Imagine you are the procurement manager for a mid-sized engineering company, and you have been tasked with running a tender for your company to obtain a vital component for a new product. You receive four bids in response to your request for proposals. You and your colleagues are not familiar with any of the companies. They all appear to have strong credentials and the capacity to supply the component to the specifications you require. Your request for proposals asked for the legal owners of each potential supplier. You choose the bidder who has the most competitive price. Six months later your company experiences delays in receiving shipments of the component, which the supplier blames on bottlenecks in the supply chain. Your company also receives a letter from a human rights organisation alleging that the component is manufactured using slave labour. Your investigation shows that the supplier is ultimately owned, though a complex web of companies, by three politically connected individuals who are accused of using prisoners as slave labour in their factories. Several companies refuse to supply goods and services to them as a result.
This is just one of many scenarios where knowing who the beneficial owners of a supplier could contribute to mitigating risks both to operations and to the company’s reputation. Other cases where knowledge of beneficial ownership can be a powerful tool include:
• Public procurement tenders to reveal whether you are competing against companies owned by politicians who have a personal financial interest in the outcome,
• Who is the ultimate landlord of the building or plot where you have your office, factory or distribution centre,
• Who are the ultimate beneficial owners of your newest potential overseas client who is promising to bring substantial business to your firm? Are they subject to any international or national sanctions?
• Who are the new ultimate owners of your joint venture partner and who is really financing the transaction?
• Who are the beneficial owners of a start-up that appears to be a direct competitor and threatens to disrupt your business model?
There are just a few of the potential uses to which private sector companies can apply beneficial ownership information. In some, perhaps nearly all of these cases, the company involved may undertake its own enquiries into the beneficial owners, perhaps employing a specialist firm. These enquiries can be time consuming and expensive. In high-risk situations, such specialist enquiries will probably always be needed but in many cases, access to a public beneficial ownership register can meet the need to have information on who the beneficial owners of a new supplier, contractor, partner or competitor.
For private sector companies, accessing central national beneficial ownership registers supports:
• Identifying potential red flags, such as a discrepancy with information already known or ownership by a politically-exposed person,
• Confirming or verifying known information about a company,
• Providing an update on changes in ownership or level of control,
• Reducing the cost of due diligence enquiries for low or medium risk transactions,
• Identifying risks in the supply chain,
Many companies, even large, sophisticated multinationals, do not appreciate the benefits of accessing and using beneficial ownership registers. They see the provision of beneficial ownership information to such registers as a compliance burden. This is in part because government and civil society organisations often focus on the compliance aspects of a beneficial ownership reporting regime rather than make the arguments about the benefits to companies of having this information easily accessible. Harnessing the support of businesses can add a powerful dimension to campaigns advocating for the implementation of national public beneficial ownership registers. Even if businesses will not actively join the campaign, increasing awareness of the benefits for the private sector can contribute to lowering resistance to such registers and boosting levels of compliance.
So how can companies, and indeed other organisations, or any size use beneficial ownership to manage risks and add value? They can:
• Demand potential suppliers provide beneficial ownership information as part of bid processes and cross check that information where possible,
• Identify the beneficial owners of suppliers of vital goods and services such as key inputs into a manufacturing process or key services such as logistics and IT support,
• Encourage important suppliers and business partners to do the same for their supply chains,
• Investigate any changes in ownership of key suppliers, clients or other business partners,
• Keep records of the beneficial owners of important suppliers, customers and partners and analyse the data for any trends, emerging risks or red flags.
As well as using beneficial ownership data, private sector companies can also play a role in making sure that beneficial ownership data is widely available. As well as complying with any legal requirements to submit their beneficial ownership information to a national register, they can advocate for governments in important markets to establish public registers and lend their voice to campaigns for greater transparency. Private sector companies, like other parts of the economy and society have more to gain from open and competitive business environments than closed, corrupt and inefficient markets.
For a more detailed look at the use for the private sector, see a paper that we wrote for the Center for International Private Enterprise (CIPE), here.
