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Why Ultimate Beneficial Ownership Cannot Be Used for B-BBEE Ownership Assessment

Invequity Client Practice Note

Invequity Client Practice Note

June 10, 2024

June 10, 2024

Why Ultimate Beneficial Ownership Cannot Be Used for B-BBEE Ownership Assessment

Background

Ultimate Beneficial Ownership (UBO) was recently introduced through amendments to the Companies Act 71 of 2008 (the Companies Act), enacted by the General Laws Amendment Act 22 of 2022. These changes aim to combat money laundering and help remove South Africa from the Financial Action Task Force (FATF) grey list.

Compliance requires companies to file their UBO information with the Companies and Intellectual Property Commission (CIPC), identifying the actual individuals who are the ultimate owners of a company. This information is intended for use by accountable institutions such as the CIPC and banking institutions to identify the natural persons behind legal entities and their sources of funds.

The use of UBO information for purposes other than preventing terror financing and money laundering is not permitted. While UBO aims to identify ultimate beneficial owners, including their gender and ethnicity, the concept of “ownership” in UBO is distinct from that in B-BBEE. For UBO, ownership refers to:

  • Holding beneficial interests in the securities.
  • Exercising or controlling the exercise of voting rights.
  • The right or control of the right to appoint and remove directors.


In contrast, the B-BBEE Codes of Good Practice (the Codes) outline how to identify and account for black ownership of companies. Although there appears to be some conceptual overlap between UBOs and black shareholders as identified in the Codes, this is not the case.

Issues with Using UBO for B-BBEE Ownership Assessment

Firms requesting UBO information to assess the B-BBEE ownership of their suppliers face several risks due to the differences in how ethnicity is treated under UBO versus the Codes.

The Codes cater to the complexities of B-BBEE ownership and provide various ways to recognize black ownership, such as the Modified Flow-Through Principle, the Exclusion Principle, and mandated investments. UBO information does not account for these nuances.

For example, the B-BBEE Codes consider B-BBEE schemes that do not result in true black ownership by calculating the Net Value Created for black shareholders to determine if they truly benefit from their ownership. UBO does not provide for any B-BBEE rules of exception, such as:

  • Equity Equivalent programs for multi-nationals that cannot have outside shareholders.


  • B-BBEE Private Equity investments in black businesses.


  • The sale of assets at a discount to black buyers for deemed black ownership in B-BBEE scores.


  • Continued recognition of historic advances in black ownership as found by the courts.


The codes also define what constitutes a black person from a legal perspective w.r.t. ownership, while the ethnicity of a person w.r.t. UBO relies purely on the subjective assessment of the person completing the UBO form, often just based on the name or picture in an identity document. In other words, UBO owners may not be black in terms of the B-BBEE codes (or visa versa), resulting in the black ownership of companies being miss-represented.

Hence, UBO should not be used as a proxy for assessing black ownership of companies. Its use for this purpose is counterproductive to the spirit, intention, and wording of the B-BBEE legislation.

Summary

UBO reporting legislation was introduced in 2023 to comply with global anti-money laundering and anti-terror funding regulations. The B-BBEE Codes of Good Practice provide guidelines for identifying and accounting for black ownership of companies. However, using UBO information to assess B-BBEE ownership is inappropriate because:

  • UBO does not account for the fundamental tenets and objectives of B-BBEE legislation.


  • UBO disclosures deal with ethnicity but do not differentiate black individuals in terms of the Codes.


  • UBO does not include various means of measuring black ownership covered by the Codes, such as equity equivalents, sale of assets, private equity, and net value created for black shareholders.


  • UBO does not look at all shareholders, as it requires a minimum 5% threshold for beneficial ownership declaration, often excluding smaller shareholders.


  • UBO includes information on individuals who may not have ultimate shareholder interest in the firm, such as trustees of a trust that is a shareholder.


Contact Information

We trust you find this information useful. Should you have any questions, please feel free to contact us.

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