Understanding nominee shareholder

The term “nominee” is basically used for a person or an entity that holds assets on behalf of another entity. The nominee is not the real owner but only acts as a representative of another person. A nominee shareholder is an individual in a business who holds the shares of the company while acting as the registered proprietor of shareholdings symbolically. This means that the shares are registered in his name, but he or she just owns them for someone else’s profit.

In this way, the identity of the ultimate beneficial owner (“UBO”) is kept a secret. The nominee shareholders protect the corporate and financial secrecy and privacy of the original owner. The UBO holds the beneficial title of the shares, while the nominated shareholder holds the legal title, making him the registered shareholder listed in the company’s register.

Declaration of Trust Agreement

A nominee shareholder is usually appointed by signing a Declaration of Trust (“DOT”) agreement. It is a trust agreement that contains all the information regarding the agreement and declares that the nominee shareholders have no right over the shares and that their role will be to act as a representative on behalf of the original owner of the company.

The Declaration of Trust Agreement is a private agreement between the UBO and nominee shareholders, through which the identity of the ultimate beneficial owner is not disclosed to the company. Although the name of the nominee shareholder appears on the company registers, the UBO is still the one who is entitled to the income and capital gains from the shares.

Nominee shareholders do not have access to the company’s bank accounts, are unable to sign checks or make payments, and have no legal authority over any of the company’s assets. The actual owner of the shares continues to benefit from the ownership and receives dividends as usual.

It is also typical for the nominated shareholder to execute and sign an undated Instrument of Transfer in favour of the UBO, which safeguards his rights and can be used to lawfully transfer the shares into his name at any time. The declaration of trust should also indicate how the company’s expenses will be paid, accountability for the company’s bank account, signatories, loans, bank credit, and so on. It can also specify a mechanism for the transfer of name in case of breakdown of a relationship or cause of death to a party.

Bringing transparency among nominee shareholders

International organizations such as the World Bank and the International Monetary Fund (“IMF”) work on managing financial regulations across borders and provide guidelines and regulations for bringing transparency to the workings of financial institutions.

The Financial Action Task Force (“FATF”) is an intergovernmental body that sets standards and develops recommendations for the effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and proliferation financing.

The latest recommendation published by the FATF, i.e., recommendation number 24, focused on bringing transparency and beneficial ownership to legal persons. This recommendation sets up new rules and guidelines that should be implemented while appointing nominee shareholders.

Some of the guidelines were that:

(a) Nominees must disclose their nominee status as well as the identity of the company’s and any relevant registry’s nominator; and/or

(b) Nominees should be licensed, and the nominee status and identity of the nominator should be held by a public authority or body or an alternative mechanism; maintain information identifying the nominator on whose behalf the nominee is acting.

These guidelines were set up to prevent the misuse of nominees and to bring anonymity to the process, although nominees are used for legitimate purposes. The fact that a nominee holds shares for the benefit of or acts on behalf of another natural or legal entity (whose identity is not disclosed) makes determining the beneficial owners more difficult.

The amended FATF guidelines include new requirements for bearer shares and nominees. These guidelines mandate that the countries mitigate the risk of money laundering, as in many instances, the nominees are used as an intermediary for financing their sources.

In certain scenarios, those attempting to conceal beneficial ownership information may make use of legal entities that allow nominees to represent shareholders and directors. Some nominee arrangements are genuine and official, but others can involve less formal or more opaque arrangements in which the nominee is used to disguise the identity of the beneficial owner.

These guidelines will work on bringing transparency among nominee shareholders and beneficial owner relationships.

Road ahead

Nominee shareholders are widely used by foreign investors to invest in a particular company. Appointing a nominee shareholder hides the identity of the real owner, as the name of the nominee is registered in the company, but the ultimate beneficiary is the person who appointed the nominee.

However, the concept is being widely used for the purpose of concealing the identity of the real owner and is used for activities such as money laundering and other financial crimes. To reduce the likelihood of such activities, the FATF established guidelines for nominee shareholders in recommendation 24, which will increase transparency in the relationship between nominee shareholders and real owners.

These guidelines can bring a positive change to the concept of nominee shareholders, as they will bring clarification and reduce the chances of financial crimes taking place soon.