Investigate any person who owns at least 10% of a company through due diligence
It is common practise for companies to identify any person who owns 25% or more of a company they are considering for investment or as a partner. While a step in the right direction, identifying ownership at 25% or higher shares still allows ultimate owners to be hidden, and anonymous shell companies to be used as vehicles to mask nefarious behaviour. One solution would be to collect ownership information on any owner with at least 10% stakes in the company ownership.
Leading companies are raising the bar by collecting beneficial ownership information down to a lower level – for example, anyone owning 10% –whenever they conduct due diligence, helping to create a new standard for global transparency.
Companies who collect beneficial ownership information down to 10% would know who they are really doing business with, keeping their company even safer from illicit activity and decreasing their exposure.
Global regulators are handing out fines at an increased pace to companies connected to corrupt activities. Detailed knowledge of who you are dealing with is the best defense against undesirable associations.
The most important benefit however, is garnering public trust. Companies and individuals are more likely to do business with an entity that it knows is protecting its investment.
Raise the bar on due diligence, and make it a company standard to investigate beneficial ownership down to 10% for all investment, supplier and partnering decisions.
Canada implements 10% threshold
In Canada, the Investment Industry Regulatory Organization of Canada (IIROC) mandates that all securities dealers adhere to a 10% beneficial ownership standard.
IIROC Rule 1300.1(b) (1) requires a Dealer Member to:
ascertain the identity of any individual who is the beneficial owner of, or exercises direct or indirect control or direction over, more than 10% of the corporation or similar entity, including the name, address, citizenship, occupation and employer of each such beneficial owner, and whether any such beneficial owner is an insider or controlling shareholder of a publicly traded corporation or similar entity.
It is important to note that the IIROC Rule refers to direction or control as well as beneficial ownership. As part of its due diligence, a Dealer Member should understand the ownership and control structure of any corporation or other entity that opens an account. In some corporations ownership may be split from control, for example where a corporation has both voting and non-voting shares. In the case of trusts, the trustees have direction or control without being the beneficiaries.
Liberia Extractive Industry Transparency Initiative Beneficial Ownership Pilot uses 5%/10% Threshold
From 2013-2015, 11 Extractive Industry Transparency Initiative Countries took part in a pilot project to collect beneficial ownership information in their extractive sectors. Liberia was recognized for best practice in its pilot due to collecting information down to a lower level of ownership than in other countries. In large scale extractives projects, even a small share of ownership can involve significant sums of money. Liberia decided to request information on all owners (shareholders) with not less than 5% ownership of shares (aggregate or otherwise) issued by companies in the oil, mining (under Mineral Development Agreements) and agriculture sectors and 10% ownership of shares in the foresty sectors and for companies holding mining rights that are not Mineral Development Agreements (MDAs). In the instance where a single individual did not own at least 5 or 10 percent of a company, the top five shareholders with the greatest percentage of ownership were asked to disclose.
The evaluation of the pilot recognized this as good practice by enabling more meaning disclosure.