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Managing subsidiary compliance

In today’s increasingly complex business environment, it has become more imperative than ever for corporations to have clear oversight and control of their subsidiaries around the world. The risks of non-compliance are increasing, with a growing threat of fines and regulatory censure, while directors face greater personal responsibility.

As operations become more globalised, group headquarters’ risks are becoming further and further distanced from the companies that carry out the day-to-day business. At the same time, legal entities are multiplying and corporate structures are becoming more complex. As a result, establishing and maintaining a clear picture of a group’s legal entities, their business function and risk profile is becoming increasingly difficult. And things will not get any easier as economic disrupters such as the threat of trade wars from the US, Brexit in the EU and the OECD’s global anti-tax avoidance initiatives start playing out around the world.

We are also seeing regulators not only issuing new rules but also taking a harder line with existing ones, together with an increasing number of stakeholders that are demanding more transparency and accountability. This has translated into higher risks and increased associated costs of corporate governance failure. It has also reinforced the need for robust corporate governance frameworks at every level.

At the same time, risks are rising on a personal level for company directors. With increasing globalisation comes the need for directors to be appointed to multiple boards across the globe. Being aware of local expectations and risks is key. The penalties for non-compliance are becoming stiffer in many parts of the world, so organisations have a duty towards their directors to ensure they don’t fall foul of them on a personal level.

All of these factors mean that Global Entity Management (GEM) has become an ever more crucial part of general counsel and corporate secretariat’s roles.


At KPMG, we have an extensive and experienced team of GEM professionals who work with businesses to manage their subsidiary compliance programmes. With coverage in more than 140 countries, KPMG’s integrated teams operate using a multi-disciplinary approach that leverages subject matter experts in major business centres, across virtually every industry, to deliver tailored advice and services to our clients.

Centralised v. decentralised models

But what is the most effective way of managing your entities and subsidiaries around the world? In practice, there are two basic approaches: a centralised model or a decentralised one.

Under both models, a balance is needed between control from the top and freedom at the bottom. The difference is largely one of where that balance lies.

■  A centralised model is characterised by a strong parent company board with largely passive boards at subsidiary level, focussed on regulatory compliance and day-to-day decision-making and reporting. This results in more direct control and a clearer division of responsibilities, but it also risks fettering local initiative, stifling motivation and slowing down decision-making. Under such a model, clear and relevant information flows back to the parent board as an essential part of the governance framework, in particular, if local conditions are to be properly taken into account

■  A decentralised model means empowering subsidiary boards so that they have the freedom to develop their business in a way that makes sense from a local perspective, without unnecessary or irrelevant interference from the parent board. This results in a more agile, pro-active board that can respond quickly to local conditions. The challenge here is to ensure that subsidiaries take into account group governance policies and feedback sufficient information to enable their activity to be monitored and, where necessary, corrections made

Which model should be chosen depends on various factors, such as the size and composition of the group and its constituent entities, including its business sector, the functions performed by the various entities and the maturity of the group’s existing corporate governance model. In fact, it is not necessarily a question of choosing between one model or the other, but a question of which elements are appropriate for the given group. The result should be a model tailored to the group’s actual circumstances.

Finding the right balance may not be easy but it can make the difference between success and failure. Problems can arise where too much control is concentrated at the level of the parent board, which may also have tax implications. But insufficient levels of oversight also create problems. This is true not only for the general well-being and efficiency of the subsidiary’s business but also from the point of view of legal liability.

In practice, we are finding a growing trend towards the centralised model, given the rising regulatory risks and pressures around the world. This is a model that our GEM service is well-placed to support, given that KPMG has teams around the world who can liaise with the central GEM team helping to manage a company’s compliance and advise them on practical, relevant local issues and conditions that need to be taken into account.

Global world, local customs

Having an understanding of local variations in practice remains an essential part of doing business, no matter how much the world is globalising in terms of corporate governance standards. There remain some interesting quirks of local practice, such as:

■  China: The traditional requirement to sign official documentation with a black fountain pen is still in place today. Failure to do so could result in a contract being deemed invalid. At KPMG, we have created a signature requirements checklist to help our clients around the world

■  India: There is a growing requirement for corporations to prove that their Indian operations are genuinely staffed and active on the ground by taking photos of the director(s) inside and outside the office

■  Ultimate beneficial ownership: Rules are increasingly being adopted around the world requiring businesses to show where ultimate ownership of subsidiaries resides. In the EU, the fourth Anti-Money Laundering (AML) Directive requires member states to set up registers of the ultimate beneficial owners of legal entities. However, even though the deadline to implement the 4th AML Directive was 26 June 2017, debates are still ongoing about how the Directive should be implemented and there are variations in national practice. The Netherlands and Italy, for example, are yet to implement the UBO requirement, given that a fifth AML Directive is expected soon. It is important, therefore, that businesses understand the exact requirements in different countries. Meanwhile, similar requirements have been coming into force in other jurisdictions around the world, such as Canada, Hong Kong, Singapore and the Caribbean

KPMG’s GEM teams can provide businesses with the up-to-date local insight they need to ensure that they are in compliance with regulatory requirements in the territories in which they operate.

KPMG’s GEM approach

Through KPMG’s global network, we strive to adopt a consistent approach, providing oversight and control across global structures, delivered in an effective and client-centric way.

We bring our clients a dedicated project manager who is the central point of contact on all engagement matters. The project manager liaises with KPMG’s compliance, tax and legal experts around the world to manage compliance on our clients’ behalf. We charge competitive fixed fees, providing certainty of the budget from the outset.

Through our GEM services, clients will reap a number of further significant benefits:

■  Centralised: Through our centralised model, in which we access the KPMG network around the world, clients no longer have to deal with the coordination of multiple parties, reducing time and cost

■  Multi-disciplinary: As part of KPMG’s multi-disciplinary environment, clients benefit from the integration of services and teams combining wider areas of compliance, such as tax and statutory accounting

■  Local expertise: Our global network of corporate secretarial specialists and legal advisors provides the local expertise to support the central project manager in the delivery of in-country requirements

■  Technology-enabled: Accurate and robust data management is a key requirement for any organisation. We utilise market-leading entity management software and process management technology. We can maintain and update clients’ existing systems, or provide them with access to market-leading entity management platforms to manage corporate information and track global compliance. This will provide online storage of corporate information and records, and centralise data for quick access when working on any internal project. Through our services, clients have the potential to maintain accurate corporate information, access it instantly, and easily run company reports and produce group structure charts


KPMG’s GEM services

We provide a wide variety of solutions to support businesses and help bring them greater control and peace of mind:

■  Core annual service: Our core annual service is designed to ensure the routine corporate compliance matters that entities face each year are addressed in an efficient and consistent manner. We provide support with ongoing compliance requirements, such as annual approvals, statutory registers and filings. We also provide regular written updates on key changes to corporate secretarial law and practice to cover your global footprint

■  Health check: The KPMG corporate health check provides a snapshot of the current status of compliance for an organisation’s entities, delivered in a uniform report. We assess the compliance status of entities, covering such issues as director appointments, shareholdings and corporate records. The health check can be particularly useful if a business is considering making structure changes, is about to undertake a sale or acquisition, or has found gaps in compliance and wants a deeper assessment

■  Incorporation services: From a single entity to a regional expansion plan, branch offices to companies, KPMG can assist in the incorporation of new entities into an organisation’s structure. With access to specialists across the globe, we can provide a checklist of requirements for incorporation of a new entity, manage a step plan from approval to completion, and assist with post-incorporation work where required, such as business licenses and registrations

■  Transactional and ad-hoc filing support: KPMG can provide flexible support for one-off filings or projects, to relieve the burden on internal teams. This could involve providing assistance with restructuring projects, capital adjustments, dissolutions, share transfers and director changes. We can also support ad-hoc filings, such as changes of company name, change of financial year-end, constitutional document updates and updates to registers on ultimate beneficial ownership

■  Directors’ responsibilities: With directors’ personal liability rising in today’s governance environment, ensuring that individuals know and understand their responsibilities has become an increasing priority for organisations. We have developed a comprehensive, country-specific guide to directors’ responsibility and risk that gives an overview of core duties and requirements in different jurisdictions that can be used by directors themselves and as a tool for in-house legal teams providing support

■  Corporate governance support: While assisting with administrative support for corporate secretarial matters, we can provide guidance on wider corporate governance issues. KPMG member firms provide regular forums for company secretaries to discuss key issues facing them in their role and focussed topic group meetings, such as governance frameworks, corporate culture and the evolving use of technology

Time to act?

As we have seen, the need to manage subsidiary compliance around the world is becoming ever more pressing. Corporate structures are becoming more complex at the same time as the regulatory bar is rising and governance failures are more severely punished. Increasing numbers of organisations are taking steps to embed strong and consistent governance across their operations by taking a more centralised approach. Robust global entity management has become an essential part of doing business today.

Our GEM service, as part of KPMG’s Legal Services offering, leverages the full strength of KPMG to bring an integrated, fully packaged solution covering all aspects of law and seamless coordination with specialists from related fields, such as tax and pensions. If you would like to discuss any aspect of KPMG’s GEM services, or have a query about any aspect of managing subsidiary corporate compliance today, please do not hesitate to contact us.


Ethical Boardroom is a premier website dedicated to providing the latest news, insights, and analyses on corporate governance, sustainability, and boardroom practices.

Ethical Boardroom is a premier website dedicated to providing the latest news, insights, and analyses on corporate governance, sustainability, and boardroom practices.


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