With the global adoption of greater corporate transparency and the public's close attention to ESG factors, general counsels seek to gain more visibility into the corporate structure. At the same time, the rising compliance burden makes GCs consider new ways to manage their costs by bringing administrative legal work in-house.
These causes and other factors make entity management even a bigger priority for GCs in 2023. Below we discuss in more detail the challenges created by the UBO regimes, the lessons learned after loud ESG and subsidiary scandals and how adopting entity management software can help GCs attain better control over governance and compliance costs
1. Ultimate Beneficial Ownership and the US Corporate Transparency Act
With more jurisdictions moving towards adopting corporate transparency, beneficial ownership disclosure has become standard in most countries. The regulations, like the Corporate Transparency Act in the US, require legal entities to collect, file and update private personal information of UBOs, aka Ultimate Beneficial Owners of legal entities, to regulators, following tight deadlines.
Reporting UBOs puts heavy demands on compliance teams
At a minimum, the regulations require filing information about UBOs' names, dates of birth, addresses, ID numbers and copies of identifying documents. Thus, an organization with 100 entities and 2 beneficial owners per entity will need to collect, store, file and update a minimum of 1,000 data points on its key stakeholders while facing severe penalties for non-compliance. These requirements call for the application of digital technologies and entity management software to ensure updating ownership information in real-time, timely filings and unobstructed data flow across the organization.
All major jurisdictions adopt similar requirements
Similar to the CTA Act in the US, other jurisdictions either already adopted the requirements for UBO disclosure or outlined a roadmap for adopting them in the next few years with their own set of deadlines and penalties. For example, in France, companies need to register changes in beneficial ownership within 30 days, while in Poland, this period makes 7 days. In Canada, the UBO disclosure requirements were introduced by the amendments to the Canada Business Corporations Act, which have already received royal assent in 2022 and are expected to come into effect at a later date.
The disclosure requirements create challenges for data privacy
Short deadlines and severe penalties for non-compliance are not the only challenges faced by GCs while implementing transparency regulations.
Collecting, updating and reporting huge volumes of private personal information of key shareholders sets a high bar for maintaining data security across the organization. With new regulations in place, older practices of storing data in spreadsheets or keeping them on shared drives create risks of data leaks and violating privacy legislation, which calls for creating a centralized database for all corporate records.
2. ESG and Subsidiary Scandals
Today, consumer groups, investors and non-governmental organizations keep a closer eye on businesses' implementation of environmental, social and governance (ESG) practices worldwide.
While a diversified entity structure limits risks exposure and liabilities, the public still expects organizations to take responsibility for the impact made by their operation on the local environment and communities. In the modern global environment, parent companies can no longer play a blind eye when their subsidiaries are involved in unsustainable or unethical behavior, for example, in third-world countries. Besides, new regulatory regimes such as UK's Senior Managers Regime hold parent directors and officers liable for such subsidiary activities.
The latest subsidiary scandals involving major players like BlackRock or Lafarge have clearly demonstrated that lack of openness and transparency about operations are among the major causes which alienate the public and the courts, finally leading to penalties and forfeitures. Meanwhile, proper management of corporate data can help provide sufficient oversight of business operations and avoid major governance errors.
3. Cost Management
With the growing complexity of organizational structure and regulatory burden, optimizing entity management costs has become top of mind for general counsel. One of the ways to have better control over the costs is to internalize the administrative work instead of outsourcing it to alternative legal service providers.
In fact, approximately 48% of GCs have a priority to bring outside counsel spent in-house. Instead of paying law firms for routine administrative work, organizations are looking into ways to handle their compliance themselves while outsourcing more substantive legal work that requires legal expertise.
Benefits of internalizing entity management
While some businesses may still choose to outsource their entity management, there are multiple benefits of moving compliance in-house. Besides, in-house legal teams can be fully capable of handling entity management on their own when equipped with the right digital automation tools.
In addition to cost reduction, general counsel can achieve multiple other cost-related benefits by moving administrative legal work in-house. These include:
Instead of having an outsourced provider respond to requests, the legal, tax and auditing teams can access corporate records at the click of a button by leveraging a central database provided by entity management software. A quicker turnaround results in cutting wait time, better compliance, higher deal readiness and ultimately, lower costs.
By keeping all corporate records internally, general counsel can reduce risks which arise when organizations rely on third parties to manage critical and confidential data.
By leveraging a central entity management platform, all stakeholders have immediate real-time assets to the whole corporate structure, every entity and compliance activity. Meanwhile, the availability of audit trails helps to control how and when entities are updated as well as to identify and prevent process flaws, security violations or performance issues
Learn More with Athennian
The global trend towards more transparency and ESG disclosure moves entity management to the top of the GCs' agenda. Meanwhile, the availability of modern digital tools and rising compliance costs make general counsel look towards bringing entity management in-house.
When in-house legal departments are equipped with modern entity management software, they can ensure compliance and effectively handle entity maintenance at lower costs while providing better visibility and oversight for all stakeholders. For more information about how entity management can assist GCs in addressing major governance and compliance challenges at a lower cost, please don't hesitate to contact the Athennian team for a free consultation and demo.