Affilia would like to thank Florence Beauregard for the preperation of this blog.

As a business law firm, we observe daily the growing impact of transparency requirements on businesses. Far from being just an administrative formality, these obligations can have significant repercussions on your operations. Here’s why you should pay close attention to them.

Transparency, the New Global Standard

In recent years, a significant shift has taken place in the business world: the growing focus on combating tax fraud, money laundering, and the financing of terrorism. Governments worldwide are tightening regulations and demanding greater transparency from businesses. Canada, as an active member of the OECD, plays a key role in this global effort. It is one of 147 jurisdictions committed to implementing the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. This Convention has led to the creation of a robust legislative framework designed to assist authorities in detecting and reporting illicit activities.

Specifically, in Quebec and Canada, this implies a key obligation for businesses: to declare their “Ultimate Beneficial Owners” or “Individuals with Significant Control” (ISC). This measure aims to shed light on the true owners of companies and to prevent the use of business structures for fraudulent purposes.

Who are these So-Called Ultimate Beneficial Owners?

In simple terms, these are the individuals who control things behind the scenes. These obligations require businesses to disclose the identity and certain personal information of anyone who has the ability, directly or indirectly, to exert control over the company. The Quebec government defines an Ultimate Beneficial Owner as ‘an individual who holds a right that allows them to benefit from a portion of the income or assets of a business, or a right that enables them to direct or influence the activities of the business.’

At the federal level, the term ISC is used to refer to any individual who owns or controls a company. This individual:

• Owns, controls, or manages 25% or more of the shares individually, jointly, or in concert with one or more individuals;
• Does not hold shares but exerts de facto control over the company; or
• Meets a combination of these criteria.

The criteria for identifying the relevant individuals vary according to legislation, but the principle remains the same: To ensure increased transparency.

How does this Concern You?

It might be tempting to take a shortcut with these declarations. After all, it may seem improbable that a government official would unexpectedly show up at your door on a Wednesday morning to inspect your corporate records. Sharing personal information can feel uncomfortable, and it may seem like just a trivial formality, despite the potential risks of financial, administrative, and legal penalties.

However, adopting this approach could lead to costly long-term consequences for a business. Here’s why.

Legislative Sanctions: A Very Real Risk

It is important to emphasize that the new transparency measures are not just a simple administrative exercise: they come with very real sanctions, both at the provincial and federal levels.

In Quebec, failing to comply with disclosure obligations can result in significant penalties. This includes:

• Failing to comply with a request from the Quebec Enterprise Registrar (REQ) within the prescribed timeframe,
• Submitting a false or misleading declaration,
• Failing to meet disclosure requirements.

Sanctions vary depending on the status of the offender:

• For an individual: a fine ranging from $500 to $5,000
• For a legal entity: a fine ranging from $1,000 to $10,000

At the federal level, the requirements are just as strict. A company that fails to keep its ISC register up to date or omits to provide the required information to Corporations Canada may face a fine of up to $100,000 upon conviction by summary procedure.

Directors and officers are not exempt: Any person who registers, authorizes, or allows the registration of false or misleading information in the company’s records, or who makes an inaccurate declaration, may also face a maximum fine of $100,000 as well as a prison sentence of up to two years.

These sanctions highlight that authorities are deeply committed to ensuring business transparency. Therefore, complying with the new obligations is not merely an administrative requirement, but a critical step to avoid significant financial and legal repercussions, both for the company and the individuals held accountable.

Operational Consequences: An Underestimated Risk

While the legal sanctions for non-compliance may appear to be a strong deterrent, some may perceive the actual risk of facing them as relatively low. However, another often underestimated danger can lead to much more immediate consequences: operational risk.

This risk doesn’t always present itself through government intervention, but rather in the form of unexpected obstacles that disrupt the smooth running of your business. Seemingly minor administrative oversights can trigger a domino effect at the most inconvenient times.

The real impact of non-compliance is often felt during critical strategic operations:

• Obtaining a Bank Loan: Financial institutions typically require certificates of compliance and accurate company information before granting funding. A business with incomplete or non-compliant records may face delays or even rejection of its loan application.
• Major Transactions: During a sale or merger, due diligence may uncover discrepancies in corporate filings. These irregularities can not only delay the transaction but also lead to unforeseen legal costs or even cause the deal to fall through.
• Suspension of Legal Proceedings: A company that fails to respond to requests from the Quebec Enterprise Registrar within the prescribed timeframe risks being struck off the registry. If a company is not registered in Quebec, it could face the suspension of its legal actions, jeopardizing its ability to defend its interests in court.

Compliance goes beyond merely avoiding fines or legal penalties. It is a cornerstone of credibility and seamless business operations. Ignoring these obligations can create complications at the worst possible time.

A Real-World Example: When Failing to Meet Transparency Obligations Comes at a High Cost

Consider the case of a company that failed to properly declare its ISC’s and Ultimate Beneficial Owners. This could happen due to oversight or a lack of coordination between different entities within a group. During a sale, the buyer’s lawyer might require the declarations to be updated in the registers before issuing their legal opinion. This process, often time-consuming and complex, could result in consequences beyond the legal penalties, such as:

• Delays in finalizing the transaction;
• Additional costs to correct the declarations;
• Unnecessary stress for the executives and parties involved.

In addition, discrepancies in the declared information could result in the publication of an individual’s personal address by the Quebec Enterprise Registrar (REQ), which is an undesirable outcome.

It should be noted that an individual can only have one professional address for the purposes of the application of the Act respecting the legal publicity of enterprises. Therefore, when a company fails to comply with its obligation to update an individual’s professional address within 30 days of a request from the Quebec Enterprise Registrar (REQ), the information regarding the individual’s declared home address may be disclosed.

Prevention: An Entrepreneur’s Best Ally

The good news? These hassles are easily avoidable. By taking the time to thoroughly understand and fulfill your transparency obligations from the outset, you’ll spare yourself significant future headaches.

View these declarations not as a burden, but as an investment in the long-term success of your business. Properly managed transparency is the key to smoother operations and stronger credibility with your business partners.

In Conclusion

Corporate transparency is no longer an option; it’s a necessity. As a savvy entrepreneur, it’s in your best interest to take these obligations seriously in order to avoid costly complications and maintain your ability to seize business opportunities. Not only will you be complying with the law, but you’ll also be laying the foundation for a stronger, more credible business.

Have questions or concerns about your corporate obligations? Contact us today. We are here to guide you through every step of the process.