Establishing a company in Hong Kong is easy, and hiding the beneficial owners of such an entity is not too difficult either. An amendment to Hong Kong’s Companies Ordinance that came into effect on March 1, however, should make hiding more difficult.
The Companies (Amendment) Bill 2017, along with an amendment to Hong Kong’s existing anti-money laundering and counter-terrorism financing law were passed to ensure, among other reasons, that Hong Kong was fulfilling its obligations to the Financial Action Task Force (FATF), a multilateral body focused on preventing the use of the international financial system for money laundering, terrorist financing, and the proliferation of weapons of mass destruction.
In light of United Nations Security Council sanctions, the FATF considers North Korea a high risk, non-cooperative jurisdiction.
Research conducted by the UN Panel of Experts on North Korea and highlighted in recent investigative media reports has revealed Hong Kong to be one of the leading jurisdictions for DPRK front companies.
This has been an open secret and has long been on the radar of the U.S. government as such front companies engage in seemingly legitimate commercial activities to procure restricted goods, services, and capital for Pyongyang. It is highly likely that many of these activities are violations of the various sanction regimes that North Korea is currently under.
In the past few years, Hong Kong has become a hub for North Korean economic activity. In 2012, the city-state emerged as North Korea’s second largest two-way trading partner. Most recently Hong Kong-registered vessels have been suspected of involvement in sanctioned ship-to-ship transfers.
The FATF considers North Korea a high risk, non-cooperative jurisdiction
As a result, during a visit to Hong Kong at the beginning of the year, Sigal Mandelker, Under Secretary for Terrorism and Financial Intelligence at the U.S. Treasury, admonished local authorities for the permissive environment that facilitated illicit North Korean economic activity through the use of Hong Kong’s liberal company law regime.
Suspicious Hong Kong company activity does not just benefit North Korea. The ease of capital flow and company formation that have helped make the city-state one of the easiest places to do business in the world also fosters an environment of abuse. There is an entire ecosystem that makes establishing companies not only easy but relatively opaque as well.
The new update to the law will add transparency with its emphasis on the identification of a company’s significant controllers. Specifically, the amendment requires most companies formed and registered pursuant to Hong Kong’s Companies Ordinance to maintain a significant controllers register that is not open to the public, but available for inspection by law enforcement when required.
It is incumbent upon a company to take reasonable steps to ascertain its significant controllers. Elements of significant control include formulaic factors such as holding, directly or indirectly, more than 25% of a company’s shares or more than 25% of its voting rights.
Additionally, the power to control the majority of a company’s board of directors would also satisfy the requirement to be classified as significant control.
The new update to the law will add transparency with its emphasis on the identification of a company’s significant controllers
Even if a person or entity does not meet the above-prescribed factors, the actual exercise of significant influence or control over a company or entities that may have such control can potentially be captured in the definition of significant control.
A company’s significant controllers register must include basic identity information. For example, if a significant controller is a person, then their name, correspondence address, identity document number, the date of becoming a significant controller, and a description of the type of significant control the person has all need to be recorded.
If the significant controller is a legal entity, such as another company, then the nature of its business form, registration number, place of incorporation, and address of its registered office, all need to be reflected in the registry along with the date the entity became a significant controller as well as a description of the type of control it exercises.
The key point here is that even if a person or other legal entity exercises significant control through different layers of ownership and sub-companies, a company is still responsible to record this on its significant controllers register.
One desired effect of the amendment is that it will be easier to establish who beneficially owns and controls such front companies as nominees and other methods to obfuscate control become less effective.
NO LONGER HIDING IN PLAIN SIGHT
As this update to the law applies to existing companies, and not only those newly formed, there should be increased visibility on Hong Kong-domiciled companies engaged in illicit activities, including those linked with North Korea’s overseas commercial activities.
At the very least, Hong Kong will start being viewed as a less welcoming environment for North Korean activity. Specifically, the additional transparency of ownership should hinder the ability of DPRK proxy entities to access banks and other financial services as these institutions may request greater clarity on ownership and control as part of their know your client procedures.
Of course, over two decades of evading sanctions have made North Korean commercial operatives savvy manipulators of legal and regulatory loopholes to mask their activities.
Given this cumulative experience, it is naïve to think this single amendment to Hong Kong’s law will serve as a panacea. That said, it is indicative of broader global coordination to disrupt North Korean Inc.
Hong Kong will start being viewed as a less welcoming environment for North Korean activity
Historically, for Hong Kong enforcement agencies, international obligations have generally not been a priority, and this sentiment is further exacerbated when considering North Korea – not normally considered a direct priority for the territory.
With the amendment incorporating certain obligations into local law, however, this should lead to greater awareness and accountability in Hong Kong’s enforcement agencies of proxy North Korean actors that use Hong Kong companies to mask their activity.
Ultimately, such awareness should make it much more difficult for such North Korean front companies to hide in plain sight in one of the world’s leading commercial centers.
Edited by Oliver Hotham
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Featured Image: Foggy Hong Kong Night by aotaro on 2016-06-15 21:05:37