Penalty woes: A not so beneficial disclosure
Years after the implementation of Securities and Exchange Commission (SEC) Memorandum Circular (MC) No. 15-2019 updating the General Information Sheet (GIS) to include information on beneficial ownership, the SEC recently issued SEC MC 10-2022 increasing and imposing additional non-financial penalties for non-compliance and providing further guidelines for submission.
As readers may recall, SEC MC 15-2019 categorized “Beneficial Owners” into nine, grouped mainly as those either having “ultimate ownership,” “ultimate control” and “position” in the reporting corporation. Moreover, the reporting corporations’ directors/trustees have since been required to adopt a written procedure for obtaining, updating, and recording the reporting corporation’s beneficial ownership information. Board and Senior Management oversight is also a requirement as part of the due diligence measure to ensure that prescribed procedures are observed. Failure to comply with the directive, subjects directors, trustees or officers and the reporting corporation to mainly monetary penalties.
Since its implementation, corporations have submitted the additional beneficial ownership page in their annual GIS. However, submissions are every so often treated with minor regard and frequently do not reflect the needed information. This could be because corporations still struggle to understand the proper approach in determining their beneficial owners, not to mention that most reporting corporations have yet to adopt written procedures or have Board and Senior Management oversight to ensure their compliance.
Despite these challenges, the SEC decided to increase the penalties imposed and included additional non-financial sanctions to “make them proportional, effective, and dissuasive for non-compliance.” This move is in line with the recommendations of the Financial Actions Task Force and other international standard setting bodies.
Under SEC MC 10-2022, reporting corporations will no longer be penalized for failure to disclose alone but will be sanctioned as well for making false declarations on their beneficial ownership disclosures. Notably, the MC highlights that Criminal Actions and Criminal Liability are likewise imposable on persons responsible, on top of the usual administrative sanctions, in accordance with the Revised Corporation Code of the Philippines, as well as other applicable laws, rules and regulations.
As for the monetary penalties, the SEC has substantially increased the imposable fines based on the retained earnings for Stock Corporations and fund balance for Non-stock Corporations. The updated penalties for failure to disclose without lawful cause are as follows:
• For stock corporations with retained earnings of less than P500,000:
First Violation – P50,000 (formerly P10,000)
Second Violation – P100,000 (formerly P20,000)
Third Violation – P250,000 (formerly P50,000)
Fourth and subsequent violation – P500,000 (formerly P100,000)
• For non-stock corporations with fund balance of less than P500,000:
First Violation – P25,000 (formerly P5,000)
Second Violation – P50,000 (formerly P10,000)
Third Violation – P100,000 (formerly P20,000)
Fourth and subsequent violation – P250,000 (formerly P50,000)
• For stock corporations with retained earnings or non-stock corporations with fund balance of P500,000 or more but less than P5 million, the penalty is twice the abovementioned amounts.
• For retained earnings or fund balance of P5 million or more but less than P10 million, the penalty is thrice the abovementioned basic penalties.
• Finally, for retained earnings or fund balance of P10 million or more, the penalty shall be four times the basic penalties.
Unlike its predecessor, the current MC provides that the SEC, upon its finding motu proprio or upon referral by a competent authority, can penalize reporting corporations with a fine of P2 million for any false beneficial ownership information. Most striking is the fact that the SEC can now proceed to dissolve the corporation if after notice and order, the corporation fails to submit complete and accurate beneficial ownership information and a written explanation for the false disclosure.
In addition, it is noticeable that the liability of directors, trustees and officers has been expanded to include false declarations which may subject those responsible to not only a fine of P200,000 but also disqualification to be a director, trustee and officer of any corporation for a period of five years.
OTHER IMPOSABLE PENALTIES
Furthermore, under the MC, if after due notice and hearing, the SEC finds that there is willful violation of the circular or its related orders, or that any person has refused to permit any lawful examination into the corporation’s affairs, it is within the SEC’s discretion to subject the reporting corporation to the penalty of suspension or revocation of its certificate of incorporation along with other penalties within the SEC’s power to impose.
Other updates are the addition of passport details for identified foreign beneficial owners and the standardization of the period to submit updates in the disclosures which should now be done within 30 calendar days after such change has occurred or became effective.
While the SEC’s move in ensuring compliance is laudable, it bears highlighting that the issues being addressed may not always be due to the reporting corporation’s deliberate refusal to declare but rather the apparent lack of clear-cut parameters and procedures to determine their beneficial owners. Perhaps another circular on the matter in tandem with the current one on penalties will balance the gravity of the heavier monetary sanctions and harsher non-financial penalties considering that the very existence of reporting corporations is now at risk in the event of non-compliance.
Ultimately, ensuring compliance through the imposition of harsher penalties is never an issue if only the regulations sought to be enforced are clear in terms of procedure and its intended mandate. Otherwise, the graver penalties will only end up burdening reporting corporations which are already being plagued by numerous compliance requirements.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Maxencio Jr. Rios is an assistant manager at the Tax Services department of Isla Lipana & Co., a Philippine member firm of the PwC network.
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