Shell Companies under Indonesian Law and the Risks of Misuse

A shell company is often understood as a business entity that does not actively conduct operational activities but is established for a particular purpose. In business practice, such a structure may lawfully be used for investment, securitization, asset management, or risk separation. However, a simple corporate structure with limited activity may also be misused to conceal the true owner, transfer assets, hide proceeds of crime, or avoid obligations that should otherwise be fulfilled.

Indonesian law does not, in principle, automatically prohibit the existence of shell companies. Their legal treatment depends on the purpose for which they are established, the activities they conduct, and their compliance with requirements concerning ownership transparency and supervision within the relevant sector. Shell companies must therefore be distinguished between corporate structures used for legitimate business purposes and structures deliberately established as a means of concealing transactions or beneficial owners.

The Concept of Shell Companies and Special Purpose Vehicles

In international practice, shell companies are often associated with the concept of a special purpose vehicle (SPV), an entity established to perform a limited and specific function that is separate from the principal activities of its founder. An SPV may be used to hold certain assets, undertake financing, securitization, or fund management. Its main characteristic lies in the narrow scope of its activities and the legal separation between the assets or risks of the SPV and those of the party that established it.

Nevertheless, the term shell company is not always synonymous with a formally regulated SPV. In a broader sense, a shell company may be a legally registered entity that does not conduct substantive business activities. This condition creates risks where such an entity is used to conceal the identity of the controlling party, transfer funds through multiple layers, or serve as a vehicle for holding assets derived from unlawful activities.

Regulation of SPVs under Indonesian Law

In the financial sector, Law No. 4 of 2023 on Financial Sector Development and Strengthening provides a legal basis for financial instrument management entities that may perform functions as SPVs. Such entities may be established for securitization activities and/or trust fund management. These activities include receiving and managing assets under trust relationships and receiving transferred assets that are subsequently securitized and issued as instruments to investors.

For certain structures in the financial sector, an SPV takes the form of a limited liability company and is subject to specific characteristics. Its management may involve financial services institutions that are subject to the regulation and supervision of the Financial Services Authority (OJK). In addition, restrictions apply to certain corporate actions, including share transfers, mergers, consolidations, acquisitions, or spin-offs, which in certain circumstances require OJK approval. Such regulation demonstrates that an SPV is not treated as an uncontrolled entity, but rather as a corporate instrument with a particular function that remains subject to supervisory mechanisms.

In the tax context, Minister of Finance Regulation No. 127/PMK.010/2016 also recognizes an SPV as an intermediary company established solely to perform certain special functions for the benefit of its founder, including the acquisition or financing of investments, and which does not actively conduct business activities. This characteristic demonstrates that the absence of active operational activities does not by itself make an entity illegal. The determining factors are the purpose of its establishment, the source of its funds, its transaction patterns, and its compliance with applicable regulations.

Risks of Misuse of Shell Companies

Legal risks arise when a shell company structure is used to obscure the relationship between assets and their true owner. The separation of legal entities may create multiple layers of ownership so that the party enjoying the benefits or controlling the company is not directly visible in corporate documents. If used unlawfully, such structures may facilitate money laundering, fraud, asset concealment, unlawful avoidance of tax obligations, or the transfer of proceeds of crime.

It is important to distinguish legitimate business planning from the use of business entities for unlawful purposes. Establishing a company to separate risks, facilitate investment, or conduct securitization is not prohibited provided that it is carried out in accordance with applicable regulations. Conversely, where the structure is deliberately used to conceal the origin of assets, disguise the controlling party, or obstruct law enforcement, the existence of a separate legal entity cannot be used as protection against the resulting liability.

Beneficial Ownership Transparency

One important instrument for preventing the misuse of shell companies is the obligation to identify the beneficial owner. Presidential Regulation No. 13 of 2018 defines a beneficial owner as an individual who in substance owns, controls, receives benefits from, or has certain authority in determining the management of a corporation, either directly or indirectly.

In a limited liability company, indicators of beneficial ownership may be reflected in the ownership of a certain amount of shares or voting rights, receipt of profits, authority to appoint or dismiss directors and commissioners, the ability to control the company, the right to receive benefits, or status as the true owner of the company's funds or shares. Through this approach, the law does not merely consider the person formally listed as a shareholder, but also seeks to identify the person who actually stands behind the ownership and control of the company.

Corporations are generally required to implement identification and verification procedures, determine their beneficial owners, and submit such information to the Minister of Law. Verification is conducted by taking into account relevant risks, including the risks of money laundering and terrorist financing. The information submitted must be accurate and updated to reflect the corporation's actual circumstances. This obligation plays an important role where corporate structures involve multiple layers, because law enforcement authorities and regulators can still trace the individual who ultimately controls or economically benefits from the company.

Sanctions and Compliance Consequences

Failure to comply with beneficial ownership obligations may result in administrative sanctions. Under the regulations governing the verification and supervision of corporate beneficial owners, sanctions may be imposed where a corporation fails to report its beneficial owner or provides inaccurate information. Administrative measures may include warnings, inclusion on a blacklist, and the blocking of access to the Online General Legal Administration (AHU Online) system.

In addition to administrative consequences, the use of a shell company as a vehicle for criminal activity may result in liability under the relevant criminal laws. Corporate compliance therefore cannot be limited to ensuring that a company has been formally established. Ownership transparency, accuracy of information, the purpose of transactions, sources of funds, documentation, and compliance with sectoral supervision form an integral part of corporate governance.

Conclusion

A shell company is not a form of company that is automatically prohibited under Indonesian law. Structures such as SPVs may serve legitimate economic and legal functions, particularly for securitization, investment financing, fund management, asset separation, and risk limitation. However, the characteristics of an entity that does not actively conduct business and can be separated from its true owner make such structures vulnerable to misuse.

For this reason, the most important considerations are transparency and the purpose for which the company is used. The obligation to identify and report beneficial owners is a key instrument for ensuring that the person who ultimately controls the company remains identifiable. Accordingly, the use of shell companies or SPVs may remain within the boundaries of the law provided that their establishment, ownership, transactions, and activities are conducted transparently and in compliance with all applicable requirements.