Risks of dummy arrangements

If former Makati Vice Mayor Ernesto Mercado’s recent statements before the Senate blue ribbon subcommittee were to be believed, Vice President Jejomar Binay is using dummies to hide his wealth.

Mercado alleged that Antonio Tiu (chief executive officer of Sunchamp Real Estate Development Corp.), Gerardo Limlingan (Binay’s long-time aide), and Prof. Tomas Lopez (President of University of Makati), among others, fronted for Binay in his property holdings and business transactions.

Piling on that imputation, Sen. Antonio Trillanes IV said lawyer Martin Subido, a senior partner of a law office that has Rep. Abigail Binay as co-partner, is a director and legal counsel of the corporation that controls Sunchamp.

As expected, the persons Mercado named denied his accusation. For one, Tiu stated that he was a legitimate businessman and that his company’s ownership of the purported P1.2-billion Hacienda Binay was above board.

The alleged dummies have been invited by the subcommittee to shed light on Mercado’s incriminating statements in its next hearing.

Assuming they honor the invitation, they will face the difficult task of proving a negative (or something that does not exist or is not true), i.e., they do not represent Binay’s interests in the companies that have been linked to him and his family.

Representative

It is common practice in the business community to use dummies (or token representatives) in the registration of new corporations if the minimum number of incorporators required by law—five—cannot be met by the organizers.

As long as the persons brought in to meet the membership requirement are of legal age and the other incorporators are willing to assign to him one share of stock, he can be an incorporator.

No income or property test has to be passed by a dummy to qualify for inclusion in the list of incorporators.

If he does not have the paying capacity, his contribution to the initial capital stock can be made on his behalf by any of the incorporators.

As long as the indicated capital stock is fully paid and the company treasurer attests to that fact, who and how the payments were made are not material to the registration process.

In the case of Janet Lim Napoles who is facing plunder charges, her household help, drivers and clerical staff were listed as incorporators of the NGOs she allegedly used as conduit for pork barrel funds.

Setting aside moral considerations, as a rule, no law is violated if a person is made a dummy or agrees to be one in the organization or management of a corporation.

Liability

A dummy arrangement becomes problematic only if the business of the subject corporation is wholly or partly nationalized, i.e., the Constitution or a law requires that a certain percentage of its capital stock be owned by Filipino citizens or Filipino-owned or -controlled corporations.

To illustrate, under the Constitution, only Filipino citizens or corporations that are 60-percent owned by Filipinos or Filipino corporations, can engage in the exploitation and development of our natural resources.

In the case of mass media, the Filipino ownership requirement is 100 percent.

There are also restrictions on non-Filipinos or foreigners participating or intervening in the management, operation and administration of nationalized businesses.

If a Filipino agrees or allows himself to be used as a dummy in these corporations in order to circumvent the restrictions on foreign ownership or management, or make it appear the Filipino ownership requirement has been complied with, the dummy (or dummies) and company officials who participated in the scheme itself could face criminal charges.

In addition, the franchise or authority to operate the corporation may be withdrawn and the corporation dissolved.

Consequences

Lately, our regulatory agencies have been strict in the enforcement of the laws against dummy arrangements in nationalized businesses.

In this regard, it is noteworthy to mention that many of these cases were triggered by feuding stockholders or dissatisfied company insiders, clearly for financial rather than nationalistic purposes.

Although dummy arrangements may appear harmless to the dummy at the beginning, there is no assurance it will remain as such in the future when the corporation ceases operation or gets into legal or political trouble, as what seems to be happening in Binay’s case.

A dummy cannot claim ignorance or escape accountability if the corporation to which he willingly lent his name to be an incorporator is later found to have committed illegal acts.

If this happens, it is doubtful if the rest of the incorporators whom he allowed to use him as dummy will admit to the dummy arrangement or agree to assume the criminal or civil consequences of that action.

Unless there are documents that can prove the existence of the dummy arrangement, it would be the word of the dummy against those of the other incorporators.

That evidence, however, is useless and, worse, would pin down more the dummy and the people behind the arrangement if the corporation is engaged in a nationalized business.

Whichever way it goes, it’s a no-win situation for dummies in case that arrangement is disclosed and the corporation involved gets entangled in a legal or corporate dispute.

In Binay’s case, the dummy relationships alleged by Mercado have already caught the attention of the Department of Justice and Anti-Money Laundering Council.

They have served notice of their intention to look deeper into Mercado’s allegations to determine if any law was violated by the persons he mentioned.

The fallout from the Senate subcommittee’s investigation on Binay should be food for thought for existing dummies or those who may be inclined to be one.

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