TISL Challenges Companies Act Amendment for Beneficial Ownership Transparency

September 21, Colombo (LNW) Transparency International Sri Lanka (TISL) has taken legal action against a Bill amending the Companies Act No. 07 of 2007, filed in the Supreme Court on August 6, 2024. This amendment introduces a beneficial ownership register, aimed at enhancing transparency in the country’s corporate governance.

The beneficial ownership register mandates companies to disclose the identities of individuals who ultimately own or control them, thus addressing issues like corruption, conflicts of interest among public officials, money laundering, and terrorist financing. By making this information publicly accessible, the register seeks to expose hidden financial activities and illicit gains, which is vital for the implementation of laws like the forthcoming Proceeds of Crime Act.

Despite the potential benefits, TISL has raised significant concerns about the effectiveness of the register due to the Bill’s provisions. TISL argues that if the register is not universally applicable, it could create loopholes that undermine its purpose. Specific exemptions for certain companies would enable illegal activities to persist unchecked, thereby defeating the intended objectives of the beneficial ownership law.

One critical point in TISL’s petition is the exemption of offshore and overseas companies from disclosing beneficial ownership information, as outlined in Section 130A (10) of the Bill. TISL contends that this exemption encourages the creation of shell companies, which are often used for fraudulent activities like money laundering.

 Moreover, it does not guarantee that these offshore companies comply with beneficial ownership registration requirements in their respective jurisdictions, further diminishing transparency and increasing the risk of conflicts of interest.

Additionally, the Bill’s provisions are seen as discriminatory, violating the fundamental right to equal protection under Article 12(1) of the Constitution. Only domestic companies would be subject to disclosure requirements, creating an unequal playing field.

TISL also criticizes Section 130D, which limits public access to beneficial ownership information. This section requires individuals to request access to details about beneficial owners, which could hinder transparency. 

TISL argues that comprehensive disclosure of beneficial owners is essential for promoting fair competition and reducing corruption risks. By allowing public scrutiny, citizens, journalists, and civil society can better identify the true owners of companies, thus deterring illegal activities.

Moreover, TISL emphasizes that the Bill impairs the Right to Access Information, as enshrined in Article 14A of the Constitution. By restricting the information available to only names and ownership extent, the Bill falls short of providing meaningful access to data, thereby hindering public oversight.

Both the Civil Society Governance Diagnostic Report of Sri Lanka and the IMF-supported Governance Diagnostic Assessment advocate for a publicly accessible beneficial ownership registry. The recent Government Action Plan, stemming from the latest IMF review agreement, emphasizes the importance of implementing such a registry.

 TISL’s petition seeks a determination from the Supreme Court that the Bill violates constitutional rights and requests that it be passed into law only with a two-thirds majority vote in Parliament, as required by Article 84(2). TISL has filed this petition in the public interest, with the Attorney General named as the respondent.