Nominee directors may seek higher fees under new laws, pinching corporate service providers’ margins

Corporate service providers who now have to find “fit and proper” individuals to act as nominee directors for companies are likely to face higher rates from these individuals, said industry observers and players.

This is as errant corporate service providers will be facing higher penalties for breaching anti-money laundering laws passed in Parliament on Jul 2.

Some amendments to the law are related to nominee directorships. For example, such directorships can be arranged only by a registered corporate service provider.

Companies and limited liability partnerships must also now provide information on nominee directorships to the Accounting and Corporate Regulatory Authority (Acra), which will indicate which shareholders and directors in a company are nominees.

Justin Lim, partner and Singapore head of outsourcing at financial auditor Forvis Mazars, said that due to the higher risk faced by nominee directors, these candidates are likely to ask for higher fees.

“We expect to see a slight or incremental increase to the compliance costs (for clients) simply because now, we’re talking about a higher risk,” said Lim, who is also the firm’s Asia-Pacific head of corporate secretarial.

Forvis Mazars also provides corporate services, such as tax compliance and corporate secretarial services. Lim estimates that the firm’s corporate services which fall under the new laws make up about 25 per cent of Forvis Mazars’ fee income.

One of its services includes aiding clients who are looking for nominee directors. It links these clients with candidates that the firm has deemed suitable, and charges a fee for facilitating the nominee director’s appointment.

Lim said if these candidates charge higher rates, corporate service providers will likely have to pass these costs down to clients.

S Suressh, partner and co-head of international arbitration at Harry Elias Partnership, said the new regime will largely affect the practice of corporate service providers whose business model includes the sourcing of individuals to act as resident directors for certain types of customers.

This is specific to foreign clients with no connection to Singapore, as well as those who wish to conceal their involvement in the company.

“The need for (nominee directors) to be fit and proper is going to shrink the pool of suitable Singapore individuals, and these individuals will be able to charge a premium.”

He highlighted that there have been cases of individuals being recruited to act as nominee directors for as little as S$400 to S$500 a year. However, such individuals who are willing to accept “a relative pittance” will become “increasingly hard to find”, he told The Business Times.

Forvis Mazars’ Lim said nominee director fees can vary, ranging from S$2,000 to over S$15,000 a year, and the directors are typically paid up front for the year, with a deposit equivalent to up to twice the annual fee. The fee is influenced by factors such as the client profile and complexity of the company’s operations.

Meanwhile, corporate service provider One Tax CM’s managing director Lancaster Lee said there could be some increased compliance costs as corporate service providers will need to spend time to inform Acra of the arrangements of nominee directorships, which was previously not required.

Corporate service providers have come under scrutiny since several individuals were slapped with penalties for failing to fulfil their directorship duties.

One such individual, who ran a business helping clients from China set up companies in Singapore, had been made a director at 980 companies, and was convicted on multiple charges of failing to exercise his duties as a director.

Singapore has since passed a Bill to amend existing laws governing corporate service providers, as well as a second Bill for companies and limited liability partnerships, aimed at tightening regulation and curbing the misuse of nominee directorships.

The Corporate Service Providers Bill is expected to be effective early next year, with a six-month transition period from the effective date.

Using nominee directors

Nominee directors, who are people appointed by a business owner to act on their behalf, are often used to fulfil the requirement of having a director based in Singapore.

The previous practice usually involved recruiting people, with little knowledge or experience of their duties as company directors, to act as nominee directors – as nominee directorships could be arranged by anyone, not just registered corporate service providers.

Now, nominee directorships must be arranged by a registered corporate service provider and these providers must be satisfied that the nominee director is “fit and proper”.

Raymond Lam, director at Drew and Napier, said some factors of determining candidates to be “fit and proper” are already set out in the law.

This includes looking into the past conduct and compliance history of the individuals; the individuals’ commercial integrity, referring to whether they were involved with any professional misconduct or breaches of fiduciary duty; as well as their capacity and capability of fulfilling their obligations as a director.

“The more specific guidelines on how to determine ‘fit and proper’ will be set out in the subsidiary legislation, which will be published later this year,” said Lam, who is former chairman of the Chartered Secretaries Institute of Singapore.

One Tax CM’s Lee said some ways that providers can do these checks is by looking into the persons’ previous directorships in other entities, if any, and checking if they made their required filings – a basic task of directors.

That said, One Tax CM prefers to keep its nominee directorships in the firm – its two chartered secretaries, Lee and director Franco Ng, usually serve as nominee directors for their clients.

Being nominee directors “is an additional layer of detection and protection that we provide to the company”, said Ng. In most instances, nominee directorships were temporary until the client’s designated directors get their employment pass.

Meanwhile, at Forvis Mazars, clients’ nominee directorships are fulfilled by sub-contractors – the company had instituted an internal policy about one-and-a-half years ago to not have internal personnel serve as nominee directors for clients. 

This is as the firm had changed its strategy after previously assessing the risks, noted Lim. He previously acted as a nominee director for some clients, but has since relinquished the posts. 

Capping the numbers is not a good idea

There was also some talk of capping the number of nominee directorships one could hold. The new law stopped short of making that a rule, with Second Finance Minister Indranee Rajah stating that a cap could be a “blunt tool that is unnecessarily restrictive”. Chenthil Kumarasingam, dispute resolution partner at law firm Withers KhattarWong, noted that a balance has to be struck. “Better to have capable people doing more, than to force companies to turn to less capable people,” he told BT.

Harry Elias Partnership’s Suressh said a maximum number is, by its nature, “arbitrary”.

“The issue is not the number of directorships held by an individual, but whether that individual can and is discharging his responsibilities as a director,” he said.

Source: Business Times © SPH Media Limited. Permission required for reproduction.

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