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In the first instalment of this two-part series, we asked what integrated ownership is and why it's becoming an important consideration in third-party compliance and due diligence.
As a reminder:
- We explained that integrated ownership is a catch-all term used to describe the summed percentage ownership by an individual or entity of another entity;
- We described how to figure this out by looking at all the intricate paths through to that individual or entity, multiplying percentages between each level, and adding up the resulting figures for each path – something that's done automatically within Orbis, our database of around 220 million companies across all countries worldwide; and
- We discussed some of the areas of compliance with which this and related types of corporate ownership analysis helps.
The first piece looked at three relatively simple types of integrated ownership; this one looks at two slightly knottier types. The first is conceptually complicated; the second is more intuitive but no less tricky to find information about – and also legally open to interpretation.
Circular indirect ownership
Circular indirect ownership arises when two entities in a usually complicated corporate structure each part- own the other. One of them can theoretically fully own the other. The other can’t, as this structure would form a closed loop without any ultimate ownership from individuals. But in extreme cases, one entity can own 100% of the other, and be reciprocally 99% owned. The remaining 1% then comes from elsewhere.
Typically, many such loops exist in a wider corporate structure. The loops are necessarily interconnected, with additional ownership links into them making up the percentage shortfall from otherwise closed loops. Often these links represent a very low quoted percentage. Depending on your specific compliance consideration, these percentages can’t always be taken at face-value, particularly if they link to an individual rather than an entity; they often represent a larger share and more control (although OFAC usually takes a more literal approach).
Calculations involving circular indirect ownership are counterintuitive. Our Integrated ownership and related risk poster provides a practical and proven method of analysis, alongside a sample diagram. But in any case, Orbis ownership explorer displays integrated ownership percentages for such structures.
Structures involving circular indirect ownership are not automatically suspect; often they simply evolve as corporate groups expand. But they can be designed to deflect attention away from individuals or entities by disguising their true interest in a company.
Sample workings (see diagram)
Individual A effectively owns 100% of Companies A, B and C, despite on paper only owning 5% of Company A. Sometimes designed to obfuscate, circular ownership is hard to assess. One method is to add up the percentages into each company from other companies, then look for any company with < 100%. This difference represents individuals. As Individual A is the only person in the structure, the validity of the 5% figure can be called into question in some areas of compliance.
Aggregate ownership
Aggregate ownership is a special type of integrated ownership.
On one hand, it’s quite simple, as it isn’t concerned with multiplying percentages down chains of ownership; it’s only concerned with total ownership at individual levels.
On the other, it’s a bit more complicated, as it involves combining ownership percentages of different entities at the same level.
This type of analysis is needed when considering the direct ownership at any level of an entity by two or more separate sanctioned entities or individuals, each of which owns less than the OFAC 50% ownership percentage threshold.
Where their combined ownership meets the percentage threshold, the part-owned entity is sanctioned by extension, even though these owners might have nothing other than shared ownership of the same entity in common.
Sample workings (see diagram)
Company A directly owns 45% of Company C; Company B directly owns 6% of Company C. If Company A and Company B are both sanctioned, then by some assessments Company C is "sanctioned by extension". This is because the combined ownership of sanctioned companies at that level is greater than 50% (in this example, 51%), even if Companies A and B have nothing other than this shared ownership of Company C in common.
But what does this all mean? What do the percentage thresholds relate to? And what are the implications for areas such as beneficial ownership and sanctions compliance?
We set this all in context in a twinset of free corporate ownership resources, available digitally and in hard copy: our A-Z guide of corporate ownership and compliance terms, which includes definitions like those above; and our Integrated corporate ownership and related risk poster, from which the accompanying images and workings are excerpts. The poster also highlights the relevant ownership percentage thresholds for different compliance concerns.
Order your free corporate ownership resources
A-Z guide of corporate ownership and compliance terms
The pocket-sized booklet covers themes such as third parties, AML4 and sanctions. It defines and discusses types of corporate ownership, outlines associated considerations, and includes related terms in the complex world of risk and compliance.
Poster explaining integrated corporate ownership and related risk
Our Integrated corporate ownership and related risk poster helps you understand complex corporate ownership structures within the context of different fields of compliance. The poster, which is A2 in size (42.0 x 59.4cm), sticks to any flat surface using static electricity, so it doesn’t need pins or Blu-Tack, and can be easily moved.
