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How Beneficial Owner Disclosure Help Tracking Corporate Human Rights Violations?

Source: Detik

By: Iman Prihandono*

In early March 2018, the government issued President Regulation No. 13 of 2018 (PR 13/2018), an important regulation on the disclosure of company’s beneficial ownership. It is a long-awaited regulation and is aiming at combating money laundering and terrorisms by tracking down the flows of funds. This regulation entered into force in March 2019 and has been followed by the enactment of two implementing ministerial regulations.

Apart from combating money laundering and terrorisms, PR 13/2018 may have positive force to promote a better business dan human rights (BHR) practices. To a certain extent this regulation may be used to hold the ultimate owners of companies responsible for human rights abuses, particularly in relation with environment, labour dan consumers rights.

Beneficial owner (BO) is person or group of persons who act as the ultimate beneficiary of company’s profits or funds. These persons are not necessarily the shareholders of the company, as their name may not be appeared in the shareholders list. Although their names do not appear, BO has the power to appoint board of director and to control the company’s operation and strategic decisions.

The identity of BO is intentionally undisclosed for several reasons. One of the main reasons is when BO intentionally uses a network of companies as vehicle to facilitate illicit, illegal, or criminal activities. These companies are used to receives, transfers or to hide funds and assets for the benefit of the BO.

Many governments believe that disclosing the BO may help to suppress terrorism, crimes, and other illicit conducts. More importantly, this disclosure may help to increase the states’ tax income. Since the government can trace where the funds are transferred and on what purpose, tax avoidance and tax evasion practices may easily be detected.

There are various types of corporate misconducts. There are corporate crimes other than tax evasion, money laundering and financial support of terrorism. Article 2 of the Law No. 8 of 2010 on Money Laundering stipulates that certain asset may be related to a criminal conduct, these includes environmental crimes, forestry, marine and fishery, and other crimes punishable for 4 years imprisonment or above.

Companies’ activities may also bring negative impact to human rights, while at the same time are still able to make profits. Their business operation may cause environmental degradation, air and water pollutions, deforestation, and the loss of biodiversity and wildlife habitat. Likewise, companies may also violate labours’ rights such as minimum wages, rights of women at work, prohibition of children workers and fails to provide health and safety standard in workplace. For the consumers, companies have the responsibility to assure product safety and to disclose substantial information. These conducts may fall within the category of criminal conduct under Indonesian law.

Unfortunately, it is not easy to hold the company accountable for the harm it causes to environment, labour, and consumers. There are some reasons for this situation. First, the structure of company may consist of many different layers and levels which makes it difficult to identify which company should be held liable for the damages. Second, the ‘limited liability’ doctrine has been used to shield parent company from the damages caused by its subsidiary.

Indeed, the above two conditions have been the most problematic issues in BHR discourse. A company may be owned by layers of other companies located in two or more different countries. Likewise, it is true that the ‘limited liability’ shield may be set aside by the ‘piercing corporate veil’ doctrine. However, the practices between states may be vary. Some countries put a high threshold to bring parent company responsible for the abusive conduct of its subsidiary overseas.

For the above reasons, several countries–led by Ecuador–proposed a legally binding instrument for corporations to observe human rights in their business operations. These countries believe that a soft instrument such as the UN Guiding Principles on Business and Human Rights will not be adequate to stop human rights abuse by corporations worldwide. However, the negotiation of this legally binding instrument will not be easy, as many developed countries – home to large corporations are reluctant to involve. 

Therefore, a hard law at national level such as the PR 13/2018 would play important role to fill the gaps in corporate liability problem. Based on this regulation, companies conducting business operation in Indonesia must identify, disclose and to report information relating to their ultimate ownership. This rule eliminates substantial burdens in tracking layers of corporate structure and identifying parent companies.

Further, any persons may request information relating to BO, in accordance with the law on the disclosure of public information. This specific rule may help communities, labours, and consumers to identify who should be held liable for the damages resulting out of the company’s business operation.  

More importantly, PR 13/2018 provide a mechanism for the sharing and exchange of information between governments. Although with certain limitations, the sharing of information between governments may help victims of corporate abuse to track and identify the company’s ultimate BO which located overseas. Indeed, identifying the BO does not guarantee that the victims of corporate human rights violation will obtain remedy. However, naming the persons who obtain benefit from corporate misconduct would serve as a bad publicity.

Unfortunately, the Ministry of Law and Human Rights report reveals that as of December 2019 there were only 32.756 out of 939.000 limited liability company (Perseroan Terbatas) submitted their report on BO. Likewise, as of June 2020 there were only 80.085 out of 964.359 limited liability company submitted their report, this number only account for less than 10% of the total number of registered companies in Indonesia. Indeed, the level of compliance by company are very low. Most possible reason to this situation is the lack of effective sanction for incompliance.

To conclude, the low participation by companies to the regulation on the disclosure of corporate’s ultimate owner may be a challenge in improving better human rights practices by companies in Indonesia. Nevertheless, at a minimum, this regulation reduces the opportunity for business owners to hide behind complex webs of worldwide corporate structure. It opens the possibility for law enforcer and affected communities to utilise this regulation against companies who seek profit by abusing human rights in Indonesia. However, more efforts are needed to increase compliance. A proper stick and carrots mechanism may be the best way to increase the number of disclosures.

*) Associate Professor at the Faculty of Law, Universitas Airlangga