Compliance – Today and Tomorrow

In today’s ever-changing regulatory climate, organisations must be adaptable in order to be compliant with legislation, regulations & policies. The international push for transparency and the demand for more stringent reporting from regulatory authorities is changing the way businesses operate globally. Compliance impacts every single aspect of a business, whether it is mandated through regulations, voluntary frameworks or as a result of contractual agreements. Additionally, businesses face other compliance related challenges including effective management of workflow and processes.

Businesses reluctant to adapt and evolve risk falling behind and may ultimately be branded as non-compliant and possibly having their licences revoked. It is therefore essential that compliance frameworks within a business are dynamic not only to keep pace with the changing regulatory environment but also to satisfy the business risk appetite and customer needs.

To meet this challenge, a compliance assessment of the business products offered needs to be carried out in the first instance. The regulatory requirements can be aggregated into control sets and normalised to establish policies and guidelines to be followed. The whole compliance infrastructure set up after an appropriate assessment will need to be monitored to ensure its proficiency.

We will discuss two major developments in this field that businesses that impact the compliance infrastructure of a business.

Changes to Beneficial Ownership Threshold

The Eastern and Southern Africa Anti-Money Laundering Group (“ESAAMLG”) is a regional body ascribed by international laws to combat money laundering and financing of terrorism. ESAAMLG is a member of the Financial Action Task Force (the “FATF”). Established in 1989, by the Ministers of its member jurisdictions, the FATF is an intergovernmental organization founded to develop policies to combat money laundering. ESAAMLG abides by the recommendations issued by the FATF.

Since Mauritius is a member of ESAAMLG, several mutual evaluation processes have been undertaken and the relevant reports have been issued. As far as practicable, Mauritius has tried to include the recommendations given by ESAAMLG in its legal and regulatory framework. The most recent ESAAMLG report was issued in July 2018.

The 2018 report highlighted a series of weaknesses in the anti-money laundering framework of Mauritius. For instance, there were no legal provisions requiring disclosure of beneficial ownership or information related to them. As such we were faced with a situation where the lack of documents on the beneficial owners directly hindered the application of the recommended risk assessment methods.

Consequently, ESAAMLG recommended to amend The Financial Intelligence and Anti-Money Laundering Act 2002 (“FIAMLA”) to include preventive measures aligned with the FATF standards.

Prior to October 2018, a 20% threshold defined the controlling interest of the beneficial owners. In line with the recommendations of ESAAMLG, this threshold was scrapped from the Financial Intelligence and Anti-Money Laundering Regulations 2018. Instead, licensees, for instance, Rogers Capital Corporate Services or Rogers Capital Fund Services, must apply their respective judgements to decide upon the extent of the controlling ownership interest and also the verification of the identity of beneficial owners.

It is important to note that the Financial Services Commission (the “FSC”) has already started applying this standard to licensees. This implies that any management company should act responsibly in ascertaining who the controlling owners and the beneficial owners are respectively.

Practice statement issued by the Government of Mauritius to define the Place of Effective Management

The Organisation for Economic Cooperation and Development (the “OECD”), as part of its recommendations relating to base erosion and profit shifting, recommended that countries use a mutual agreement procedure – an in-built treaty mechanism to resolve double tax disputes –relating to corporate tax residence. According to the OECD, a company’s “place of effective management” (“POEM”) is one of the factors that countries should look at when determining corporate tax residence.

In order to determine if a company’s POEM is in Mauritius, the company needs to demonstrate substance in Mauritius. The FSC has issued indicative guidelines for substance requirements for the different legal entities composing the new global business framework.

Further to the Finance (Miscellaneous Provisions) Act 2018, the Income Tax Act has been amended to introduce a new Section 73A which provides that a company which is incorporated in Mauritius shall be treated as non-resident if its POEM is situated outside Mauritius. For a Mauritian entity to be treated as tax resident in Mauritius, the following requirements should be applied:

  1. all the strategic decisions relating to its core income generating activities should be made in Mauritius. Reference is being made to the place of decision making and not to the place of income earning activities of the entity.
  2. any one of the two conditions are met:
  • a majority of the members of the Board of Directors should be in Mauritius; or
  • the executive management should be regularly exercised in Mauritius.

In accordance with the Financial Services Act, to qualify for the Global Business Licence (“GBL”), an entity will have to carry out its core income generating activities in Mauritius by:

  • employing, either directly or indirectly, a reasonable number of suitably qualified persons to carry out the core activities;
  • having a minimum level of expenditure, which is proportionate to its level of activities;
  • being centrally managed and controlled in Mauritius; and
  • being administered by a management company.

It is to be noted that the requirement to submit a tax return still applies even though a company is considered to be resident outside of Mauritius on the basis that its POEM is outside of Mauritius.

The regulatory environment is dynamic and this makes compliance a never-ending learning process. Hence, all companies are bound to abide by the changes to be able to keep afloat in the cut-throat competitive world of global business. The one with the greater aptitude to adapt will be the winner.

The above examples provide only a glimpse of some of the compliance matters with respect to global business. Should you require any information, please contact us.