A nominee shareholder is a person who officially holds the shares of an entity but on behalf of the beneficiary or a third party. The nominee shareholder is not the real beneficial owner of an entity. He is just the face. Moreover, this person is appointed by the beneficial owner of the entity through a written agreement.
Nominee shareholdings are not illegal in many jurisdictions as many people use them to protect their identity and keep a degree of privacy.
Although the nominee shareholder appears as the registered shareholder of an entity, he doesn’t have any economic interests in the entity.
Under a formal (written) nominee agreement, the nominee only receives a contractual fee for this service – nothing else.
The economic interests are retained by the real beneficial owner of the entity.
However, there are significant money laundering (ML) and terrorist financing (TF) risks associated with nominee arrangements. There is a concept of “Signature for Sale” which is becoming popular in the laundering world.
Criminals may use these “Signature for Sale” services to conceal the ownership of entities, especially in the case of shell companies. Generally, these shell companies are part of the larger money laundering schemes.
Entities under AML regulations must take appropriate measures and obtain adequate documents to identify and verify the identity of:
- The nominee shareholders
- The real beneficial owners.
It is difficult to identify the real beneficial owner of the entity without accessing the agreement between the nominee and beneficiary. This agreement is difficult to obtain.
In some cases though, the beneficial owner of the entity may appoint a friend or a relative as the registered shareholder without any written agreement in place (“strawman”). How do you identify strawmen in entities where no official written agreement is in place?
Not an easy task, of course! But there are some flag indicators.
- Strawmen usually have a limited understanding of the business, the funding, and the operations.
- You can identify them by asking well-designed questions.
FATF Measures
The FATF has suggested specific measures by countries regarding nominee shareholders and directors such as:
- Require nominees to disclose to the company registry that they are nominees and the identity of the person who nominated them
- License nominees and require them to retain records of who has nominated them.
- Countries should have a mechanism for obtaining beneficial ownership information on foreign-created legal persons that have a ‘sufficient link’ to their country. Many countries have established beneficial ownership registries which require the disclosure of the real beneficial owners of entities.
Regulated entities should not rely only on the beneficial ownership registry for their CDD, including in the case of customers that have nominee directors or shareholders.
They will normally conduct their CDD, obtain all the relevant documentation and then confirm the information they have with the information included in the registry.
In case of any discrepancies, the regulated entity is usually required to disclose the discrepancies to the authority maintaining the beneficial ownership registry as specified in the national law.
What measures does your country implement for nominee arrangements?
