When Beneficial Ownership Research Hits a Dead End

By Tracey Kungl

You have a questionnaire. You’ve conducted due diligence. Your research of beneficial ownership just hit a dead end. Now what?

There are a number of reasons research into beneficial ownership can lead nowhere: layered ownership, tax havens, and nominee shareholders can all put the brakes on your attempts to complete compliance checks.

Fortunately, several jurisdictions now require the disclosure of beneficial interest and details of ownership. However, even in jurisdictions where there has been an attempt to expose beneficial owners, these efforts do not always prevent those who want to manipulate the system, as strategies which are technically legal in these jurisdictions (such as layered ownership), can be a roadblock.

We once conducted a comprehensive due diligence background check on a company registered in Gibraltar which was wholly owned by a company registered in the United Kingdom. A review of available records further determined that the U.K. company had layered ownership by five additional companies also registered in the U.K. before coming to a “dead end” with ownership by a company registered in Luxembourg. Any further research to obtain ownership would have required additional fees and budget for the client.

Fortunately, the client had obtained a detailed questionnaire from their potential partner and the ownership found in the official records was consistent with what was self-disclosed in the questionnaire; unfortunately, the disclosed ownership also ended with the Luxembourg entity.

In this situation, the allocation of further time and resources to determine additional beneficial ownership was not recommended for several reasons:

• A robust and detailed questionnaire had been completed and the self-disclosed details such as initial levels of ownership, management, address, telephone number, etc. had been verified.
• Discreet site visits and inquiries determined that the company was operational.
• Directorships and employment history of the company’s management and directors were found to be consistent with the company’s business activity. No indications were found of nominee individuals with no true interest in the company or who held numerous additional, unrelated appointments.
• Reviews of social media revealed profiles for individuals employed by the company and a media presence was located for the company indicating that it was operational.

In higher-risk situations and jurisdictions with murky ownership, what strategies can used?

• Conduct an in-country investigation
• Go back to the potential partner and request more information
• Expand the scope of review to include business affiliates, a site visit, and/or members of management
• Conduct reputational inquiries with parties in the country and industry who may be familiar with the company
• Request contact details for references

Ultimately, if beneficial ownership is unable to be determined, a non-answer is also an answer. Potential partners should be willing and able to provide details of beneficial ownership and the inability or refusal to do so should be a red flag before any commitment.