Nominee directors and AML risk

A nominee director is an individual or legal entity that acts as the director of a company on behalf of someone else. They sign documents, appear on registers and fulfil all the formal functions of a director. 

The issue here is that the person whose name appears on the company register isn’t the person who owns or controls it. The nominator (the person who appoints the nominee director) holds the real interest. They benefit from the company’s activities, direct its decisions and control its assets. All without their name appearing anywhere on public record.

That space between the nominee director and who actually controls the company is exactly what makes nominee arrangements attractive to people who want to conceal the proceeds of crime.

How nominee directors create AML risk

Nominee arrangements aren’t inherently illegal. In some jurisdictions they’re a common part of company structures: a local director appointed to meet residency requirements, for example, while the real owner lives or works elsewhere.

The problem is that the same structure that makes a legitimate business work can be used to criminal advantage. 

When a nominee director is in place, the nominator can move funds through the company, enter into contracts, acquire assets and conduct transactions. All without their name appearing anywhere on public record. This completely obscures the beneficial ownership. 

FATF lists nominee arrangements as one of the primary methods of concealing beneficial ownership, alongside bearer shares and opaque ownership structures. They consistently appear in its reports on corruption, organised crime, sanctions evasion and money laundering.

So when a regulated professional forms a company, handles a transaction or provides ongoing services to a client where a nominee director is in place, they may be dealing with a structure that has been deliberately designed to prevent them from identifying who they’re really working for.

What FATF Recommendation 24 requires

FATF tightened its recommendation on nominee directors in March 2022, making it harder for nominees to be used for money laundering. In some cases, nominees have to declare who they’re really acting for. Whereas some nominee arrangements are essentially banned in most cases.

Corporate nominee directors

When a company is appointed as director of another company, it puts an almost impenetrable layer between the business and any real person. Some jurisdictions have banned these arrangements. Others require disclosure or a special licence instead.

Bearer shares

When a company is formed, it can issue shares that record no named owner. Whoever physically holds the share certificate owns the company. Ownership can change hands without any registration, signature or paper trail.

Bearer shares are now only found in offshore and lower-regulation jurisdictions, and FATF’s 2022 revisions push countries to ban new issuance and deal with any still in circulation.

What this means for your CDD

When you encounter a nominee director in the course of client onboarding or transaction work, your standard client due diligence (CDD) is unlikely to be sufficient. The nominee’s identity tells you little about who is actually in control.

Your obligation is to identify the nominator, that is the person who has appointed the nominee director, and beyond them to the ultimate beneficial owner if relevant. In practice that means:

• establishing who instructed the nominee and under what terms;
• verifying the identity of the nominator as you would any controlling party;
• applying enhanced due diligence where the ownership structure is complex, opaque or involves a high-risk jurisdiction;
• treating an unwillingness to disclose the nominator’s identity as a risk indicator in itself.

The standard expected from FATF is that you need to know who you’re really dealing with, not just who has signed the paperwork.