If you are reading this – congratulations! This post is likely going to save you thousands of dollars, euros, or pounds. And I’m not even selling you anything.
I often come into contact with companies, usually run by a sole individual, which either through a sales pitch by the OSP (offshore service provider) or by misinformation on the internet has appointed nominee shareholders and/or nominee directors.
In almost every case of using nominee directors or shareholders, there is no added benefit. Instead it just cases problems. Nominees can make a company more expensive to manage and companies with nominees have a much harder time opening bank accounts unless using their OSP, which significantly limits the number of banks.
So let’s dig into this matter. What are nominees? What aren’t nominees? Who are they? When do you need them?
What are nominee directors and nominee shareholders?
When a typical offshore company is formed, it consists of one or more persons (legal or natural) which act as directors, shareholders, and/or partners, depending on the company’s legal form. In case of an LLC or partnership, nominees can still be used but would then be called nominee members or nominee partners. The term nominee officer is sometimes used.
A nominee is a third-party who is nominated to act as director, shareholder, member, and/or partner in the company. Nominees are usually appointed with a separate agreement in place stating that the nominee can be let go at any time by the UBO (ultimate beneficial owner), which would be you. It is unclear how (if at all) enforceable these contracts are in cases where the nominee is director and shareholder or primary partner of the company.
A nominee director or shareholder will typically not do anything unless instructed by the UBO.
What aren’t nominee directors and nominee shareholders?
Nominee directors are not resident directors or managers of a company. This means that using traditional nominees will not qualify your company as resident and, thus, access a country’s DTAs or other legal privileges (and obligations) a resident company may have. Resident local managers cost a lot more than nominees. They are commonly used in for example Singapore, UAE, Cyprus, and Malta to make the company appear to be controlled from that jurisdiction for compliance and tax purposes.
Furthermore, nominee directors will not be bank account signatories. This is a different type of service and although your nominee director can sometimes be your nominee bank account signatory, it is a separate service, with a plethora of other fees, concerns, and risks.
Nominee directors are not involved in your day-to-day business activity. They are essentially just names on a piece of paper.
What about these bank account signatory nominees?
When you open a bank account for your offshore company, the bank will require one or more persons to act as signatories on the account. This means that any instructions sent to the bank (practically meaning wire transfers, trades, and card applications) require this person or these persons to sign on behalf of the company.
In most cases, the signatory on a bank account will be you as the offshore company director. This means that the bank account belongs to your offshore company and that you have control over the funds in the account. By using a nominee bank account signatory, your name will not be known to the bank – unless required by law. Some banks tolerate not knowing the UBO and opting to believe (while knowing it’s not true) that the nominees are the UBOs of the bank account. In those (rare) cases, requests for information under a TIEA or other tax treaty will not reveal your name. However, in most cases, your identity will be disclosed to the bank under international standards of compliance. The bank will know who you are and will be able to disclose this for a request for information.
Since you do not have control over the bank account, any wire transfers will have to go through your nominee. They often charge a handling fee, meaning you will pay both the bank’s fees for the wire transfer plus the nominee fees. This will get extremely expensive if you make a lot of transfers.
By using a bank account signatory nominee, the nominee is in control of the funds and it is unlikely that any misuse could be pursued in a criminal court. At best, you could try to make a civil case and sue the nominee. Since they will probably be in a different country, your chances of getting anywhere are slim.
Who needs nominees?
The purpose of nominees is not to hide your identity against authorities. It is unlikely to provide the privacy sought. Laws surrounding tax evasion and anti-money laundering have caught up with the usage of nominees. That doesn’t mean a TIEA will always go through. Your nominees could refuse to give up the UBO, but they would be in breach of regulations and risk fines and jail time. You need to be a big client to make them want to assume that risk.
Nominees are useful for signing agreements that would otherwise not be possible, if for example the UBO behind the nominees is someone with whom the contracting partner – for any reason – does not want to or cannot deal with. This may have severe legal implications if nominees are used to violate sanctions or trade embargoes.
Nominees do offer a layer of privacy against civil investigators (nosy relatives, private investigators, in some jurisdictions also creditors), in that your name will not appear on any public record and your signature with the bank should be protected by banking secrecy.
So, in conclusion, you probably don’t need nominees; at least not for the reasons you thought.
Streber – noted, your list of OSP’s not recommended OSP’s. He did receive guality advice.
Crowne – Agreed on the proximity per my example.
Thanks Gents!
It’s funny there technically is no such thing as a nominee director, a director is by definition a nominee but it doesn’t make a lot of difference, they are liable just like any other director and hence people often find they’ll scrutinize transactions and hold up business, logically so as they risk a lot if they are authorizing criminal activity.
Nominees seem useful primarily in three cases:
1. Proximity – as mentioned by Evan above if you’re say setting up a local entity in a particular jurisdiction it can be useful and much faster to have someone local doing it so they can physically go into the banks, etc. as generally dealing locally has a lot less hassles. This has downsides as well of course but there are cases where it might be worthwhile.
2. Surface anonymity – for tax evaders it can be useful to cloak evasion though under form vs. substance tests they will fail in practice as those acting as directors will be deemed such even if not officially named the fact is it makes investigation less likely unless disclosed. Of course there are cases where a nominee might be legitimate in the control their are exercising, which is completely different and potentially valuable (also generally more expensive)
3. Protection – in certain rare situations it might be possible to have a nominee willing to stand up to investigation in an uncooperative jurisdiction and this might be used to deflect liability, though this would be risky and likely expensive. I doubt if this is a service offered by typical providers one would find online.
Good article on nominees. A few years back, an associate needed a merchant account — he was advised a ready made (COS)name that expedited the short time-fuse he had, that said he used a nominee to open the company and bank in about 4-5 days. 1 week later he was up and running. So, I would say that this was a needed to expedite the timing and having a ready made name with nominee gave him instant bona-fides per se. HE paid a lot an of course the service provider was on your list of recommended OSP’s.
There are definitely some less common situations where nominees can be useful, such as when taking over a ready-made/shelf company. Sounds like your associate received quality advice.
I just want to clarify that I do not maintain a list of recommended OSPs. (I’m probably going to have to update those posts to highlight this.) The reviews are just attempts at identifying the people behind the company, assessing its reputation, and outlining my own experiences. “Review” might be a poorly chosen word.