The risks for the clients requesting Directors Services are not often considered accurately. There are opportunities to mitigate the risks and to protect the client’s interests.
Directors powers and duties
The notion of Nominee Director and the corresponding nominee agreement are unknown from third parties (except bankers and we will engage this topic below) and this leave room to Directors powers being potentially abused. Having an agreement mentioning that the Director will only act on written instructions is enforceable but obviously only after the commission of potential illicit actions.
Directors engaging in good faith the company into a delicate situation
Honesty doesn’t compensate experience and skills, a Director could fail his Director’s duties by inadvertence, misjudging an operation and not taking into consideration a specific law or regulation. The potential to see errors is important, the demonstration of this is reflected by indemnify agreements and liability insurances requested to protect the Directors.
Directors personal reputation and private activities
Extreme political views, engagement into private activities in opposition with the Company values, the Directors activities on social medias could damage the company reputation. The public exposure of a Director is nowadays easily accessible to competitors, business partners and compliance departments.
Directors professional profiles
Directors are often selected from the team of the Corporate Services Provider, from a Certified Public Accountants firm or from a Legal professional’s firm. Despite the Company obvious advantage to have such professionals well aware of the compliance process as Directors, this is also a demonstration that the Directors are not specialized into a specific activity, say digital marketing, and this only will drag attention to their Nominee roles.
Directors Business activities
Risks are attached to every operation, to every Companies, by multiplying operations and companies and by engaging in many Directorships the risks are increasing drastically. The possibility to see a director bringing reputational, or worst, issues to a new client is real. Additionally, the Directors access to proprietary information (and the multiplication of such clients) is generating difficulties to always maintain a “Chinese-wall” between clients.
This subject itself could be expended into a long article, as a matter of fact the most important notion is the UNUSUAL CONFIDENTIALITY level so, basically, it’s a judgment call from the bank compliance department about the use of Nominee Director Services. Some banks are very reluctant to accept Companies using Nominee Directors and Nominee shareholders services.
The risk assessment process could be supported by an unbiased legal professional (not providing the said Directors Services). In addition to a compliance on the company providing the individual directors I would suggest the below actions.
1. Hiring two Directors
One Director could go rogue, two at the same time would be extremely rare. Having the directors not located in the same country could also represent some tax advantage.
2. Request for a qualified, fit & proper, Director
The Director should have at least 5 years of experiences in a Senior position, plus adequate experiences as a Director for other companies.
3. Request for a list of occupied positions
The Director in addition of his/her qualifications should present an impeccable public profile, a compliance should be effectively prepared on his/her profile and the client should obtain a list of all the Direction positions held, at least in the company jurisdiction.
4. The Director should have something to lose
Let’s be straight-forward, a taxi-driver would not attach great importance to his public exposure as a company Director, a director should suffer (and will but it’s another story) from any wrong doing by any of the Companies for which he does act as a Director.
5. Soft factors are important too
Where does the Director reside? A public housing location will not be credible for an important company, his age and professional experiences are also informing about his qualities when your business partners will search the public register.
6. Documents list to obtain
Passport copy, identity card copy, address proof (utility bill) of less than 3 months old, Resume (CV), list of positions as Director in the same jurisdiction.
7. Compliance to be performed
Short compliance on the Companies for which the Director is acting, searching for red flags about activities and adverse medias. Full compliance on the proposed Director – private database and open sources.
Few words about the Hong Kong situation:
In Hong Kong there is No PUBLIC Register of significant controllers, so the use of Nominee Directors and Nominee shareholders is effective to protect confidentiality, privacy and business freedom.
These services were in the past very well accepted, quite common and so obviously misused by criminal and tax cheaters. AML laws and regulations and more effectively bank’s reluctance to onboard clients using nominees did put the services providers on heavy pressure.
The main issue is the compliance, and so the associated costs, incurred by a Corporate Services Provider before accepting a client and for the continuous monitoring of the Company activities.
The Corporate Services Provider is confronted to a long list of risks, this will be explained further in another article. Offering nominee services is often reserved to existing clients or to other professionals whom performed due compliance and are knowing their clients very well.
Disclaimer: I the co-founder of a Corporate Services Provider licensed in Hong Kong which provide Nominee Directors and Nominee Shareholders services.