What Is the Function of a Dummy Shareholder?

A legitimate owner can appoint a dummy shareholder to act on their behalf. Dummy shareholders serve various purposes, some of which may be potentially illegal or unethical. They usually operate under a nominee agreement and receive a fee for the services rendered.

Basics

In the realm of corporate ownership, a dummy shareholder represents an entity entrusted with holding shares in a public company for the true owner, who can be an individual or a firm. The dummy shareholder lacks any beneficial interest in the shares held on their behalf. Moreover, when it comes to decisions regarding the shares, such as selling or tendering them, it is the real owner who holds the authority, not the dummy shareholder.

Controversy Around Dummy Shareholders

Dummy shareholders are a contentious subject in many jurisdictions due to their potential use in circumventing securities laws and committing fraud. They can pose challenges during hostile takeover attempts when large blocks of shares are held by unidentified individuals with unknown intentions. Offshore companies often resort to dummy shareholders when investors located far away struggle to comply with local regulations, such as minimum shareholder or director requirements. Moreover, corporate residency obligations in offshore jurisdictions and the need for signatories on bank accounts may further drive the adoption of dummy shareholders.

Nominee Services and Dummy Shareholders

In certain situations, it is common for individuals or companies to employ the use of dummy shareholders, directors, or bank account signatories. These "straw persons" are provided by nominee services for a fee. The purpose of using these individuals is to maintain privacy and distance in business dealings. However, it's important to note that acting as a nominee may be against the law in some jurisdictions. Local regulations may require the true decision-maker to be registered as the director and the beneficial shareholder in official company records. Failure to comply with these rules can have legal consequences for the arrangement involving dummy shareholders.

Real Example of a Dummy Shareholder

The release of the Panama Papers in 2016 exposed the use of dummy shareholder accounts and nominee directors. Over 214,000 offshore entities were revealed, involving politicians, celebrities, athletes, and criminals in illegal activities. The scandal resurfaced in 2019 with the documentary film, The Laundromat. Governments took action, recovering more than $1.2 billion and addressing fraud and tax evasion.

The Panama Papers highlighted the exploitation of offshore shell companies. While setting up such companies is not inherently illegal, they were used for money laundering and tax evasion. Governments worldwide responded by focusing on financial transparency and recovering funds associated with illegal activities.

The impact of the Panama Papers led to a greater awareness of fraud and tax evasion. Governments took steps to prevent future misuse of dummy shareholder accounts and nominee directors, emphasizing the need for stricter regulations and oversight.

Conclusion

Dummy shareholders can serve legitimate purposes but are controversial due to their potential for illegal and unethical activity. Nominee services may provide these "straw persons" for a fee, but compliance with local regulations is essential to avoid legal consequences. The Panama Papers scandal exposed the exploitation of offshore shell companies and led to increased awareness and government action. Stricter regulations and oversight are necessary to prevent future misuse of dummy shareholder accounts.