The Legitimacy of Dummy Companies

Published on 6th November 2007

If you are an ardent East African investor, you know very well about the Safaricom saga involving the indirect 5 per cent ownership by Mobitelea Ltd. Mobitelea, a dummy company registered in Guernsey, holds 12.5 per cent stake in Vodafone Kenya Ltd, which in turn owns 40 per cent in Safaricom Ltd. The borne of contention has been whether the ownership of Mobitelea in Safaricom is legal.

A dummy company or shell company is an entity created to serve as a front or cover for one or more legitimate companies. It can have the appearance of being real but lacks the capacity to function independently. The goal of Dummy Corporation can be to conceal the true ownership or avoid taxes. In the case of Mobitelea Ltd., the real owners hide behind two nominee firms, Guernsey-registered Mercator Nominees Ltd and Mercator Trustees Ltd. whose directors are Anson Ltd and Cabot Ltd, based in Anguilla and Antigua respectively.

The concept of dummy companies is still new in not only Kenya but also other African countries. In developed countries, dummy companies have always been legally doubtful to say the least. Last year, there was an extreme case where Siemens Ltd., a German technology company, was marred in corruption allegations for using secret funds channeled to dummy companies through Swiss bank accounts. These funds were used to bribe customer staff into awarding Siemens both lucrative and shady contracts. Several of Siemens top managers were arrested and charged on these grounds.

 

How legal are dummy companies?

 

I am not a legal issue professional, but from the few cases I have read or heard of, none of the dummy companies have indicated that they are legal. In most instances, dummy companies either cook books of accounts or hide the identity of unscrupulous individual persons promoting it.

 

Dummy companies are corporate entities in name only, hollow false-fronts, which own no real assets. They are essentially an exercise in fraud designed to keep the real owners involvement a secret from outsiders. They use this to hide the true nature of their aim in the business. On the other hand, legit privately owned companies usually engage in genuine business and have identifiable assets. To be precise, a dummy company only gives a friendly face that has nothing behind it.

 

To prosecute individual persons responsible for the formation of unscrupulous dummy companies is not easy due to the corporate veil clause that governs companies as artificial persons. The corporate veil law states, “Incorporation of a company raises a separate legal liability in the new company, which is distinct from that of the company's directors and shareholders. Thus, a company is a separate legal entity from that of its directors and shareholders and therefore has a separate and distinct liability from those directors and shareholders.”  In very limited cases, can the court lift or pierce this veil to prosecute the individual person behind it.

 

In many cases, dummy companies have been used to defraud both the government and individual firms in Africa and around the world. A good example is the Anglo-leasing contracts in Kenya that led to loss of billions through fake promissory notes to dummy companies. The best way to curb this vice is by enacting proper laws that make sure all companies are vetted properly before being allowed to own other companies or transact business with the government or other firms. The only problem is usually such dummy companies involve well-placed individuals in the society and prosecuting them can prove very difficult especially in developing countries like Kenya.


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