What Are Nominee Services and How Do They Work?

Nominee services are legal arrangements in which third parties are appointed to act on behalf of the actual owner of a business, portfolio, or asset. Many entrepreneurs use nominee services as a way to protect their identity, strategically delegate legal roles, and even make cross-border operations simpler. Indeed, directors, shareholders, and accounts can all be nominated to a third party in international business structuring, facilitating greater flexibility alongside maintaining regulatory compliance.

This is a global service provided in multiple jurisdictions, rather than being limited to specific countries or regions. Nevertheless, it’s vital to get a solid understanding of how they fit into legal and impactful business strategies. We’re going to take a closer look at the concept to ensure entrepreneurs and professionals can make informed decisions.

Understanding the Concept of Nominee Services

So, what are nominee services? In essence, they’re used in business structures as a way to separate the legal title from the beneficial interest. When a nominee is appointed in some capacity, they have legal ownership, meaning that they appear as the title holder on public records. This differs from beneficial ownership, which in this context refers to the true owner of the business or related assets. Only beneficial owners have the control to use, influence, or dispose of the assets, while the nominee simply maintains the legal title.

This is a perfectly legal arrangement, utilized widely as a strategic method of maintaining privacy, navigating foreign ownership regulations, and ensuring continuity of corporate governance in multinational structures. There are also various types of nominee roles that beneficial owners can utilize, including nominee directors, nominee shareholders, and nominee account holders.

Legal Framework and Global Relevance

Nominee structures are common tools across the world. Indeed, Ascot offers global services, unlike the majority of other providers that only focus on local areas. It’s important to recognize, though, that each jurisdiction’s approach to the legal use of these services can vary, with regulations sometimes differing in quite significant ways.

Alongside the individual legislation of each jurisdiction, nominee services are also often affected by international regulatory frameworks. Corporate disclosure guidelines set out by the Financial Action Task Force (FATF) and the Organization for Economic Cooperation and Development (OECD) are applicable worldwide to prevent the concealment of illicit activities. The most important safeguards related to nominee roles are Ultimate Beneficial Ownership identification and reporting rules. Any use of nominees must align with the specific transparency requirements of relevant authorities while still serving the privacy needs of owners.

Use Cases and Practical Applications

Nominee services are multifaceted tools that entrepreneurs and corporations use for a wide range of legitimate purposes. One of the most common applications is to maintain the privacy of high-profile beneficial owners. In instances where the principal’s name being connected to a company on public records could lead to unwanted scrutiny or security issues, nominees provide a layer of added protection.

There are also opportunities to employ nominee services in facilitating overseas investments, as they can simplify administrative elements related to foreign ownership. Not to mention that nominees can help individuals navigate residency requirements related to directors or shareholders.

Furthermore, nominee arrangements tend to simplify corporate structuring and management of international subsidiaries. They help to centralize oversight and can facilitate voting or proxy voting mechanisms for owners. As a result, nominees support effective Ultimate Beneficial Ownership (UBO) practices in legally compliant ways.

Types of Nominee Roles

Nominee services tend to be tailored to the needs of the beneficial owners. In general, though, the applications available fit into three common role types. These are:

• Nominee directors – These nominees fulfill the statutory duties of a company director without having unilateral control over decision-making. They act on the instructions issued by the beneficial owner and their name appears on public-facing records. The limits of their role are outlined in private and legally binding agreements.
• Nominee shareholders – What is a nominee shareholder? In most cases, these third parties hold shares in trust on the beneficial owner’s behalf. This is often to protect privacy where shareholder information is made public, while still ensuring the benefits and control related to the shares remain with the beneficial owner.
• Nominee bank account holders – These nominees are entities or individuals that manage corporate or investment accounts under proxy control on behalf of beneficial owners. They act within strict legal and transparency-related frameworks to maintain regulatory compliance. In some instances, beneficial owners must be identified to banks under know-your-customer (KYC) legislation.

In addition to these categories, arrangements are also active or passive in nature. Passive roles are those in which nominees serve a purely administrative function and don’t engage in any actual business activities. Active arrangements, on the other hand, see nominees taking on day-to-day operational functions to the extent outlined in the nominee agreement.

Risks, Limitations, and Compliance Obligations

These arrangements are perfectly legal when used responsibly. However, there are common misconceptions about these tools, one of which is that they’re used to support secrecy. This is far from the truth, particularly as transparency is a key condition to the application of nominees. Indeed, misconceptions that nominees provide complete anonymity are counter to the reality of the service’s legal limitations, as beneficial owners will still be disclosed to authorities.

When nominees are misused, there can be significant risks. For instance, misuse for concealment can see owners subject to tax or other regulatory fines, which is why ethical and reputable firms actively safeguard against it.

Another area of risk to be mindful of is that rules around disclosure can vary in complexity in different jurisdictions. Without fully understanding the regulations, owners can fall afoul of non-compliance penalties. Indeed, banks and regulators may apply additional scrutiny to owners or businesses that appear to be misusing nominees. 

This is why having robust due diligence processes supported by experienced and trusted fiduciary service providers is so vital. Indeed, complying with KYC frameworks is particularly important if owners are using nominee accounts. What are nominee accounts? Like other such services, these are bank accounts under the name of nominees but controlled by a beneficial owner. Filling the potential gaps for misuse is the only way to protect all parties involved.

FAQs

Is using a nominee director legal in my country?

The legality of appointing a nominee director depends on the specific jurisdiction. However, most global business hubs allow it if it’s disclosed properly. 

Can I stay anonymous using nominee services?

Beneficial owners usually won’t appear on public records, but disclosure to authorities and banks is usually required. Therefore, anonymity is limited.

Who actually controls the company if there is a nominee director?

The beneficial owner will usually retain complete control via powers of attorney or other internal agreement mechanisms.

Do nominee services mean I give up ownership?

No, despite nominees holding the legal title, the beneficial ownership remains with the client.

Are nominee services only for tax purposes?

No, nominees can be utilized for enhanced privacy, residency law requirements in foreign jurisdictions, and international structuring, among other purposes.

References

FATF. (2024). Beneficial Ownership. FATF. https://www.fatf-gafi.org/en/topics/beneficial-ownership.html

OECD. (2024, July). Beneficial Ownership and Tax Transparency – Implementation and Remaining Challenges. OECD. https://www.oecd.org/content/dam/oecd/en/publications/reports/2024/07/beneficial-ownership-and-tax-transparency-implementation-and-remaining-challenges_616488db/f95790b1-en.pdf

Chen, J. (2024, August 6). Know Your Client (KYC): What It Means and Compliance Requirements. Investopedia. https://www.investopedia.com/terms/k/knowyourclient.asp