CNA Explains: What are 'silent' directors, and what's the impact of Singapore becoming stricter on them?

SINGAPORE: Court cases involving "silent" or nominee directors - with a lack of oversight in companies they helped incorporate - have cropped up regularly.

Many are often prosecuted after said company, a foreign entity incorporating in Singapore, ends up transacting criminal proceeds. 

Most recently, in June, two men were hauled to court after firms they helped incorporate received more than US$1 million in scam proceeds.

And at the start of July, Singapore passed a law meant to prevent the misuse of nominee directorship arrangements to create shell companies for money laundering.

Who can be a nominee director, and why are they 'silent'? 

Singapore citizens or permanent residents above the age of 18 can be nominee directors. They cannot be undischarged bankrupts or previously disqualified from the role.

Foreign companies who don't know anyone in Singapore can pay a fee for a corporate service provider to appoint such an individual. 

According to the Singapore Legal Advice platform, as opposed to an executive director who runs day-to-day operations, a nominee director is generally not involved in other forms of business operations.

What's the point of the role? 

That doesn't mean that being a nominee director simply involves putting a name on a piece of paper. 

Nanyang Technological University's (NTU) Associate Professor Kelvin Law said a nominee director serves as a "real" contact point for local authorities in the event of inquiries.

"Imagine trying to reach out to a company whose only address is a post office box – it would be a significant regulatory challenge," he said. 

In the event that a foreign company breaks the law, a local director can then be held accountable.

Local directors are also supposed to ensure that companies comply with regulations such as filing annual returns and keeping accurate accounting records. 

The role is crucial to striking "a delicate balance between attracting foreign investments and maintaining robust local regulatory oversight", said Assoc Prof Law, who's from the Nanyang Business School.

He reiterated that nominee directors are not meant to be passive. 

They shoulder "substantial" legal responsibilities and duties similar to active directors, and can face penalties in cases of gross negligence or complicity in illegal activities. 

What could go wrong for a nominee director? 

In many cases, a nominee director accepts a fee in exchange for allowing their name to be used in incorporation documents, and is not actively involved in the company, the Singapore Police Force told CNA. 

Some relinquish personal credentials, such as their Singpass digital identity, to criminal syndicates, who then use these to incorporate companies and open bank accounts to transact criminal proceeds.

In the recent case involving over US$1 million in scam proceeds, one of the men became, in the span of a year, nominee director for more than 50 companies. He was recruited by a friend, a chartered accountant who was also a corporate service provider. 

The nominee director faced a jail term of up to a year or a maximum fine of S$5,000. He pleaded guilty to failing to exercise reasonable diligence in the discharge of his duties and was jailed for a week on Tuesday (Jul 9). 

He was not aware of the companies' business activities, operations or transactions; and did not supervise their bank accounts. 

So what should nominee directors do? 

They should put in effort to understand the firm's structure and its strategy to stay in business, said senior lawyer Andy Yeo, whose expertise lies in white-collar criminal defence and anti-fraud investigations.

"You must know who you are working for, who is the company; what role you are playing even though you are a nominee. You must know a few basic things - who are the fellow directors, where they are from, what is the business model as well as the sources of their business activities."  

It should not be difficult for smaller businesses to provide such information, which would not require a lot of time to digest, he added. 

That said, Mr Yeo noted that nominee directors face a "constant struggle" between their nominal role and the substantive duties that bind them to the role. 

"A lot of them do not have the right to access a lot of what is being decided on the company's operational and management side," he said. 

"While they are vested with the legal responsibility, they might not be given sufficient access to do the job properly. That is the dilemma."

Frequent and transparent two-way communication is crucial, said NTU's Assoc Prof Law, who added that structured reporting protocols and regular meetings with key executives would help.

What are some red flags nominee directors could look out for? 

For one, transactions that do not align with declared objectives, experts said. 

"For example, an artificial intelligence tech company suddenly engaging in a high volume of real estate deals or precious metal trades ... This misalignment could indicate the use of a legitimate business front for potential illicit activities," said Assoc Prof Law. 

An overly complex holding structure, or the "heavy use" of certain types of transaction mediums - such as cryptocurrency or gold - that don't align with the business model, could also be warning signs. 

And frequent changes in company structure, directors or beneficial owners without clear business reasons could indicate attempts to evade detection or hide ownership, said Assoc Prof Law. 

"Basically, if something doesn’t match up with what the company says it does, or if the financial flows seem unnecessarily complex or opaque, that’s worth the nominee directors (having) a second look". 

What are the safety measures? 

A new law will tighten requirements for nominee directors in Singapore.

They can now only be appointed through a corporate service provider, which must ensure that the nominee director is "fit and proper". 

The law effectively puts the responsibility on corporate service providers to ensure the adequacy of nominee directors, said Mr Yeo, the lawyer.

A "higher level of professionalism" is thus instilled in the director, he added. 

This would help put a stop to businesses using nominee directorship arrangements in money laundering offences, a situation which the Accounting and Corporate Regulatory Authority has said was "largely created" by corporate service providers appointing unqualified individuals.

Money laundering has been a subject of significant public interest in Singapore due to a S$3 billion case uncovered last year.

What's the impact of tightened measures? 

Experts told CNA the new law would bode well for legitimate businesses seeking to expand to Singapore. 

"In the long run, these measures should help keep the bad actors out while enhancing our reputation as a clean and well-regulated business hub," said Assoc Prof Law, who said it was about closing loopholes that criminals exploit.

A legitimate business would not be worried about having a nominee director who could potentially "whistleblow", said Mr Yeo. 

He said a bona fide business would eventually move away from having an appointed nominee director, as the company would become established enough to appoint its own local employee or local business partner as a member of its board.

"Having a nominee director should be like a tentative or temporary measure until you find somebody local you can trust to appoint as a director. This process shouldn’t take more than a couple of years."

That said, Mr Yeo cautioned against having overly stringent requirements for nominee directors as it might increase the cost of retaining one. This may in turn be passed on to the company or impede foreign businesses looking to start out in Singapore.