Affiliate

An affiliate is a company or person connected to another through ownership or control. In business law the term usually covers a parent company, its subsidiaries and sister companies that share the same owner, as well as individuals who control a company, such as major shareholders and senior officers. Affiliates are separate legal entities, but their close links mean laws often treat dealings between them with extra care.

Definitions vary by context. Securities, banking, tax and accounting rules each set their own tests for when two parties are affiliated, and the specific meaning in regulated finance is discussed in affiliate in financial services. Outside corporate law, "affiliate" also describes an independent partner who earns commission for referrals, as explained in affiliate marketing.

Think of a family of shops owned by one parent company. Each shop has its own name and its own accounts, but the same people ultimately call the shots. The shops are affiliates of each other and of the parent. If one shop sells goods to another at a strange price, outsiders might suspect the family is moving money around rather than doing normal business.

That is why the label matters. Lawmakers want to know when two companies are really independent and when they are, in effect, the same group dealing with itself. Being affiliated is not wrong, but it brings extra rules and disclosure.

Most definitions turn on control. Under US securities rules, an affiliate of a company is a person that directly or indirectly controls it, is controlled by it, or is under common control with it, where control means the power to direct management and policies, whether through shares, contracts or otherwise. Common indicators include:

• Ownership. Holding a significant share of voting stock; many rules use thresholds such as 10%, 25% or more than 50%.
• Board and management. The ability to appoint directors or officers.
• Contracts. Management or franchise agreements that give one party decisive influence.
• Individuals. Directors, executive officers and large holders, often treated as control persons.

Accounting standards use related but different concepts: subsidiaries that a parent controls are included in consolidated financial statements, while "associates" over which an investor has significant influence, presumed at 20% of voting power under IFRS, are accounted for using the equity method.

Affiliate status has practical consequences. In the United States, affiliates of a listed company face limits on reselling their shares under SEC Rule 144 and may have reporting duties. Banks face strict limits on dealings with their affiliates: Sections 23A and 23B of the Federal Reserve Act, implemented by the Federal Reserve through Regulation W, cap a bank's lending and other covered transactions with any one affiliate at 10% of its capital and with all affiliates together at 20%, and require such dealings to be on market terms. These rules stop a bank's insured deposits from being used to prop up other parts of a group. Similar ring-fencing appears in rules on holding company structures in many countries.

Dealings between affiliates are a form of related-party transaction, which accounting standards require companies to disclose. Tax authorities apply transfer pricing rules to make sure goods, services, loans and intellectual property moving between affiliates in different countries are priced as if the parties were independent, the arm's length standard. Without such rules, a group could shift profits to low-tax affiliates by over- or under-charging itself.

Affiliate relationships became a central issue in several crypto failures. In the collapse of FTX in November 2022, the exchange's close ties to its affiliated trading firm, Alameda Research, and the movement of customer funds between them were at the heart of later criminal and bankruptcy proceedings. Regulators now pay close attention to whether an exchange's market-making or proprietary trading affiliates receive special treatment. In compliance work, firms map affiliates as part of know your business checks and identify each ultimate beneficial owner, because sanctions and anti-money laundering risks can sit anywhere in a group.

Because definitions differ, two companies can be affiliates for one law and not for another, which creates room for confusion and for structuring around the rules. Control can also be informal, exercised through family ties, side agreements or nominee holders that do not appear in ownership records. Supervisors therefore look at substance as well as form when judging whether entities are truly independent.