Regulators could be about to make a huge mistake on identifier rules that affect company directors
Policymakers should shelve plans to restrict publication of directors’ details and instead focus on improving the depth and quality and of corporate filings
Whether it be in the public or private domain, Hong Kong has developed a reasonably effective system of corporate disclosure to show what is being done in the name of shareholders and by whom. Historically, minorities suffered “abuse” when controlling interests shoved through related party transactions on poor terms. Such antisocial behaviour has been tackled over the last 30 years on multiple fronts, but recent incidents show the continued presence of bad actors.
Consider a recent High Court case revolving around public announcements made by a listed firm which may just as well have come from 1986 as 2016. It involved a director attempting to pass off the sale of an asset to his listed company as an “arm’s length” transaction, when in fact the sale ultimately benefitted a company held by him, and helped him pay off personal debts.
In such situations, the asset is often held offshore with the ultimate ownership being difficult to verify. While the Listing Rules require the director to declare whether he or she had an interest in the deal, there is no stipulation forcing disclosure of the ultimate owner.
For any interested third party attempting to trace such information, the system is based on the assumption that the underlying ownership of a company, although potentially opaque, is truthfully disclosed and so can be verified. The concern is that the lobbying power of interests that would prefer to keep a lid on awkward disclosures could be enough to compromise a system of market-driven regulation which relies on openness and a free flow of information.
This is a big deal for a supposed top tier financial centre as being able to assemble the “facts” on counterparties or customers is now essential for financial institutions and professional advisers which face exacting compliance obligations. For any institution wanting to do the right thing, the big constraint remains the quality and availability of information on market players.
In recent years, Hong Kong has worryingly toyed with a deliberately more opaque system of disclosure. After the personal business dealings of senior Beijing leadership figures were revealed by journalists who had trawled disclosures listed in the Companies Registry, it was proposed in 2013 to remove key identifiers (ID card numbers and home addresses) for directors.
The revamped Companies Ordinance was enacted in 2014 with draft sections that provided for such identifiers to be withheld from the public, with access limited to a few special classes, such as creditors, who could apply to the court for such information. Although these measures are not yet in operation, there would seem to be an intention to do so in the future.
The Privacy Commissioner at the time argued that government bodies should be more discerning in the way they put such “private” information on publicly available lists. However, no strong evidence was submitted that corporate directors were the subject of abuse by virtue of their details being in the public domain. Indeed, the former head of the Companies Registry, Gordon Jones, at the time of the proposed restrictions noted that there were no complaints about invasion of privacy during his 15-year tenure.
A hard fact which can be observed is the crime statistic which shows deception reports to have more than doubled in the past 10 years against the backdrop of an overall fall in crime. Many such scams and frauds involve companies. It is worth noting that at the time of the proposed restrictions on directors’ information, small and medium-sized company lobby groups were vocal in their opposition, citing a need to be diligent about trading partners.
The registry has more than 1.2 million companies listed, many of these connected to businesses in China. Last year there were nearly 4 million searches for corporate information, a near 25 per cent increase over the past five years. The free flow of this information is a prerequisite to any basic check on the legitimacy of a deal or the bona fides of directors. In the UK, this information is now available to the general public over the web at no charge.
Given the clear demand for quality corporate information for all the above reasons, it would at the very least be reassuring to see policymakers shelve any plans to restrict publication of directors’ details and instead focus on improving the depth and quality and of corporate filings.
For regular users of Corporate Registry filings, it is not uncommon to find that information recorded at the registry is incorrect. Indeed, the Post discovered last year that the address details of an individual, who reneged on debts having taken out multiple mortgages on a luxury property in Mid-Levels, were probably bogus.
A financial system which depends upon individual investors and professional firms to monitor everyday business transactions cannot work without clear information and sanctions for those who would falsify such data. There will always be interests that would prefer their affairs to be shrouded in privacy, but Hong Kong risks a genuine system failure if it continues down this path away from openness and toward selective disclosure.
Jane Moir is a Director at FTI Consulting. She was admitted as a barrister in 2012 and previously worked as a journalist.