Can Foreign Investors Legally Use Nominee Shareholders in Indonesia?

According to the OECD Global Forum on Transparency and Exchange of Information (2023), intermediary or opaque structures hold close to 40% of global corporate ownership in today’s highly interconnected financial world. Among the most significantly used of these mechanisms is the nominee shareholder arrangement, which is an instrument that facilitates one person or entity to legally hold shares on behalf of another, often shielding the true beneficial owner from public view. While such structures can serve legitimate administrative or compliance functions, they have also become a lightning rod for debates on transparency, money laundering, and the accountability of multinational capital flows.

A 2022 World Bank report estimated that more than $1 trillion in illicit financial activity passes through shell and nominee structures every year, much of it hidden behind layers of corporate veils. The Financial Action Task Force (FATF) has repeatedly identified nominee shareholding as a “key vulnerability” in global anti-money-laundering systems, citing cases where beneficial owners used proxies to disguise political exposure, evade taxes, or circumvent foreign-ownership limits. In Southeast Asia, particularly Indonesia, the conversation has intensified.

Following the enactment of Presidential Regulation No. 13 of 2018, companies are now legally required to declare their ultimate beneficial owners, but compliance remains worryingly low, with only 29 percent of Indonesian entities having reported BO data as of August 2022 (source: Extractive Industries Transparency Initiative).

This evolving global narrative, balancing privacy, compliance, and economic openness, places nominee shareholders at the very heart of the modern corporate-governance dilemma. Whether viewed as a legitimate tool of business efficiency or as a potential cloak for financial opacity, their role has never been more consequential. This article unpacks how nominee shareholding works in Indonesia, its legal and ethical dimensions, and what it reveals about the country’s pursuit of transparency in a globalized economy.

 

 

What is a Nominee Shareholder?

A nominee shareholder is the individual or entity whose name appears in the company’s register of members as the legal owner of shares but who holds those shares on behalf of a different person, the beneficial owner, who retains the economic benefit and often the control.

Nominee shareholding arrangements are used for various purposes, such as compliance with jurisdictional requirements, administrative convenience, or strategic ownership structuring. But beneath the surface, the arrangement presents a complex web of legal, regulatory, and governance issues, particularly in jurisdictions where the beneficial owner remains hidden from public registers or statutory oversight.

 

Key aspects of a Nominee Shareholder

1.  A nominee shareholder is the name on the register, and the beneficial owner enjoys dividends and voting rights (by contract or trust).
2. The arrangement may involve a formal declaration of trust, nominee agreement, or custodian contract.
3. While legitimate in many jurisdictions, nominee structures raise questions of transparency, liability, and regulatory risk.

 

Why Do Investors Use Nominee Shareholders?

Investors operating internationally often prefer nominee shareholders for reasons ranging from market access to privacy and administrative ease. Using the nominee name allows the beneficial owner to remain behind the scenes, while the nominee executes formal registration requirements.

In jurisdictions with foreign ownership restrictions, minimum-capital burdens, or complex registration processes, nominee structures offer a workaround, albeit one that often carries heightened legal and reputational risk.

 

1. Legal workarounds:

In sectors where foreign ownership is capped, having a local nominee may facilitate control despite formal legal restrictions.

 

2. Administrative convenience:

Consolidating many small shareholders under a nominee can simplify share registers and reduce paperwork.

 

3. Privacy and confidentiality:

The identity of the beneficial owner may be secured from public disclosure, which can be an appealing feature in certain investment contexts.

 

4. Capital and cost optimisation:

In some cases, minimum capital requirements or local shareholder mandates can be managed more easily through nominee arrangements.

 

5. Flexibility of structure:

The beneficial owner may retain control by means of side-agreements such as loan agreements, pledge of shares, etc.

 

Legal and Regulatory Landscape of Indonesia

In the context of Indonesia, the use of nominee shareholders has drawn intense regulatory scrutiny. Domestic law does not recognise the beneficial owner if the nominee is on record as the legal shareholder: the rights, liabilities, and obligations attach to the person whose name is on the register, and nominee contracts that purport to hold shares “for and on behalf of” another may be declared null and void.

Specifically, under Law No. 25 of 2007 on Capital Investment and Law No. 40 of 2007 on Limited Liability Companies, agreements stating that share ownership is on behalf of another person are prohibited. Meanwhile, efforts to increase transparency around beneficial ownership have led to reforms; a 2018 presidential decree established a beneficial ownership register, but as of August 2022, only about 29% of domestic entities had reported BO data.

1.  Nominee shareholding arrangements in the investment sector can be declared void under Indonesian law.
2.  Article 48 of the Companies Law provides that shares are issued in the name of the actual owner; any arrangement that masks the beneficial owner may lack legal force.
3.  The beneficial ownership register requires that companies disclose who ultimately controls or benefits from the entity, even if a nominee is on record.
4.  Despite the legal requirements, compliance has lagged: only about 29% of companies had submitted BO data by August 2022.
5.  Legal commentary warns that nominee arrangements expose both the nominee and beneficial owner to risk of liability, loss of control, and regulatory sanctions.

 

Advantages of Using a Nominee Shareholder

When deployed carefully and in a compliant manner, nominee shareholding structures can offer certain strategic benefits, particularly in cross-border investment contexts. These advantages, however, must be weighed against the attendant risks.

In jurisdictions with burdensome shareholder registration, local-director quotas, or foreign-ownership limits, the flexibility of a nominee arrangement may provide a competitive edge. But the structure’s legitimacy hinges on robust documentation, legal backing, and transparency of intent.

 

 

 

What are Some of the Critical Risks and Governance Pitfalls in Indonesia?

The very attributes that make nominee shareholding appealing also give rise to significant legal, regulatory, and reputational risks. When structures lack transparency, proper contracts, or effective oversight, they open doors to misuse, ranging from tax evasion to illicit finance.

In jurisdictions like Indonesia, where nominee arrangements for investment purposes are explicitly prohibited, engaging in such structures may result in the shareholder agreement being declared null and void, loss of legal rights, exposure to liability, and loss of actual control of the business.

 
Significant Risks Include The Following:

1. Legal invalidity:

If a nominee agreement contradicts mandatory law, the arrangement may be declared void, and the beneficial owner may be exposed.

2. Loss of control:

The nominee on record may assert rights, refuse instructions, or hold formal legal power that the beneficial owner cannot easily override.

3. Regulatory non-compliance:

Failure to disclose beneficial ownership may contravene anti-money-laundering (AML) or investment-law rules, leading to sanctions.

4. Tax and liability exposure:

The nominee may bear tax liabilities, dividends may be contested, and creditors may pursue the nominee as the legal shareholder.

5. Opacity and reputational risk:

The arrangement may raise suspicion among banks, regulators, and investors about the company’s true control, complicating financing.

6. Regulatory reform risk:

As jurisdictions increase transparency (e.g., BO registers), legacy nominee arrangements may become untenable or subject to retrospective challenge.

7. Exit or succession complications:

If the nominee dies, becomes insolvent, or disputes arise, the beneficial owner may have no legal recourse to recover title.

 

What are the Best Practices for Structuring and Use?

For investors contemplating nominee shareholder arrangements, careful structuring, robust documentation, and ongoing compliance monitoring are essential. The arrangement should never be treated as a simple “name-swap” but rather as a legally sound trust, agency, or contractual framework backed by enforceable rights.

In markets like Indonesia, given the heavy regulatory constraints on nominee shareholding for investment purposes, alternative legal structures (such as a foreign direct investment vehicle, local partner, or joint venture) may provide a safer and more enduring basis for business.

 

Structure Checklist For Businesses:

1. Transparent beneficial-owner disclosure:

Maintain records of who the beneficial owner is, and ensure that the arrangement is disclosed where required by law.

2. Clear documentation:

Use trust deeds, nominee service agreements, or pledge or loan agreements to define rights, responsibilities, and exit mechanisms.

3. Legal alignment with jurisdictional rules:

Ensure the arrangement does not violate investment, company, or AML laws in the host country. For example, in Indonesia, nominee shareholding for foreign investment is expressly prohibited under certain statutes.

4. Governance safeguards:

Appoint reliable nominees; define procedures in the event the nominee becomes incapacitated, disputes or dies; require indemnities and regular audits.

5. Exit planning:

Ensure the beneficial owner retains the ability to exit or transfer beneficial interest without undue risk or cost, even if the nominee continues as registered owner.

6. Ongoing compliance and review:

Monitor regulatory developments such as beneficial-owner registers, disclosure obligations, and anti-money-laundering rules that may impact the arrangement.

7. Alternative structures exploration:

Where nominee arrangements carry excessive risk, consider bona fide joint ventures, foreign direct investment (FDI) vehicles, or local partner structures instead.

 

How are Global Transparency Reforms Changing the Future of Nominee Shareholding?

Worldwide, the reconceptualisation of corporate ownership transparency is placing nominee structures under intensified scrutiny. The push by regulators, financial institutions, and international agencies to obtain accurate beneficial-ownership data means that nominee-based arrangements are increasingly viewed as high-risk. The Organisation for Economic Co‑operation and Development (OECD) and other bodies highlight nominee shareholding as a key potential anonymity device for illicit financial flows.

In Indonesia specifically, while a presidential decree in 2018 mandated beneficial-owner disclosure, implementation remains uneven, and the existence of only around 29% compliance (as of August 2022) highlights the gap between regulatory ambition and practical reality.

 

• Many countries are building central registers of beneficial ownership, reducing the veil behind nominee arrangements.
• Financial regulators and banks apply higher due-diligence standards to entities with nominee shareholders or opaque ownership chains.
• Cross-border investment often requires disclosure of ultimate beneficial owners (UBOs), meaning that the legal nominee may not satisfy regulatory transparency.
• Legal reforms are increasingly focusing on nominee structures where they serve to circumvent foreign investment, tax or ownership rules and Indonesia is one such example.
• Investors relying on nominee arrangements face counterparty risk, evolving regulatory landscapes, and reputational vulnerabilities if the structure is perceived as a concealment device rather than a bona fide governance choice.

 

Critical Factors to Consider

1. Understand local law:

A nominee arrangement acceptable in one jurisdiction may be prohibited or void in another.

 
2. Document comprehensively:

Transparent and legally enforceable agreements are essential to minimise risk of dispute or loss of control.

 
3. Monitor disclosure regimes:

Beneficial-ownership registers and transparency reforms are advancing globally, reducing the anonymity advantage of nominees.

 
4. Mitigate counterparty risk:

The nominee must be trustworthy, and the structure should account for death, insolvency, or dispute of the nominee.

 
5. Consider alternatives:

If the regulatory risk of a nominee is too high, explore local partner, joint venture, or full foreign-owned entity options.

 
6. Align with governance best practices:

Good governance, independent oversight, and clear rights of beneficial owners strengthen both legitimacy and investor security.

 
7. Stay ahead of regulatory change:

Structural choices made today may be challenged tomorrow as jurisdictions tighten transparency, AML, and investment controls.

 

Conclusion: How We Can Help?

At 3E Accounting Indonesia, our corporate advisory team helps clients evaluate the feasibility and risks of nominee arrangements, ensuring every structure aligns with Indonesia’s investment and company laws. We help in drafting compliant documentation, conducting beneficial ownership disclosures, and identifying safer alternatives such as joint ventures or direct investment routes.

Our role is to guide you toward legally sound, sustainable decisions that strengthen your corporate governance.