TISL Challenges Companies (Amendment) Bill

Transparency International Sri Lanka (TISL) filed legal action on Friday (13) in the Supreme Court challenging the Bill issued on August 6 to amend the Companies Act No. 07 of 2007.

The amendment introduced a much-needed anti-corruption tool to Sri Lanka’s legal framework – a Beneficial Ownership register. A publicly accessible beneficial ownership register creates a legal requirement for companies to disclose the identities of individuals who ultimately own or effectively control them and benefit from their returns, the anti-corruption watchdog said.

This transparency is crucial in combating corruption, conflicts of interest for public officials, money laundering and terrorist-financing, as it enables to trace and expose hidden financial activities and illicit enrichment. Beneficial ownership registries are also vital for the effective implementation of crucial laws such as the upcoming Proceeds of Crime Act.

Despite this welcome introduction, there are serious concerns over the efficacy of such a register, given the manner in which the Bill is drafted. It is vital that the Beneficial Ownership register is effective and transparent and not merely superficial. Without universal applicability, loopholes are created that undermine the entire purpose of the register.

"If certain companies are exempt or vital information is hidden, the register loses its effectiveness, allowing illegal activities to continue unchecked, thereby defeating the purpose of the objectives of the introduction of beneficial ownership law," a statement from TISL said.

Challenging the said serious concerns, TISL’s petition pointed out that Section 130A (10) of the Bill exempts Offshore Companies incorporated outside Sri Lanka and registered under the Companies Act or overseas companies registered under the Companies Act from disclosing beneficial ownership information, where such companies are required to comply with the beneficial ownership registration in the respective countries of incorporation.

Exempting offshore and overseas companies from disclosing Beneficial Ownership information enables and encourages the establishment of shell companies (inactive companies created for fraudulent purposes such as money laundering), which are used as vehicles for corruption and illicit gain.

Furthermore, this does not necessarily ensure that such overseas companies have registered in compliance with the Beneficial Ownership registration requirements in the respective countries.

Moreover, such an exemption undermines transparency and increases the risk of conflicts of interest as Beneficial Ownership information is not widely available through the Registrar of Companies. Additionally, it requires less information from companies where the beneficial and legal owners differ, a distinction that has no reasonable connection to the internationally accepted purpose of beneficial ownership registration.

TISL also noted that this provision, not only undermines transparency and accountability but limits legal avenues available to prevent and deter corrupt business practices.

The petition also stated that this exemption creates a discriminatory classification between offshore companies, overseas companies, and other local companies, violating the fundamental right to equal protection of the law (Article 12(1) of the Constitution, as only domestic companies are subjected to disclosure requirements.