Beneficial Ownership – Implementation, Supervision and Sanctions

If you only hold minority shares in a company, can you be considered a beneficial owner of that company from an Indonesian regulatory perspective? If the answer is “yes,” should your name be reported to the Indonesian authorities? Up to what level of ownership is a company required to disclose the identity of its owners? And what are the sanctions for not complying with beneficial ownership disclosure and reporting obligations?

These may well be your questions when asked to complete a disclosure letter identifying the beneficial owners of Indonesian companies.

In an April 2018 bulletin we discussed some of the key provisions of Presidential Regulation No. 13 of 2018 (“PR 13/2018”), including the test to identify a beneficial owner of a corporation. In this bulletin we discuss two 2019 regulations of Indonesia’s Ministry of Law and Human Rights (“MOLHR”) that relate to PR 13/2018:

• Regulation No. 15 of 2019 on Guidelines for Implementing Know Your Beneficial Ownership Principles in Corporations (“Regulation 15”)

• Regulation No. 21 of 2019 on Supervising Implementation to Identify Beneficial Owners of Corporations (“Regulation 21”).

This bulletin highlights the main points of Regulation 15 and the introduction of on-site audit and specific sanctions under Regulation 21. Regulation 21 comes into effective on 23 December 2019.

Ultimate Individual Owner

Similar to PR 13/2018, the main purpose of Regulation 15 is to identify the ultimate individual beneficial owners of corporations. A corporation may have one or more beneficial owners and must disclose the identities of all beneficial owners who satisfy the criteria set out in the regulations – not only direct shareholders of the corporation (i.e. legal owners) but also individual owners whose names are not disclosed in the corporate documents of the corporation, if any.

Identifying Beneficial Owners

In the context of limited liability companies, when identifying beneficial owners, the test is not limited to whether an individual holds more than half of the shares in the corporation. Individuals can be considered beneficial owners if they provide funding to or acquire benefits from the corporation, no matter the value involved.

While the term “funding” is not defined by Regulation 15, we do not believe that normal loan financing – typically involving a lender and a borrower – would be considered as “funding” in the context of this regulation. Regulation 15 also does not provide a specific definition for the term “benefit,” preferring to interpret it broadly to include tangible and intangible goods and services as well as digital currency.

When to Report

With respect to reporting obligations, Regulation 15 makes it clear that the obligation of a corporation to report the identity of its beneficial owners applies not only at the time it is set up but also whenever there is a change in beneficial ownership.

Supervision and Sanctions

Although reporting obligations still tend to be based on self-reporting, Regulation 15 and Regulation 21 both contemplate the relevant authorities conducting on-site audits.

Corporations are obliged to cooperate with the authorities during an on-site audit, which includes giving them access to and providing the required information and documents.

A corporation found to be in breach of its obligations has 14 business days to follow up on the recommendations issued by the authorities. Failure to do so may lead to sanctions, which could include suspending the company’s access to the MOLHR’s online system. In the case of limited liability companies, the MOLHR may also recommend that the relevant licensing agency suspend or revoke their business permit.

Exchange of Information

Under Regulation 15, the MOLHR may, on request, share information about beneficial owners with other authorities, including law enforcement agencies, government institutions, and other local or foreign authorities.

To allow this sharing of information, the MOLHR has already entered into cooperation agreements with several Indonesian government offices, including the Director General of Taxation, Ministry of Plantations, Ministry of Energy and Mineral Resources, and Financial Transaction Reporting and Analysis Centre (Pusat Pelaporan dan Analisis Transaksi Keuangan or PPATK).

Under these cooperation agreements, the MOLHR and the other institutions can exchange information on beneficial owners recorded in their databases in order to prevent corporate crime.

Conclusion

While Regulation 15 clarifies how corporations should identify whether they have beneficial owners, and when to report the identity of their beneficial owners, it is unclear how this will play out in practice. Since Indonesia’s company and investment laws still do not formally recognise the concept of “beneficial ownership,” existing corporations may find it challenging to disclose to the authorities the identity of their beneficial owners if doing so reveals that they have not complied with other legal obligations.

Please contact us if you would like to discuss how these new regulations might affect your business.