Large companies and corporations have the resources to distribute or outsource their activities to a number of separate entities at the touch of a button. There are usually legitimate reasons for this, such as entering into partnerships, pooling shareholdings, or expanding internationally.
“The Good”
On North Data, we use our network illustrations to visualize these cross-connections, and make them easy to understand. These company networks are an important element of business operations in our digital age—perhaps even the most important.
We shed light on these networks in various ways, in particular, connecting the people involved. This does not refer to employees or customers (who are subject to data protection) but to the official legal representatives (such as managing directors) or so-called “beneficial owners” (usually the majority shareholders). No company can operate in anonymity. They must name their representatives publicly.
People with many cross-connections are often investors, founders, or even serial founders. They are—rightly—pleased about our network illustrations, and for some, it is even a badge of prestige. We regularly receive requests from these companies to merge or extend networks (which we cannot always do).
“The Bad and the Ugly”
In the vast majority of cases, the division into separate companies has legitimate reasons, such as those mentioned above, but not always. Now, we want to look at some of the less favorable reasons.
1. Fractionalization
Following the COVID-19 super spreader incidents in German meat processing facilities, stricter rules were introduced in early 2020 for operations with more than 50 employees. Germany’s largest meat processor, Tönnies, swiftly created 15 new companies, presumably in order to distribute its employees among them, and not exceed the new limit.
In general, smaller companies are less regulated. They have fewer rules and regulations, for example, in financial disclosure (with simplifications for small companies) or employee rights. You may know how “fractionalization” works when it comes to party political contribution. The donation is divided into several smaller contributions to stay below the limit above which disclosure is required.
This strategy is also known as smurfing - especially in connection with money laundering.
2. Cluster risk
The German Property Group/Dolphin Capital hit the headlines in 2021 when affected British pensioners demanded Chancellor Merkel compensate them for the loss of their retirement savings (Read more about this case in Business Insider). Dolphin was an opaque conglomerate of several hundred individual companies led by Charles Smethurst (Smethurst’s profile on North Data). It collapsed like a house of cards in 2020. The total loss for investors is estimated at over EUR 1 billion, and it will never be possible to reconstruct the cash flows. Within such a network, both money and risks can be moved around practically at will, and the risk can no longer be assessed by outsiders. However, the construction of the network can serve as a warning signal and raise questions.
3. Conflicts of interest and overlapping interests
Ideally, a managing director or board member represents the interests of the company and its shareholders (investors) and takes into account the interests of other stakeholders, such as employees or business partners. At least, this is what an outsider would assume.
This is often not the case—in the real estate sector in particular. For example, a tenant might assume that the property management company engaged by the landlord would appoint a building maintenance service company (which is paid for via tenant utility fees) at a reasonable price. The reality is often that the same person benefits (one example of many is in this article in the TAZ).
An analysis of the company’s network can uncover such conflicts of interest.
4. Circumvention - the exploitation of legal loopholes
If a company owner wishes to avoid transparency, they can hire resourceful consultants who promise solutions specifically designed to exploit legal loopholes. René Benko was a master of evading liability (See our article in the North Data blog).
For small companies, there are the lightning-fast, off-the-shelf liquidation service providers who advertise via Google Ads on how to “legally bypass” German liquidation requirements:
Advertising promises of a “liquidation service provider.”
Even more blatant is the appointment of straw men as managing directors—who are literally picked up on the street (RBB TV documentary on illegal car racing in Berlin).
Or completely shameless is the managing director of a complicated company network that was involved in a serious real estate scandal, who simply changed his surname. He then sued us for not merging the entries under his new name with his old name, most likely to conceal his involvement in the scandal. The Hamburg Regional Court rejected this request, stating: “The use of the plaintiff’s new name is also in line with [North Data’s] legitimate interest in creating transparency with regard to the responsible personnel of corporations.”
To shed light on such cases, we include historical information in the network representation so that we can see the chronological order of events.
The principle of equality of arms
Digitalization via Excel & Co. enables companies to divide their activities into a large number of companies that are connected to each other in different ways. These companies can then meet the complex challenges of a modern networked world.
In exchange, customers, suppliers, creditors, employees, and journalists must be given the tools to navigate and understand these relationships. At North Data, we see this as our core mission. Our network illustration is based on the cross-connections between companies and individuals under company law - many of them transnational. But we include geographical, linguistic, and chronological aspects, to obtain a holistic picture of how the company can be viewed in the business market.
