Don’t let nominees mask real discussion about beneficial ownership

Attempts to bring transparency to beneficial ownership (BO) can be derailed by misconceptions about nominee arrangements. A nominee shareholder is the registered legal owner of shares but holds those shares on behalf of someone else. Someone who might not want to disclose their interest. Someone who really controls the shares. Disguising the ownership of a company using a nominee can be a tool used to facilitate corruption or illicit enrichment by hiding who is really benefitting from a company. For this reason, nominee shareholders pose a risk of financial crime. But there is another problem here. The person for whom the nominee holds the shares has long been referred to as the beneficial owner.

And there is the issue. We have witnessed several occasions when policy discussions on beneficial ownership have been derailed by a deep-seated misconception that it primarily relates to nominee arrangements, rather than beneficial ownership more broadly. Such a simple misunderstanding can result in miscommunication, confusion and even badly drafted laws and regulations.

Beneficial ownership transparency is an important tool in tackling corruption, money laundering and other financial crime. A beneficial owner of a company is usually defined as a natural person who directly or indirectly owns or controls that company. Ownership and control mean many different things and be represented by shares, shareholder agreements or other legal arrangements.

Beneficial ownership is about looking through any layers of holding companies or other structures to identify the natural persons who sit at the top of the chain. The real people who own or control the company. For this reason every company has beneficial owners. They might be direct shareholders in the company, individuals at the top of a chain of companies, or people with control over the company by other means. Most countries have a threshold for when beneficial owners need to be reported (25% in many cases), and there are sometime special rules applicable to companies listed on stock exchanges or those owned by governments, but the general principle is clear, beneficial ownership is relevant to all companies.

But there is one form of control which can sometimes cause more confusion than others, and in our experience this confusion can be a barrier to effective discussion. That is the case of shares held by a nominee.

The majority of beneficial owners hold their interest through the legal ownership of shares, sometimes through a chain of holding companies. It is these chains, particularly when they include overseas companies, which can be used to disguise financial crime. Beneficial ownership legislation and regulations need to focus first and foremost on bringing transparency to these structures and ensure clarity in how information on the natural persons at the top of them is captured and ideally made public. Nominee arrangement are an important sub-category of control, but not the main focus.

It is important to make sure that these concepts are well understood during the decision and design stages. Decide and Design are steps 2 and 3 of our BO framework, BO6. But it is equally important to ensure that these concepts are communicated to stakeholder through the design, implementation and active phases of a register, and Communication of a theme which runs through BO6.
Governments designing and implementing beneficial ownership regimes should ensure that policy discussions are based on a clear understanding of the meaning of beneficial ownership, and that nominee arrangements are only one small subset.

Michael Barron and Tim Law are independent consultants who have advised governments on four continents on implementing effective beneficial ownership reporting systems.