Failure to monitor beneficial ownership

An aerial photo shows excavator clearance for plantations in primary forest at PT Megakarya Jaya Raya oil palm concession in Boven Digoel regency. Since this company was issued a location permit in 2007, there has been a lack of transparency about its beneficial owner(s). 19 Dec, 2017. © Jurnasyanto Sukarno / Greenpeace

522 The use of nominee agreements to conceal beneficial owners is actually declared legally invalid by the Investment Law (Article 33 of Law 25/2007 on Capital Investment / Undang-Undang no. 25 tahun 2007 tentang Penanaman Modal, available at https://peraturan.bpk.go.id/Home/ Details/39903/uu-no-25-tahun-2007); however, the issue is not addressed in the Law on Limited Companies (Undang-Undang no. 40 tahun 2007 tentang Perseroan Terbatas, available at https://peraturan.bpk.go.id/Home/Details/39965/uu-no-40-tahun-2007).

Registry profiles for all Indonesian limited companies are available for purchase online. While these documents name a company’s shareholders (the legal owner(s)), they do not always make it possible to discover who ultimately controls a company (its beneficial owner(s)). Some companies are owned by offshore companies in secrecy jurisdictions which do not require disclosure of shareholder information, making it impossible to identify the ultimate (beneficial) owners. In other cases, the legal owners named on the profiles are Indonesian citizens, but there is reason to suspect that they are nominees, who have a contractual arrangement with the beneficial owner to act as owners of the company. Such contracts are declared to be legally invalid (i.e. unenforceable) under the 2007 Investment Law, but there are no sanctions imposed for companies who choose to use nominees anyway. The 2007 Company Law which defines what company information must be made public does not address nominee arrangements, and there is therefore no requirement on disclosure.522

Both these techniques for concealing the beneficial owners of companies are very common in Indonesia’s plantation sector. Previous investigations by Greenpeace and other organisations have revealed how both techniques are employed to create ‘shadow companies’ – companies for which evidence can be uncovered linking them to well-known business groups. Many of Indonesia’s largest plantation operators show strong links to companies which they do not publicly acknowledge are part of their groups, raising suspicion they may actually be the beneficial owners.523 Use of such companies can be a way for unscrupulous producer groups to get around the sustainability requirements of palm oil consumer companies, which require the same standards to be maintained by all companies belonging to the corporate groups they source from.

Several of the companies mentioned in this report are suspected of having concealed their beneficial owners, as they navigate the permit system and/or when operating plantations – see Case Studies 1, 3, 4 and 8.

Avoidance of sustainability requirements is not the only concern raised by the use of shadow companies: the concealment of beneficial owners can be used by companies to avoid paying tax, and by making it harder to follow the money trail can also facilitate money laundering.

In order to ensure compliance with the recommendations of the Financial Action Task Force,524 an international organisation with a mission to combat money laundering which Indonesia applied to join in 2017,525 Jokowi issued a presidential regulation in March 2018 requiring all companies to register their beneficial owners.526 In June 2019 the Minister for Law and Human Rights issued a further ministerial regulation setting out practical details of the scheme, including the operation of an online beneficial ownership registration system, and establishing the public’s right to access this information.527 This would be a useful step forward towards reducing the potential for corruption in sectors which are known to have a high corruption risk, such as the plantation sector. The light it would shed on the true extent of each corporate group’s business interests would also strengthen the movement for deforestation-free supply chains, and enable meaningful enforcement of other government policies, such as limits to the area of plantations one corporate group can control.

523 See Greenpeace (2018a,b) and Chain Reaction Research (2018). 524 FATF (2012-2020) 525 Herbert Smith Freehills (2018) 526 President of the Republic of Indonesia (2018c) 527 Regulation 15/2019 (Minister for Law and Human Rights (2019))

While this initiative is welcome, implementation has been predictably weak. Companies had one year after the 2018 presidential regulation was gazetted to supply their beneficial ownership information.528 However, after two years the government reported that only 8.3% of companies had supplied the required information.529 This is hardly surprising – while both the 2018 presidential regulation and the 2019 ministerial regulation mention that sanctions may be applied to companies that do not comply, neither specifies what they should be.530 There is so far no sign of government agencies performing verification of beneficial ownership data as envisaged in very general terms in Annex I of the 2019 ministerial regulation. Unless a stronger verification and enforcement mechanism is put in place, the regulations are thus likely to be ineffective.

One factor that could potentially help to drive compliance with beneficial ownership disclosure is the stipulation in the 2018 and 2019 regulations that companies must file their beneficial ownership details before or within seven days of obtaining a business licence. However, this requirement is unlikely to have much impact on implementation of the overall beneficial owner disclosure requirement unless it is incorporated into specific legislation governing each kind of business licence, and given a firmer legal standing through a law approved by parliament. The Omnibus Law, with its widespread reforms to the permitting system, offered an opportunity to do this, but the term ‘beneficial owner’ (pemilik manfaat) does not appear once in the law, casting further doubt on Indonesia’s seriousness about tackling this issue.

528 Ie, until 5 March 2019. 529 Suparman F (2020) 530 Article 24 of the 2018 regulation says that companies which do not comply with the requirement to register beneficial owners are subject to sanctions, but does not stipulate what those sanctions are.