Beneficial Ownership Transparency is Critical to Effective Due Diligence

Due diligence is a crucial step of any company’s business plan, especially when working with third parties like donors, board members or vendors. And within this often-overlooked sector is an even more undermined component: beneficial ownership.

Here, we outline everything companies should know about beneficial ownership, including upcoming changes in the laws around it and how to incorporate the idea into a larger due diligence strategy.

What is beneficial ownership?

Essentially, beneficial ownership is a way to appoint business stakeholders who are not actually listed publicly. Companies can name beneficial owners, who make important decisions for their business and all but own the endeavor, without needing to make that information public--creating a potentially problematic loophole.

This is different from legal owners because legal ownership is more public. Legal owners are more reputationally tied to the organization, whereas beneficial owners could potentially escape legal and financial stressors. However, beneficial owners can control assets even if they are not the legal owners.

These layers of ownership obscure who truly benefits. For example, many structures make beneficial ownership complicated. Consider a trust fund that has an anonymous owner. Without the details of the desires and outlook of that owner, it would be nearly impossible to understand the true intentions of that trust. This could create complications for business associated with that trust should it be implicated in suspicious activities.

MORE: How risk managers benefit from using quality data

Why beneficial ownership can create risks for businesses

Beneficial ownership results in an overall lack of transparency, which is concerning for many reasons. Right off the bat, it’s obvious that a business would want to know who is running their third-party vendor and what the internal hierarchy looks like. Without that information, the business could risk misunderstanding the true nature of the third-party. 

Using beneficial ownership could similarly allow for the hiding of assets and the presence of illegal activities, because the anonymity of the owners makes it easier to take larger company risks. That means that people engaged with the institution are also caught in the crossfire, and they are left largely unaware of the amount of risk on the table due to the inability to monitor specific names and portfolios.

This also makes it hard to identify the true beneficiaries: who is profiting from the company and what is its overall mission? Lack of transparency in ownership structures prevent outsiders from fully understanding the company’s intentions, creating legal, regulatory, and reputational risks.

MORE: Hidden in plain sight: Spotting signs of beneficial ownership

How due diligence research can uncover beneficial ownership

Luckily, even if beneficial ownership creates anonymity for key stakeholders, there are plenty of due diligence research solutions that can help you get an understanding of who is behind that institution. For instance, reviewing legal documents, media, or public records* can help to find trustees, shareholders and board members who might otherwise seem invisible.

It might take a bit of extra digging, but it’s often not too hard to piece together connections and ownership structures simply with technology tools, including global databases and media monitoring software. Something as simple as seeing that the same person interacts with every social media post can lead to a larger trail of understanding an institution’s hierarchy.

The most obvious option, of course, is to ask a partner or potential partner to simply release the information directly and state the importance of transparency when working together. Because beneficial ownership can pose such an undetected threat to companies, it’s valuable to include transparency as a necessity to your working relationship.  

MORE: How to use adverse media to mitigate reputational risk

Start your due diligence to mitigate beneficial ownership risks

Due diligence is a requirement for companies, lest they face legal, reputational, and financial risks, and the concept of beneficial ownership poses a threat to the completion of a due diligence checklist. Because private owners can be steering a company without any visibility, they could lead partners and customers down some unsavory, or even illegal, paths that could be avoided with more transparency.

Tools like Nexis Diligence+ offer solutions to this looming risk by providing technological ways to research a company’s structure. You can search through public and legal records to piece together answers that would otherwise feel unavailable and turn on regular news alerts for any third parties you’re working with. These simple, easy tasks will set your organization on the right track for completing all necessary due diligence measures to keep your institution, and its reputation, safe.

* Access to U.S. Public Records content is subject to credentialing. Due to the nature of the origin of public record information, the public records and commercially available data sources used in reports may contain errors.

Due to the nature and origin of public record information, the public records and commercially available data sources used in reports may contain errors. The LexisNexis Public Records services are not provided by “consumer reporting agencies,” as that term is defined in the Fair Credit Reporting Act (15 U.S.C. §, et seq.) (“FCRA”) and do not constitute “consumer reports,” as that term is defined in the FCRA. Accordingly, these LexisNexis services may not be used in whole or in part as a factor in determining eligibility for credit, insurance, employment, or another eligibility purpose in connection with which a consumer report may be used under the FCRA