SINGAPORE — A court case of Grab driver Leonard Koh Meng Huat being fined S$28,000 for failing to conduct due diligence as a nominee director raised eyebrows and generated discussions online last week.

The 46-year-old was a nominee director for 60 companies and earned S$57,009 for his roles. From 2019, he was paid S$100 a month for every company of which he was a nominee director until July 2020.

Due to his negligence, scam proceeds were funnelled through one of the companies' bank accounts. 

Koh pleaded guilty to seven charges under the Companies Act, with an additional 39 charges considered before he was sentenced to a fine. 

His case was heard at a time when Singapore is taking steps to buffer its regime and on high alert for anomalies such as this, on the back of the S$2.8 billion money laundering probe where 10 suspects are facing prosecution after police raids and arrests. 

In September, The Straits Times reported that a resident here living in Bedok was listed as a director, secretary and shareholder for 185 companies, some of which were linked to a number of suspects arrested in the high-profile money laundering case.

Experts were quoted as saying then that such extensive involvement in numerous companies should be a red flag, suggesting potential irregularities. 

For now, the Accounting and Corporate Regulatory Authority (Acra) aims to limit nominee directorships and enhance penalties for anti-money laundering breaches through the Corporate Service Providers Bill that is expected to be tabled in Parliament. 

The authority is the national regulator of business registration, financial reporting, public accountants and corporate service providers.

TODAY explains how nominee directorships work and finds out if there are possible gaps in the system that need to be plugged.

WHAT IS A NOMINEE DIRECTOR?

Singapore mandates that all companies incorporated in the country must have at least one resident director on their board at all times. 

A resident director means that the person must be either a citizen, a permanent resident or an EntrePass or Employment Pass holder who resides in Singapore. These two passes allow foreigners who satisfy certain criteria to start businesses or work here as professionals, managers and executives. 

This also means that foreign entrepreneurs looking to establish a Singapore-incorporated company must engage a resident individual as a director to comply with the law. 

This individual, appointed by a company’s nominator, is commonly known as a nominee director.

WHO CAN BECOME A NOMINEE DIRECTOR?

Generally, Singapore citizens or permanent residents with a permanent address within the country who are at least 18 years old are eligible to be appointed nominee directors. 

Besides the residential status and age, they must also be “of full capacity”, meaning that they understand the full scope of their responsibilities and the repercussions of their actions.

For Employment Pass holders who possess a domestic residential address, the appointment can only occur after the successful incorporation of the company. 

Employment Pass holders need approval from the Ministry of Manpower to serve as directors in accordance with the ministry's guidelines.

WHAT DO NOMINEE DIRECTORS DO?

Nominee directors play a crucial, but often passive, role in meeting the legal requirement of having a resident director. 

Unlike regular directors with executive powers, they typically do not engage in voting during board meetings or take part in day-to-day business operations. 

SingaporeLegalAdvice.com, a website that provides resources for individuals and small businesses who have legal needs, states that the focus of a nominee director is solely to fulfil the legal obligation of maintaining a resident director on the board.

However, this does not mean that one can simply “pick somebody off the street” to do the job, as one professor said.

Professor Lawrence Loh, director of the Centre of Governance and Sustainability at the National University of Singapore (NUS) Business School, explained that a nominee director still needs the relevant experience and knowledge that fits the “of full capacity” condition mentioned above. 

One of the important tasks that nominee directors have to do is to ensure that a company follows the rules. This includes handling paperwork such as submitting annual reports and keeping good financial records. 

They also provide a domestic address for the company and act as its face in Singapore, and they might need to sign documents on the company’s behalf.

Nominee directors must always do what is best for the company and its owners. If they have a personal interest that could affect the company, they must tell the board of directors and avoid making decisions about it.

Most important of all, if nominee directors do not do their duties properly, they can be held responsible for any problems or illegal activities such as breach of fiduciary duties, negligence or fraud.

For instance, the maximum penalty for breach of duties by a director under the Companies Act is a jail term of up to 12 months or a fine of up to S$5,000, or both. 

If entrepreneurs do not have suitable candidates for a nominee director, firms known as corporate service providers offer a paid nominee director service. 

These firms facilitate the appointment of an individual from their team as the nominee director for the client's company. 

WHAT ARE THE GAPS IN THE SYSTEM?

Looking at the current system of appointing directors, Professor Mak Yuen Teen, who teaches accounting at NUS Business School, noted that people can still incorporate many companies and appoint others as directors while hiding their identities. 

These individuals can also move money through these companies without the nominee directors asking questions. 

“The identity of those behind these companies can be further hidden by incorporating offshore companies, and using those offshore companies as shareholders of the Singapore-incorporated companies,” he said. 

To mitigate this, Prof Mak said that regulators have an important role, such as using network analysis to look for relationships among companies and individuals. 

“They could also look into the ultimate beneficial shareholders who control offshore entities that own the Singapore companies.”

As for Prof Loh, he said that the most significant gap is the lack of due diligence on the corporate service providers’ part, such as ensuring a proper screening process for all directors of a company. 

“The authorities can introduce a code of practice for corporate service providers, focusing on due diligence and work towards progressive enforcement. 

“I’m very mindful that we don’t want to make this process onerous for these corporate service providers, the directors and, more importantly, the companies that want to set up here.

"If there are too many rules, the ultimate loser is our economy,” he added. 

HOW MANY NOMINEE DIRECTORSHIPS CAN ONE HOLD?

Acra plans to introduce a Bill in Parliament early next year to enhance its measures. 

The proposed changes include limiting the number of nominee directorships a person can hold unless the person meets specific qualifications. 

This is part of the Corporate Service Provider Bill that also seeks to increase penalties for corporate service providers and their leaders who flout anti-money-laundering and counter-terrorism financing rules.

Prof Mak said that even if there is an established limit for how many nominee directorships one can hold, it does not necessarily mean that the gaps or loopholes as discussed earlier would be closed. 

“It would mean having to find more individuals to be nominee directors and increasing the amounts that must be paid to them," he added.

“But if pushed to put a number, I would say 10,” he said, stressing that a judgement call has to be made in each scenario because duties and directorships are matters that need to be taken seriously.

Prof Mak said that there are generally no limits on the number of directorships for unlisted companies, including private companies. 

However, he noted that for listed companies in many countries, they impose a limit of up to six directorships. 

Likewise, Prof Loh said that putting a cap on the number of nominee directorships is not a “watertight” solution.  

“Acra’s move is a holistic examination of directorship issues that surfaced while uncovering the billion-dollar money laundering case. 

“But beyond looking at the age and residence status, there’s a need to look into whether a director is fit for duty as they are required by the Companies Act to carry out certain tasks like financial reporting,” he added. 

WHY IS THERE NO LIMIT FOR UNLISTED COMPANIES?

For now, there are no restrictions on the number of companies where one can be involved as a director.

The Business Times reported in October that this is in line with international benchmarks. 

Prof Mak said that there is no restriction because different companies may require different time commitments. 

“For example, a shipping or property company often sets up a separate company for each ship or property to mitigate risk. Each company will need directors. 

“But the directors in such a situation have much less to do than in an operating company because unlike in an operating company, they are basically ‘paper subsidiaries’ and the boards don’t really oversee the management of the ships or properties,” he added.

From a business point of view, Prof Loh said that it is imperative for Singapore, a country that prides itself on being a global business hub, to make it easy for entrepreneurs to set up companies here. 

If the measures by the authorities make setting up a business here more difficult, the country's business-friendly image may be jeopardised. 

“If people have to jump through hoops and hurdles to set up a business here, we might stand to lose more than we gain with the new measures," Prof Loh added.

“In the overall scheme of things, because there is a small proportion of abusers, hitting everybody together might not be fair. 

“So we need a careful calibration,” he said of Acra’s plan to strengthen measures.