An Insight into the Nigerian Government’s Approach to Curbing Shell Companies

CONTRIBUTED BY CHIKEZIE M. IWU

INTRODUCTION

In Nigeria, companies are formed following the provisions of the Companies and Allied Matters Act 2020 which introduced several types of business that can be carried out to foster the ease of doing business in the country today.[1] This corporate structure during registration outlines the objective and business of the company and thereafter becomes a separate legal entity[2] from its members, i.e., a corporate personality. However, some of these incorporated companies, are formed for both legitimate and illicit goals.[3]

The existence of these companies presents substantial challenges to governments and economies around the world[4] and these types of companies are used in crimes like tax evasion, corruption, bribery, and even financial fraud. Such illicit behaviours have wide negative impacts on the economies, such as unstable investment markets, and diminished tax revenues which hinder revenue generation for the economy.[5]

This article gives an insight into what shell companies are and the impact of the government in curbing its illicit activities.

UNDERSTANDING SHELL COMPANIES

A shell corporation is a company that has neither substantial assets nor ongoing business activity. While not always unlawful, these kinds of organizations are occasionally employed illegally, for example, to conceal the ownership of a company from the public or law authorities.[6] They make no money and offer no goods or services to customers because they are frequently formed to hold funds and facilitate financial transactions for another organization in the country or offshore.[7]

Consequently, the identification of shell companies and their beneficiaries is predominantly accomplished through their breach of fiduciary duties in the financial system. [8] It is not surprising that the most robust manifestation of substance-over-form scepticism regarding shell companies is observed in the field of taxation. [9] These complex networks of corporations are also created for the purpose of money laundering, to conceal the sources and destinations of funds. The funds are then employed in activities, such as investing in real estate, making philanthropic contributions, renting properties, and allocating resources to public initiatives.

Furthermore, in Nigeria, these companies exploit a well-known loophole within the Companies Income Tax Act. This loophole allows for the application of three different CIT rates based on the turnover of companies in Nigeria.[10] Large companies with a turnover exceeding ₦100 million are subject to a 30% CIT rate, medium companies with a turnover ranging from ₦25 million to ₦100 million face a 20% CIT rate, while small companies with a turnover below ₦25 million enjoy a 0% CIT rate. [11] Consequently, these companies serve as tax avoidance mechanisms for both legitimate businesses and major corporations.

THE NIGERIAN GOVERNMENT’S APPROACH TO CURBING SHELL COMPANIES

The fundamental tenets of corporate governance include accountability and transparency which the government has always held in the highest esteem. Taking this into account, the government has through its consistent fight against corruption, seen the improvement of the legal framework for substantial regulation of companies with laws and regulations which are:

  1. Companies and Allied Matters Act (CAMA) 2020
  2. Persons with Significant Control Regulations, 2022
  3. Guidance on Ultimate Beneficial Ownership of Legal Persons and Legal Arrangements, 2023
  4. CAMA 2020

The enactment of the Companies and Allied Matters Act (CAMA) 2020 brought to light the need for registered companies under the Act to disclose the significant control and beneficial ownership of companies. The Act specifically states that persons who have substantial control over any company must report the details of such control to the relevant companies within seven days of gaining such significant control. All affected firms must notify the Commission within one month of receiving the information, declare it in their annual reports to the Commission, and update their member registers with the necessary information. [12]

This position repealed the position of the law in the Companies and Allied Matters Act (CAMA) 2004, wherein the obligations to disclose beneficial interest were limited to where such interest was acquired in a public company.[13]

To this end, the CAMA 2020 defines “persons with significant control” to mean[14]

  1. directly or indirectly holding at least 5% of the issued shares or interest in a company or limited liability partnership;
  2. directly or indirectly holding at least 5% of the voting rights in a company or limited liability partnership;
  3. directly or indirectly holding the right to appoint or remove a majority of the directors or partners in a company or limited liability partnership;
  4. otherwise having the right to exercise or actually exercising significant influence or control over a company or limited liability partnership; or
  5. having the right to exercise or actually exercising significant influence or control over the activities of a trust or firm, whether or not it is a legal entity, but would itself satisfy any of the first four conditions if it were an individual.
  6. PSC Regulations 2022

The Ministry of Industry, Trade, and Investment approved the Persons with Significant Control Regulations, 2022 (PSC Regulations) in 2022.[15] These regulations were established to create an effective framework and procedure for obtaining relevant information about individuals with significant control or beneficial owners of a company, limited liability partnership, or any other relevant entity. [16]

The PSC Regulations[17] define a PSC as a beneficial owner who ultimately owns or controls a company or LLP, or the natural person on whose behalf a transaction is being conducted. It also includes individuals who exercise ultimate effective control over a legal person or arrangement. It is important to note that a corporate entity cannot be considered a PSC. The development of these guidelines improves public access to information about individuals with significant control of companies through a publicly accessible portal. It also outlines the obligations and procedures for reporting PSC information or any changes.

Regulation 5 of the PSC Regulations mandates PSCs to inform the company or LLP of their control within seven days of becoming a PSC. Simultaneously, the company or LLP must disclose information about its significant individuals to the CAC, and foreign entities must provide information about the PSC who owns them.

Also, Regulation 7 warns against not disclosing persons in control. If not complied with in seven days, the company or LLP can restrict the interest and note it in the Register of Members—the restriction voids transfers, rights, shares, and payments. Compliance within 14 days withdraws the restriction. Non-compliance marks the company as “inactive”[18] and false information results in liability for the reporting entity and its officers, with fines and imprisonment of up to two years.

In addition, under the regulation, the CAC further requires companies and LLPs to provide PSC information in order to approve their registration or annual return filing and if these companies or LLPs do not comply with PSC reporting obligations, they will not receive a letter of good standing from the CAC.

The Regulations also specify the fines that will be imposed on those who fail to comply, taking into account the seriousness of the offence and the status of the party in default.

  1. Guidance on Ultimate Beneficial Ownership of Legal Persons and Legal Arrangements, 2023

The Central Bank of Nigeria on the 17th of January, 2023 released a circular to all banks and financial institutions titled “Guidance on Ultimate Beneficial Ownership of Legal Persons and Legal Arrangements”[19] to continue combating money laundering, terrorism and other unethical vices in the country in line with the Central Bank Regulations, 2022[20]. The purpose of this Guidance is to help financial institutions in identifying and verifying the beneficial owners of legal persons and legal arrangements following existing AML/CFT/CPF laws and regulations.

Furthermore, the Nigerian government is committed to eradicating shell companies that hurt the country’s economy and development through its agencies; the Nigerian Financial Intelligence Unit (NFIU) and the Economic Financial Crimes Commission (EFCC). These agencies of the Federal Government play a crucial role in identifying and investigating suspicious financial activities, including those carried out through shell companies.

  1. Nigerian Financial Intelligence Unit:

The Nigerian Financial Intelligence Unit (NFIU) serves as the primary national entity entrusted with receiving disclosures from reporting organizations, analyzing these disclosures, and generating intelligence to be shared with competent authorities. As an independent unit, the NFIU operates under the umbrella of the Central Bank of Nigeria and acts as the central coordinating entity for the nation’s Anti-Money Laundering, Counter-Terrorist Financing, and Counter-Proliferation Financing (AML/CFT/CPF) framework. [21]

In 2022, the intelligence unit released the “National Inherent Risk Assessment of Legal Persons & Legal Arrangements in Nigeria”, which was conducted by the Legal Persons and Arrangements Work stream of the NIRA Working Group chaired by the Corporate Affairs Commission (CAC) and with substantial contributions from other agencies. [22]

  1. Economic Financial Crimes Commission:

The EFCC has the power to investigate, enforce and prosecute offenders for any offence relating to the responsibilities of the commission, such as investigation of all crimes including money laundering, contract scams etc.

In addition, the Federal Inland Revenue Service runs tax assessments on these companies when forwarded to them by the NFIU and the Securities Exchange Commission for investigation for alleged illegal involvement in capital market activities.[23]

NOTIFICATION OF PERSONS WITH SIGNIFICANT CONTROL

The authority to be notified of persons with significant control of a company is the Corporate Affairs Commission. A company or LLP can notify the CAC through the Company Registration Portal (CRP). Information about persons with significant control (PSC) can be provided[24]:

  1. during the incorporation process of a new company or LLP;
  2. when any changes in control details occur;
  3. when filing annual returns; or
  4. in any other case CAC may determine.

CONCLUSION

The government through its interventions by requiring companies to disclose their significant owners, the PSC register, alongside other regulations helps reveal the true beneficiaries behind corporate entities, making it difficult for individuals or entities to hide their involvement in potentially corrupt activities. It further discourages the creation of shell companies used for money laundering or concealing corrupt practices, since the ultimate beneficial owners must be disclosed. It aids law enforcement agencies, financial institutions, and other stakeholders in conducting due diligence to identify potential corruption risks associated with a company’s ownership structure.

  1. Ogwemoh, Sylva and Folarin, Akorede, The Companies And Allied Matters Act 2020 – Highlights of the Reforming Provisions and their Implications for Businesses and Investors in Nigeria (September 10, 2020). http://dx.doi.org/10.2139/ssrn.3720259 accessed on 17 November 2023
  2. Resolution Law Firm : REQUIREMENTS FOR REGISTERING A COMPANY IN NIGERIA. https://www.resolutionlawng.com/requirements-for-registering-a-company-in-nigeria/ accessed on 17 November 2023
  3. Uz-Zaman, Md. Rokon and Afzal, Munshi Naser Ibne, Trade Based Money Laundering Through Shell Banks: A New Avenue of Tax Fraud (August 10, 2023). http://dx.doi.org/10.2139/ssrn.4537411 accessed on 17 November 2023
  4. Ibid
  5. Ibid
  6. Wil Kenton: “What Is a Shell Corporation? How It’s Used, Examples and Legality” INVESTOPEDIA (17th July 2022) https://www.investopedia.com/terms/s/shellcorporation.asp#:~:text=A%20shell%20corpora tion%20is%20a,law%20enforcement%20or%20the%20public. Accessed on 17 November 2023.
  7. Ibid 6
  8. José-de-Jesús Rocha-Salazar, María-Jesús Segovia-Vargas, María-del-Mar Camacho-Miñano,

    Detection of shell companies in financial institutions using dynamic social network, Expert Systems with Applications,Volume 207,2022,117981,ISSN 0957-4174,https://doi.org/10.1016/j.eswa.2022.117981 .

  9. Nougayrède, Delphine, After the Panama Papers: A Private Law Critique of Shell Companies (October 1, 2018). The International Lawyer, Volume 51, Issue 3, 2019, https://deliverypdf.ssrn.com/delivery. php?=pdf&INDEX=TRUE
  10. Ibid
  11. KPMG “Nigeria Fiscal Guide 2023” (Income tax) https://kpmg.com/ng/en/home/insights/2023/07/nigeria-fiscal-guide2023.html#:~:text=There%20are%20currently%20three%20(3,than%20%E2%82%A625%20million%20turnover.
  12. Sections 119 and 120 of CAMA 2020,
  13. Cap C20, Laws of the Federation of Nigeria 2004
  14. Section 868 CAMA of the 2020
  15. CAC:PSC- Regulation, https://www.cac.gov.ng/wp-content/uploads/2023/01/PSC-Regulations-2022.pdf accessed on 17 November 2023
  16. Ibid
  17. Section 119(3) CAMA,2020
  18. Regulation 12 of the PSC Regulations 2022
  19. Central Bank of Nigeria : “Guidance on Ultimate Beneficial Ownership of Legal Persons and Legal Arrangements” January 2023 https://www.cbn.gov.ng/Out/2023/FPRD/Circular%20on%20Guidance%20Ultimate%20Beneficial %20Ownership%20of%20Legal%20Persons%20and%20Legal%20Arrangements.pdf accessed on 17 November 2023
  20. Central Bank of Nigeria : Central Bank of Nigeria (Anti Money Laundering, Combating The Financing Of Terrorism And Countering Proliferation Financing Of Weapons Of Mass Destruction In Financial Institutions) Regulations, 2022 )https://www.cbn.gov.ng/Out/2022/FPRD/AML%20CIRCULAR%20AND%20REGULATIONS%20MERGED.pdf
  21. NFIU, About us About – Nigerian Financial Intelligence Unit (nfiu.gov.ng) accessed on 17 November 2023
  22. NFIU: National Inherent Risk Assessment of Legal Persons & Legal Arrangements in Nigeria (2022) DownloadFile (nfiu.gov.ng) accessed on 17 November 2023
  23. Ibid
  24. Seun Timi-Koleolu and Nuratulahi Yishawu: “Nigeria: Anti-Money Laundering: Nigeria’s Open Central Register Of Persons With Significant Control” https://www.mondaq.com/nigeria/money-laundering/1372328/anti-money-laundering-nigerias-open-central-register-of-persons-with-significant-control?login=true&debug-domain=.mondaq.com accessed on 17 November 2023

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