Commentary: Case of director of 980 companies drives home a problem for business-friendly Singapore

SINGAPORE: Can a person reasonably be a director of 980 companies, even without going into whether this should raise red flags for regulators?

That staggering number jumped out for many when one such Singaporean was sentenced to four weeks’ jail and fined S$57,000 in December last year, for multiple charges including failing to exercise his duties as a nominee director. Two of the companies were found to be used for money laundering.

If not 980, how about 185 companies? This was the case of another Singaporean, who was reportedly director and shareholder for multiple companies, including several linked to the S$2.8 billion-money laundering scandal that has been the talk of the town since last September.

How about 60 companies instead? A Grab driver was fined S$28,000 in December after a bank account of one of his companies was used to funnel scam proceeds.

These are but a few in the recent spate of cases of individuals convicted for offences under the Companies Act, usually for failing to exercise reasonable diligence in discharging their duties as nominee directors.

Companies incorporated in Singapore must have at least one director who is ordinarily a resident. Similar requirements exist in countries like Australia, Brunei, Indonesia and Malaysia.

Although several countries, including in Asia, have imposed limits on the number of directorships of listed companies, there are generally no similar limits for unlisted companies. It is not unusual for one nominee director to be tied to many companies.

That said, the string of cases associated with money laundering and scams points to an abuse of shell companies and nominee directorships and becomes a problem business-friendly Singapore needs to address.

CONSEQUENCES OF NOT CURBING ABUSE

While Singapore should welcome legitimate companies to incorporate and conduct business from here, not curbing abuse in use of shell companies and nominee directors can harm its reputation as a leading business hub, one that is trusted by investors and stakeholders.

Shell companies with nominee directors may be used for money laundering, terrorism financing, financing proliferation of weapons of mass destruction or breaching international sanctions. Layers of shell companies may be used, incorporated here and in overseas jurisdictions, to hide the trail and the identity of those behind these companies.

Requiring a nominee director who is a local resident allows the authorities greater recourse if the company or management does something wrong.

This puts nominee directors in a rather precarious position, even though they are generally appointed purely to comply with statutory provisions and do not play any meaningful role in the companies. Many may not have any understanding about their duties and liabilities and are part of the service offered by outsourced corporate service providers (in addition to services like secretarial or accounting support).

Even someone fresh out of junior college could qualify to be a director under the Companies Act. There are few specific requirements: An individual must be at least 18 years old, not an undischarged bankrupt and has not been disqualified.

However, legally, a nominee director has the same duties as any other company director and ignorance of the law is not an excuse. 

TIGHTENING THE LAW

Even before the recent slew of high-profile cases, ACRA had already been moving to address some of these gaps.

In 2022, it proposed amendments to the Companies Act and ACRA Act (and its subsidiary legislation) and a new Bill for corporate service providers, aimed at curbing abuse in the use of companies incorporated in Singapore. These changes are also intended to better align local requirements with the Financial Action Task Force (FATF) Recommendations to combat illicit financial flows globally.

One aspect of changes concerns penalties when the regulatory regime is breached. There are proposals to increase the maximum financial penalties or introduce new ones that should make the parties involved in registering and running the company more vigilant.

However, there is no proposal to increase the penalties for breach of director duties, which is currently a maximum fine of just S$5,000 or 12 months’ imprisonment.

In the recent cases, the penalties sought by the prosecution and ultimately imposed were well below the maximum anyway, given the number of charges some of the individuals faced. So increasing potential penalties is one thing, imposing them is another.

The other aspect of changes is, of course, prevention - such as by registering those who provide corporate services in or from Singapore but transact in overseas jurisdictions and by requiring customer screening against prescribed sources of information.

But the proposals stop short of mandating a hard limit on the number of nominee directorships one person can hold.

Corporate service providers will be required to ensure that their appointed directors are fit and proper, and satisfy training requirements if they hold more than a legally prescribed number of nominee directorships.

It is understandable that ACRA is hesitant to impose a blanket restriction on the number of nominee directorships. Legitimate company groups, especially in industries such as shipping and real estate, may create many subsidiaries to own individual assets for reasons such as ringfencing risks. Executives within the group may be appointed as directors to many of these subsidiaries and could still be liable if things go wrong in these “paper” subsidiaries.

CHALLENGE REMAINS MONITORING AND ENFORCEMENT

While money launderers and perpetrators of other financial crimes need only one company for malicious use, it is clearly absurd for one individual to be a nominee director of as many as 980 companies.

The number of directorships held by a single individual should be at least be an “orange flag” of potential problems as part of a risk-based approach to monitoring and surveillance - particularly if these companies are not part of a group where there may be legitimate business reasons to have many subsidiaries.

Subsidiary legislation introduced in 2015 under the ACRA Act relating to filing agents and qualified individuals specify factors for assessing whether an individual is fit and proper, who are considered qualified persons, and courses and training. These could be applied to nominee directors.

The challenge is effectiveness of such rules and their compliance, monitoring and enforcement. An individual could well meet the fit and proper requirements before they are caught and simply attending courses and training does not necessarily guarantee that an individual is equipped or inclined to fulfil their responsibilities.

In addition to better use of technology and data analytics to identify relationships and red flags, regulators should also encourage whistleblowers to come forward and provide better protection for them. Surveys have repeatedly found that most frauds are discovered through tip-offs.

While ACRA’s website provides a means for complaints to be filed, it may be quite intimidating for those who wish to do so. For example, while it seems reasonable to ask for contact details to facilitate investigations, it suggests that anonymous complaints are not allowed. If individuals are hesitant to log a complaint under such circumstances, ACRA may miss out on an important source of information.

The recent abuse of shell companies and nominee directorships requires firm action from the authorities so that Singapore will not lose its hard-earned reputation of being a trusted financial hub.

Mak Yuen Teen is Professor (Practice) of Accounting and founding director of the Centre for Investor Protection at the NUS Business School, where he specialises in corporate governance.