Nominee service: a “golden key” to success or a threat for the business?

The business landscape is extremely dynamic: the economic climate and legislation are subject to continuous change, and foreign company owners are often facing new requirements implemented by banks and regulators in specific countries. Automatic information exchange, controlled foreign corporations, complicated KYC procedures enforced by banks…all this compels businessmen to look for ways to simplify their business operations. In order to overcome new obstacles, foreign company owners are willing to pay whatever it takes to get the “problem solving pill.”

Among other options, acquisition of a ready-made (“shelf”) company with a nominee owner and/or director has long been and still remains a very popular solution. In many cases, it is not the company per se that is of interest but the nominee (shareholder or director).

A quintessential nominee service involves legal company ownership by the nominee, with the actual business owner having real control. The nominee is mentioned in all legal corporate documents and most public registers, and the real proprietor usually stays in the background. The only exception is registers of company beneficiaries, provided that the actual owners declare their rights officially. This seems a perfect picture in terms of confidentiality and asset protection. But one needs to consider potential risks before venturing to use the nominee option in their business structure.

Whether you already have nominee services in place or are just contemplating the solution, you certainly should review this article to be aware of the pitfalls inherent in the nominee service.

Risk of asset loss

A nominee owner or director often belongs to a registration or law company. As a rule, representatives of foreign jurisdictions act as nominees. They are formally appointed by foreign entity shareholders and directors but manage the operations in the interests of the actual business proprietor. With most registrars and banks, presence of a foreign owner that is a resident of the relevant country simplifies the compliance procedure. But for business owners a nominee is an unknown or little known person. You cannot be sure that the nominee will be honest with you throughout the collaboration. Even without granting the nominee direct access to your assets you could lose control of them.

The nominee director, as a technical business owner, might visit the bank any time and withdraw funds from your account. The bank would never refuse the de jure business owner (nominee) in a situation like this. The companies registry (trade register) containing basic data concerning the company’s directors and shareholders prevails any other documents. The nominee being aware of the business particulars could take possession of the owner’s assets on fairly legitimate grounds. And not only bank accounts but also any company assets could be exposed, including securities or real estate held by the business beneficiary.

This risk can only be eliminated by conducting a thorough checkup and selecting the “right” nominee. SBSB, the world class legal consultants, has immense experience in nominee ownership structures and will be happy to perform a comprehensive due diligence of your nominee candidates.

Risk of losing company control

In a majority of cases the structures associated with concealed ownership involve a trusted person(s) whose role can be described as “His Majesty the Nominee.” It may not be difficult to find a nominee participant and position them in the company, but how one does control him/her?

Loss of management control over the company is as much threatening as the loss of assets or funds, and sometimes they are all interconnected. The proprietor must always be at the helm, irrespective of the circumstances. The nominee should not be granted even the slightest possibility to influence the business, the employees and the counteragents/competitors. Other risks include execution of powers of attorney in favor of third parties without the beneficiary’s approval and various corporate decisions which might be taken by the director within the scope of his/her competence. This issue can be addressed by assuring strict regulation of the nominee participant’s rights and obligations in the corporate documents and by not granting access to the firm’s actual business processes.

The experts at SBSB will help you work out an adequate company management scheme with provisions for a legally appropriate interaction with the nominee. You will thus retain control over the company and feel secure about your business.

Risk of confidential information leaks

Even though a nominee participant is not actually involved in the company’s operations, there is always the right of confidentiality breach. Information leaks occur most often at the time of signing contracts on behalf of the legal company owner (nominee) or during his/her office visits in connection with various business matters. An intended pre-arranged transfer of company data to third parties or direct competitors is another possibility, as the nominee may be subject to outside influence and pressure. There is a history of nominees working for competitor companies with a view to procuring specific information for them.

In the event of force majeure circumstances the nominee can provide your data or information about your business to state authorities, thus protecting himself/herself and avoiding the responsibility. In a number of countries nominees may face criminal charges for their illegal actions as nominees. For example, a director in Singapore would be responsible for failing to exercise “due care” when performing their functions. A Singapore nominee was convicted and imprisoned in 2012 for lack of circumspection and care. Being aware of the negative consequences, nominees may disclose the information they possess to state authorities any time, causing damage to the company’s operations.

The team at SBSB will help you prevent confidential information leaks and will prepare the legal documents necessary to protect your business.

Reputation risk

Businessmen often venture into miscellaneous areas of activity and try new directions. Some pilot projects are successful but some may fail. Owners of major international companies with a worldwide reputation at times are inclined to conceal their affiliation to new projects in order to protect their good name in the event of failure. And this is where the professional nominee service would be an effective solution.

Unfortunately, unscrupulous nominee service providers are not a rarity. A nominee provided by this kind of providers may not only interfere with the actual company operations but also damage the reputation of your business and your brand. Nominee owners and directors often belong to disadvantaged and socially deprived groups. They can be people with no fixed address or suffering from various addictions; legally capable persons but afflicted with psychological issues. They are exposed to influences and are willing to provide false information if there is profit in it.

To avoid this risk, you should deal with reputed professional service providers at all times, and verify the identity of potential nominees.

What are the means of protection against unconscientious nominees?

Nominees are not responsible for your business and cannot guarantee its safety. There are legitimate legal instruments designed to minimize the risks inherent in buying shelf companies with the nominee service.

One of the essential conditions is signing an adequate agreement for nominee services and having the nominee sign a trust declaration. The trust declaration is signed on the day when the nominee is included in the companies registry and remains in force until revoked.

Another legal security instrument is a waiver letter authorizing the actual owner to dismiss the nominee any time, even retrospectively. Any transactions made after this date will be recognized void and, accordingly, the responsibility for any actions performed after the waiver letter date will be borne by the nominee exclusively.

The legal mechanisms of business protection against unlawful nominee actions may vary depending on the jurisdiction. Think twice about the consequences of your error before trying to safeguard yourself against nominee founders on your own. Should you decide to use nominees in your business, it is best to refer to professionals who will help you choose the right legal protection tools and prepare the documents you need.

SBSB has immense experience in managing various corporate structures, including nominee ones. Our experts are always at hand to prepare the documents package necessary to assure protection against unscrupulous nominees and help you secure your assets and confidentiality of your business.