Nominee Directors: Still in the Frame
“A Latvian pensioner has emerged as one the World’s richest
men – on paper. The 73 year old, appears to be a billionaire with an empire
that has interests in hundreds of businesses including banks, investment funds,
pharmaceuticals and shipping. But they are not his. He is revealed today as the
stooge nominee director of “brass plate” companies from London to the
Caribbean. He and others have also served on companies linked to a series of
financial scandals. The stooge directors would have signed away rights to any
powers and been unaware of any alleged fraud. “
--The Times, London 16 June 2013
The recent “Paradise Papers”, as reported in Radio 4’s “File
on Four”, showed a web of companies from Nambia to Mauritius to Hong Kong. As
the BBC reported:
“The fishing company in Nambia was Atlantic Pacific Fishing
(APF), 51% Namibian owned. APF signed a deal with a company called Brandberg to
manage their affairs, in return for 4% of the company's revenues. But despite
being named after a Namibian mountain, Brandberg is based 4,000 miles away - in
Mauritius. Why? Well, because of the island's double taxation treaties with
Namibia, signed more than 20 years ago. In theory, this agreement means that
companies operating in two countries can avoid being taxed in both by deciding
which one would get the tax. In this case, it is Mauritius which gets the
money.”
“The BBC went looking for Brandberg at its registered
address in Port Louis, Mauritius. Only, it couldn't find the company. Where it
should have been, we found instead an office for Appleby, one of the world's
largest providers of offshore legal services. In fact, Brandberg the company
that manages the Namibian fishing operation is actually based in Hong Kong. It
was set up by Pacific Andes - one of the world's biggest fishing operations.””
“They show that Brandberg appears to have no economic
activity in Mauritius. The only two directors of the company based in Mauritius
both work for Appleby. And an email from a firm of auditors asking for the
physical address of Brandberg is told in reply: Hong Kong.”
It appears these are nominee directors.
Another case in the Paradise Papers is equally instructive
Jean-Claude Bastos de Morais was trying to invest offshore
but was having a hard time finding a place to put his money.
As ICIJ reports:
“First, Bastos tried Appleby’s office on the island of
Jersey, a popular offshore financial centre in the English Channel. But Appleby
employees there balked at his 2011 request to set up a shell company without
being told why it was needed or what assets it would hold. One thing that
concerned Appleby’s Jersey lawyers was the possibility that the shell company
would own a shipping port in corruption-prone Angola.”
“Next Bastos, an amateur tennis player who runs an
asset-management firm, Quantum Global Group, tried Appleby’s office on the Isle
of Man, in the Irish Sea. Appleby’s management there decided that Appleby would
require a seat on the offshore company’s board of directors to exercise some
supervision over what they described as his high-risk business. The arrangement
did not go ahead.”
“Finally, in 2013, after Angola’s sovereign wealth fund
entrusted Bastos with $5 billion, he turned to another Appleby outpost:
Mauritius, an island nation in the Indian Ocean, 1,200 miles off the east coast
of southern Africa.”
“We are pleased to be able to act on your behalf,” Appleby’s
top lawyer in Mauritius, Malcolm Moller, wrote to Bastos’ Quantum Global in
October 2013.
The Affinex Group notes that:
“An offshore company registered in Mauritius must have at
least one director. If you do not want to be the company director for any
reason, you can use the services of a nominee director.”
“Nominee director - natural person EUR 400 a year (including
one general Power of attorney verified by a Notary with Apostille and an
undated resignation)”
The Guardian notes that “nominee directors” in some
jurisdictions have no legal status but are “fettered” – it gives an example of
a BVI company. The mechanisms used are:
·
A promise by a nominee director only to do what
the real owner tells them – “I hereby declare that I shall only act upon
instruction from the beneficial owners."
·
A "general power of attorney" –
handing back power to the real owner. "To transact, manage and do all and
every business matter … To open any bank account and to operate the same … To
enter into all contracts … To collect debts, rents and other money due."
·
A signed, but undated, director's resignation
letter – this can be used if the director acts in a way that the beneficial
owners do not desire, but which may be part of his general fiduciary
obligations as a director.
There used to be lots of nominee directors in Jersey, as
noted in Mark Hampton’s 1996 book “The Offshore Interface”. But when the
company law was changed in the Companies (Jersey) Law 1991 ("Companies
Law"), it made directors far more responsible in law, and a lot of
companies which had provided such services thought long and hard about it and
ceased to do so.
Under the 1991 Law, as in the UK Company Law – there is no
such legal entity as a “nominee director”. Indeed as Collas Crill point out,
under the law:
“In general, a director may not fetter his discretion by
contracting with other directors or with third parties to act in a certain way
in the future. In other words, a directors obligation to act in accordance with
his fiduciary duties would usually take precedence over any course of conduct
he may have previously agreed with co directors or third parties.”
In Hawkes v Cuddy (2009) EWCA Civ 291 Stanley Burton LJ
stated that:
"In my judgement, the fact that a director of a company
has been nominated to that office by a shareholder does not, of itself, impose
any duty on the director owed to his nominator. The director may owe duties to
his nominator if he is an employee or officer of the nominator, or by reason of
a formal or informal agreement with his nominator, but such duties do not arise
out of his nomination, but out of a separate agreement or office. Such duties
cannot however, detract from his duty to the company of which he is a director
when he is acting as such.
That is not to say that nominee directors may not exist in
Jersey or even in the UK. TCS Group UK says:
“We can provide UK or overseas nominee directors.”
Although it adds the caveat:
“A nominee director is not recognised by law and as such has
the same legal obligations as a client providing their own directors. Where we
are requested to provide nominees we will therefore require a full
understanding of the nature of your business and also want to know who the
beneficial owners of the company are, we will require certified copies of the
passport and a recent utility bill or other proof of address for all beneficial
owners of the company. This information is provided to us in the strictest
confidence and we would only disclose it if required to do so by law.”
Comsure cite a case looking at “Duties of nominee directors
faced with fraud” in the case of Central Bank of Ecuador and IAMF v Conticorp
SA and others (2013). It notes that:
The Court “found the defendants guilty of dishonestly
assisting and procuring the ‘nominee director’” to act in breach of his
fiduciary duties, who acted at all times on the instructions of the other
defendants.”
The Privy Council held: “Mr Taylor was in breach of
fiduciary duty to IAMF because he failed to exercise any independent judgement.”
Comsure note that:
“The law relating to nominee directors’ duties is broadly
speaking the same in the UK as it is in the Bahamas. As Lord Mance put it, “A
nominee director is not entitled to forego, or surrender to another, any
exercise of his discretion, however paltry the amount he may be paid.” In
short, a nominee director is in no different a position to a normal director
when it comes to the exercise of this duties.”
In the UK, in 2013, the Department for Business Innovation
and Skills (BIS) noted that in the UK alone:
“Assuming that an individual acting as the director of over
50 companies is almost certainly acting as a nominee director, it estimates
that 1,175 individuals are nominee directors and that 141,600 companies have
nominee directors on their boards ‒ many of which are of course perfectly
legitimate.”
Valetime Group notes that “nominee director” has no legal
status, and yet can exist. However, they point out that: “Nominee directors
share the same level of legal responsibilities as any other director. These
responsibilities cannot be signed away to others or be treated as non-existent.”
And they state:
“We can provide directors and other nominee services,
support to business processes & office services; and much else to present
an UK face to a company’s image.”
And notes that:
“It must not be overlooked that nominee directors share the
same level of responsibilities as do normal directors. Their obligations cannot simply be signed
away and directors cannot treat responsibilities as being non-existent (an
accusation known in law as “abrogation”.)”
The OECD book “Behind the Corporate Veil: Using Corporate
Entities for Illicit Purposes” comments that:
“Nominee directors and corporations sewing as directors
[“corporate directors") can also be misused to conceal the identity of the
beneficial owner and their use renders director information reported to the
companies registry less useful. Nominee directors appear as a director on all
company documents and in official registries (if any] but pass on all duties
required to be performed by a director to the beneficial owner of the company.
In many jurisdictions, the nominee or corporate director is not required to own
shares in the company in which it serves as a director.”
“Certain jurisdictions, including most OECD Member countries
and OFCs such as Cyprus. Isle of Man. Jersey. Malta. and the Netherlands
Antilles, do not recognise nominee directors. Consequently a person who accepts
a directorship is subject to all of the requirements and obligations of a
director, including fiduciary obligations, notwithstanding the fact that he is
acting as a nominee. “
“In certain jurisdictions, directors cannot be indemnified
by the beneficial owner. Non-recognition of the concept of nominee director has
one indirect benefit — those furnishing or acting as professional directors are
likely to take greater precautions to ensure that their client - the beneficial
owner - does not misuse the corporate vehicle for illicit purposes. “
And it gives an example:
“In the Netherlands Antilles, which does not recognise the
concept of nominee directors, reputable trust companies that are asked to serve
as directors will conduct a rigorous background check on their clients and. in
the case of bearer share companies, will insist on the immobilisation of those
shares as a condition to accepting a directorship. “
To curb the availability and use of nominee directorships
certain jurisdictions, such as Ireland, impose a limit on the number of directorships
a person may hold. In Ireland, a person may hold a maximum of 25 directorships.
In the United Kingdom, the Companies Act requires disclosure of the identity of
"shadow" directors, who are defined as persons on whose instructions
the directors of a company are accustomed to act.
Even Mauritius does not recognise the concept of “nominee
directors”, but it seems that some jurisdictions are better than others at
ensuring directors face the full legal responsibility of their office. Jersey and the Isle of Man seem far better than Mauritius at ensuring that any directors acting as nominees do so as if they were not nominees, but properly appointed directors and not just stooges for the beneficial owners.
But it would help to strengthen the case against nominee
directors if the directors were made to declare by law, if they had any promissory
notes, powers of attorney or unsigned resignation letters as outlined by the
Guardian’s piece above so that their nominee status could be exposed in public.
References
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