#nonadvisory

This year, the president has issued President Regulation No. 13 of 2018 on the Implementation of the Principle to Know the Beneficial Owner of Corporations for the Prevention and Eradication of the Criminal Acts of Money Laundering and Terrorism Financing (PR 13/2018). On the surface, PR 13/2018 seems to emphasise the government’s persistence in preventing money laundering and terrorism. However, looking deeper, the PR 13/2018 seems to have reignited a long unanswered question regarding nominee business scheme in Indonesia. 

PR 13/2018 basically mandates that every business entity in various forms must report to the government the beneficial owner of the business. Beneficial owner in this case refers to any person or entity that actually controls the business entity without having its name stated under official documents of the business entity such as the deed of incorporation. This can be made through any arrangement or understanding between the parties whose names are stated under the official documents (nominee) and the other parties who have the actual control or the actual recipient of the benefit of the business (beneficial owner). 

Such so-called nominee arrangement is problematic when applied in foreign direct investment in Indonesian because it can bypass foreign investment limitation set forth by the government. Under the Law 25 of 2007 on Investment (Law 25/2007) and several president regulations, the government has mandated that foreign direct investment can only be made to certain business fields in Indonesia under certain conditions and restrictions.

Often times, it causes major problem for potential investors who wish to invest in certain business but are hampered by those restrictions. However, in practice the investors seem to have discovered a nominee scheme. This scheme basically enables the foreign investors to control their investors without having their names registered as the owner. Actually, the government has impliedly prohibited the nominee arrangement through the Law 25/2007. However, the law itself is unclear on the implementation and sanction for the nominee arrangement, let alone the supervision method of the enforcement in prohibiting the nominee arrangement. This fact has made the nominee arrangement in Indonesia a grey area. 

Strange enough, through PR 13/2018 the government seems to acknowledge the existence of nominee arrangement and instead of prohibiting it, PR 13/2018 only mandates the business entity to only report the existence of beneficial owner. Thus, PR 13/2018 accentuates the ambiguity of government’s stance on nominee arrangement. 

Discussions of whether nominee arrangement must be allowed, cannot be denied, have reemerged. Many doubt the benefit of prohibiting the nominee arrangement. Instead, they believe the nominee arrangement can increase the investment in Indonesia and most importantly it respects the freedom of contract between the nominee and beneficial owner. Furthermore, this system has been recognised and protected in other countries such as the United Kingdom through a legal institution called trusts. Those situations make some stakeholder wonder the real purpose of prohibiting the nominee arrangement. 

On the other hand, there are opposing thoughts which mainly support the prohibition of nominee arrangement. The stakeholders on this side of the fence believe that the foreign investment restriction is made for the benefit of local stakeholders. First, it can protect some local investors so that they do not have to face giant competitors from abroad. Other reason is because the restriction of foreign investors will give the opportunity for the local investors, who jointly invest with foreign investor, the opportunity to learn the technology and skills needed in such particular invested sector so that later they can compete independently with the foreign investors. 

Discussion regarding those opposing thoughts would be endless. However, it does not necessarily allow the government to have a vague stance on nominee scheme. If the government wants to prohibit it, then the government should be able to show that stance without inviting any doubt such as issuing PR 13/2008. If the government does not intend to allow nominee scheme, the government can formulate a different stipulation in PR 13/2008. For instance, it can reemphasise the prohibition of nominee arrangement by providing an express provision or imposing a clearer sanction (not under PR but under different regulation that can impose sanction). If the government wishes to to allow the nominee scheme then amendment to Law 25/2007 must be made, or at least an implementing regulations that specifically discuss a new interpretation on nominee scheme in a way that it allows the nominee scheme.