparency in protecting the integrity of the global financial system. This has included the issuance of high-level principles on beneficial ownership by the G8 and G20 in 2013 and 2014 respectively, and the G20 has continued to call on the Financial Action Task Force (FATF) to improve the implementation of international standards on transparency of beneficial ownership information. To address concerns with securities ownership being used as part of money laundering and terrorist financing strategies, the beneficial owner data needs to be accessible to financial institutions when performing ‘know your client’ (‘KYC’) activities, and to regulators, generally through maintenance of a register of beneficial owners either held by each affected issuer or centrally. Questions have also been raised in these international groups over the use of bearer shares and use of nominee account structures.
The state of the Canadian market
The Canadian market currently provides low transparency of share ownership as a result of the depositary structure, and the 10% threshold that triggers early warning reporting obligations. Issuers do have access to the shareholder records of their non-objecting beneficial owners (NOBOs) however the data must be purchased from a third party, and can only be used for limited purposes. It is not accessible to financial institutions for KYC. NOBOs are also only a segment of an issuer’s beneficial shareholders, and typically represent retail investors. Access to institutional investors, who are primarily objecting beneficial owners (OBOs) is not available.
How transparency of beneficial ownership is being handled internationally
Countries have considered varying mechanisms to deliver on the G20 principles. The United Kingdom (UK) and European Union (EU) have established legislative requirements in this area, with the UK provision coming into effect in 2016 and the EU-wide provisions in June 2017. These rules generally refer to identification and disclosure of the natural persons that have a controlling ownership or interest in the securities of an issuer, with ‘controlling interest’ defined by reference to a stake of 25% of the issuer’s securities. Under the EU and UK rules, issuers listed on certain regulated markets have been exempted from the requirement to identify and disclose beneficial owners with a controlling interest, on the basis that such issuers are already subject to disclosure rules for substantial owners. It is useful to note that UK issuers already have a strong right for issuers to identify their beneficial owners, and EU law is being amended in this area to allow all EU issuers to take steps to identify their beneficial owners.
Hong Kong and Australia have also consulted on the adoption of similar provisions earlier this year. Closer to home, the influence of the international principles have been seen in the following scenarios:
- The Canadian Parliament’s Bill C-25, which includes as one of its proposals the elimination of bearer shares, which allow for anonymous ownership,
- A Financial Action Task Force (FATF) report that has called for the United States to introduce processes to require the identification of beneficial owners.
We will continue to monitor the Canadian Government’s work in this area for potential impact on issuer obligations, particularly in view of Canadian issuers’ reduced access to information on beneficial ownership compared to other markets.