The Role of Holding Company in Shaping Compliance Strategies

The corporate world is full of complexities, where different structures pose different challenges. Behind many successful companies, there often lies a holding company, like a boss behind the scenes.

Perhaps, it’s the crucial importance of ownership structure that one of the many questions in KYB due diligence includes: What is a holding company?

A holding company holds power, not products.

The holding company meaning is often misunderstood, as this is a business entity that does not engage in producing goods or providing services. Instead, the primary role of these companies is to own shares in other businesses, referred to as subsidiaries.

With the majority of control in the subsidiaries, holding companies can elect the board of directors, along with having proper rights over their operations. The ownership structure of these companies forms part of a broader and often complicated legal and corporate framework.

The layered and unclear nature of the ownership structures creates difficulties for businesses, regulators, and investors to understand and analyze who ultimately controls assets and operations.

These complexities eventually increase the risk of regulatory scrutiny, hidden liabilities, and challenges in enforcing compliance. However, holding companies enable diversified investment strategies, centralized controls, and risk management.

What is the Difference Between Holding Company And Subsidiary Company

Holding companies don’t run the businesses. Instead, they own the businesses. On the contrary, a subsidiary company is the actual company doing business, selling products, offering services, and running day-to-day operations.

The hierarchical structure between the two is that subsidiaries are owned and controlled by the holding companies.

Holding Company Structure and Ownership Relationships

Holding companies hold proper ownership stakes in the subsidiary businesses in both direct and indirect ways.

• Direct Ownership – Holding company owns direct shares. It’s a straight link with the subsidiary.
• Indirect Ownership – Holding companies own the subsidiaries through other companies in and across different states.

Moreover, the multi-layered structure of holding businesses adds more complexity to the company’s legal, financial, and regulatory aspects.

The connected relationship of these companies carries significant implications. This is because the holding company has a strong influence on the strategic decisions, financial policies, and management approaches.

Why do Businesses Need Due Diligence and Know Your Business(KYB) Solutions?

Due diligence is not an option anymore, but a need in all aspects of business. Sectors like financial institutions(FIs), investment firms, and other companies require strong due diligence.

Therefore, a fundamental step in the due diligence procedure includes identifying the legal status of entities as a subsidiary or a holding company.

It enables businesses to understand the whole hierarchy of ownership in order to accurately assess the control, influence, and risk profile of the entities involved.

Due Diligence in Holding Companies

If the due diligence doesn’t take into account the holding and subsidiary status of a business, it may underestimate the exposure to risk, including regulatory non-compliance and hidden liabilities. Due diligence in business flags suspicious activities, financial discrepancies, and legal issues.

However, businesses that aim to work with subsidiaries can conduct a proper due diligence process. This involves collecting, identifying, assessing, verifying, and monitoring the high-risk entities. Proper identification ensures that risk assessments, compliance checks, and credit decisions reflect the actual ownership of the corporate group.

Risk of Sanctions and Regulatory Exposure in Holding Company

While every other aspect is essential, one crucial dimension of holding companies is their potential exposure to sanctions and regulatory enforcement.

One of the cases necessitating subsidiary due diligence includes appearing compliant and clean when reviewed superficially.

However, the holding company of that subsidiary and related ultimate beneficial owners (UBOs) behind it might be subjected to international or administrative sanctions, regulatory penalties, or implicated in questionable activities.

In another case, a holding company could be sourcing from trading with subsidiaries that are under regulatory scrutiny. The interconnections impact both businesses in any sanction or enforcement action against one entity. Additionally, it may create a significant legal and reputation risk.

Precautions in Supply Chain and Business Partnerships

Businesses sourcing services from entities associated with a subsidiary structure are advised to practice precautions. Even if the subsidiary appears as a company that maintains compliance with all regulatory requirements and comes clean, its holding company or associated directors could be implicated in some crimes.

Failure to recognize the connections between the two will expose businesses to indirect compliance violations or reputational damage.

Therefore, it is necessary to implement robust due diligence practices that are extended beyond the partners to assess the entire ownership structure.

How The KYB Helps Holding Companies and Their Related Complicated Structures

With the increasing regulatory & financial risk with complicated ownership structures in the regulatory landscape, relying on authentic and verifiable data is crucial.

Verifying every entity before signing a deal can reduce risk. However, if one business fails, it will drag the whole group down. The KYB helps businesses like FIs, supply chain finance companies, and investment firms to validate businesses and individual entities by getting data from official business registries. We provide the most reliable sources for revealing actual ownership structures.

Authentic UBO data sourced from official business registries by The KYB enables businesses to confirm whether the subsidiary operates under the umbrella of a holding company while exposing associated regulatory red flags.

With accurate, authoritative data from official sources, organizations can protect themselves against hidden risk while ensuring compliance and building strong, risk-free business partnerships.

Frequently Asked Questions

1. What is the Difference between an LLC and a Holding Company?

An LLC (Limited Liability Company) is a business structure that offers liability protection and flexible management. A holding company is an entity created to own shares in other companies and control them without directly managing daily operations.