September 28, 2014 Leave a comment
A nominee director is a third party that is officially registered as the administrator of an offshore corporation instead of its real beneficial owner or manager, who may then remain anonymous.
The nominee director is normally provided by the agency responsible for the formation of the company, or by the registered agent. It can be either an individual or legal person, i.e. another company specifically incorporated for this role. It is common to use the nominee director in conjunction with a nominee shareholder, since this way the client does not appear either as owner or as manager of the company.
Because the main purpose of the nominee director is to protect the client’s privacy, their function in most cases is merely formal. That is, they appear to be in charge on the documents of the company, but they do not perform any executive function and are merely required to sign certain documents, including the minutes of the annual meeting of the board of directors or some extraordinary resolutions taken at the request of the client. All the operating functions are usually performed by the real owner, to whom the nominee director has given a general power of attorney before a notary, entitling them to perform the daily activities of the company. This includes opening and managing bank accounts, signing contracts, etc… Because of their lack of executive power, these nominee directors are popularly known as straw men.
Depending on the nature of the business or the personal circumstances of the owner, sometimes it may be convenient to assign the nominee director a more active role. If the position is occupied by an individual, they can participate in the issuance of documents, correspondence and billing. They may even act as bank account signatories, which is common in re-invoicing or transfer miss-pricing schemes. These consist of using offshore companies interposed in import or export operations, in order to divert part of the profit to a low tax jurisdiction, therefore reducing tax.
Many countries have specific legislation that tries to prevent this type of operation, simply by considering the income of these shell companies as having been obtained directly by their beneficial owners. This is what is known as CFC (controlled foreign corporations) rules. Using a nominee shareholder and a nominee director that also acts as bank account signatory, the owners hide their links with the company, making it extremely difficult for tax authorities to prove a connection. Of course, they may also be other perfectly legit reasons for using an accoung singatory, such as asset protection or the need of enhanced privacy (public persons, etc…).
So how are the rights of the real owner guaranteed?Although the nominee director only acts according to the instructions received from the client, since the offshore company is formally administered by him and controlled by the nominee shareholder, the rights of the real owner needs to be guaranteed in some way. This is achieved by a series of additional documents, which are kept in the strictest privacy.
In the case of the nominee director, it is common to issue an undated resignation letter which returns all the powers to the client. This can be made effective at any time by simply putting the current date on the document. Alternatively the director may also issue a memorandum in which he commits to present his immediate resignation, on request of the shareholder, who in case of being as well a nominee will recognize the rights to the beneficial owner through a declaration of trust. Moreover, the client must sign an indemnity agreement to the director, which disclaims any liability or penalty arising from the operations of the company.
If the director conducts executive functions or acts as bank account signatory, they will demand a greater level of collaboration with the client and they will have to be promptly informed of all company activities. Due to the responsibility that these functions involve, the formation agent will usually apply a higher level of due diligence, which is how the measures against money laundering, that consist of the correct client identification and determination of the origin of the deposited funds, are known.
Normally the offshore service provider or registered agent charges an annual fee, which can range from around $300 in typical offshore jurisdictions up to more than $2000 in countries where more personal involvement from the nominee is required. If the nominee director performs duties for the company, i.e. they have not fully given the management to the client through a general power of attorney, they usually bill a fee per hour worked in addition. Being as well account signatory, they will obviously charge a significantly higher amount, to which a transaction fee is sometimes added.