The President of Indonesia recently issued President Regulation No. 13 of 2018 on the Implementation of the Principle of Knowing Beneficial Owners of Corporations in Relation to the Prevention and Eradication of Money Laundering and Terrorism Financing Crimes (Regulation 13). Prior to this regulation, certain ministries/government bodies had in fact issued regulations for the same purpose (eg, Minister of Law and Human Rights Regulation No. 9 of 2017 on the Principle of Knowing the Service Users for Notaries). This alert does not include analysis on whether the provisions in Regulation 13 are in line with those in other regulations (eg, regarding the definition of beneficial owners).
Implication for Limited Liability Companies
Under Regulation 13, a corporation must:
- Determine at least one person as its beneficial owner
- Appoint an employee to implement the principle of knowing the beneficial owners, and provide information on the corporation and its beneficial owner to authorized institutions, if requested
- Report to the authorized institutions accurate information on the beneficial owner, and keep the information up to date
The authorized institutions, however, can also determine another beneficial owner based on their independent audit, information from other government or private institutions which possess information of the beneficial owner, and other reliable information. Regulation 13 defines authorized institutions as any of the following:
- Central or local government institutions that have authority over registration, legalization, approval, notification, business license or dissolution, of corporations
- Institutions that have authority to monitor and regulate corporation businesses
A corporation is defined broadly, but Regulation 13 lists examples, including limited liability companies. Regulation 13 does not differentiate between domestic and foreign investment companies. Given the broad definition, Regulation 13 would also apply to foreign investment companies. Authorized institutions are also defined broadly, and technically would cover all ministries/government agencies that issue licenses.
A limited liability company that fails to comply with Regulation 13 may have sanctions imposed on it in accordance with the laws and regulations. It is not clear what laws and regulations Regulation 13 is referring to. However, as mentioned above, certain ministries/government bodies had in fact issued regulations for the same purpose before the issuance of this regulation. So these regulations would also need to be considered.
Criteria of Beneficial Owners of Limited Liability Companies
The beneficial owner of a corporation is determined using several criteria, which vary depending on the type of the corporation. For limited liability companies, the criteria are as follows:
- The beneficial owner possesses more than 25% of the shares in the limited liability company as stated in the articles of association.
- The beneficial owner possesses more than 25% of the voting rights in the limited liability company as stated in the articles of association.
- The beneficial owner receives more than 25% of the profits earned annually by the limited liability company.
- The beneficial owner possesses authority to appoint, replace and dismiss members of the board of directors and board of commissioners of the limited liability company.
- The beneficial owner possesses authority or power to influence or control the limited liability company without the need to obtain authorization from any party.
- The beneficial owner receives benefits from the limited liability company.
- The beneficial owner is the actual owner of the fund used to subscribe for the shares of the limited liability company.
Regulation 13 states that an individual who fulfils the criteria in points 5, 6 and 7 is an individual who does not fulfill the criteria in points 1, 2, 3 and 4. This is not very clear and there is no further elaboration on points 5, 6 and 7. As such, these points may be interpreted very widely.
A limited liability company must report accurate information on its beneficial owner in any of the following circumstances:
- When it applies for establishment, registration, legalization, approval or business license
- During its operation (for any changes/updates)
The report must be submitted by the founders/management of the limited liability company, a notary or a proxy.
Existing limited liability companies that have obtained or are still in the process of applying for registration, legalization, approval, notification and business license are given one year from the effective date of Regulation 13 (ie, 5 March 2018) to implement the principle of knowing the beneficial owners.
How the beneficial owner reporting will be implemented in practice remains to be seen. We suspect that the relevant authorized institutions will issue implementing regulations of Regulation 13 if those authorized institutions require a corporation to disclose its ultimate beneficial owner. Unfortunately, it is not clear at this moment.
Even though Regulation 13 makes no reference to the Indonesian Company Law or any other corporate regulations, this reporting regulation could be linked to nominee arrangement structures. Any arrangement where an investor has an agreement or statement declaring that his or her share ownership in a company is for or on behalf another party is prohibited in Indonesia. With this regulation, and a recently issued regulation by the Capital Investment Coordinating Board (BKPM) allowing BKPM (if needed) to require the investor to make a statement letter that is legalized by a notary confirming that its share ownership in a company is not for or on behalf of another party (client alert here), it seems to us that the Indonesian government is moving towards to eliminating nominee arrangement structures. Caution needs to be exercised when structuring.
There are certain Financial Services Authority (Otoritas Jasa Keuangan or OJK) rules that regulate ultimate beneficial owners in the context of issuers and public companies, but address the scope of ultimate beneficial owners differently than Regulation 13. These rules are:
- OJK Rule No. 29/POJK.06/2016 on Annual Reports of Issuers or Public Companies and OJK Circular Letter No. 30/SEOJK.04/2016 on the Form and Content of Annual Reports of Issuers or Public Companies (Circular 30)
- OJK Rule No. 11/POJK.04/2017 on Reporting of Share Ownership in Public Companies (Rule 11),
Issuers, public companies and shareholders of public companies will need to comply with both Regulation 13 and those OJK rules. Due to the different scopes set by these two sets of regulations, there is a possibility of discrepancy in determining ultimate beneficial owners under these regulations in the context of issuers and public companies. As Regulation 13 was recently enacted, the impact of this discrepancy remains to be seen.