A dummy corporation, dummy company, or false company is an entity created to serve as a front or cover for one or more companies. It can have the appearance of being real (logo, website, and sometimes employing actual staff), but lacks the capacity to function independently. The dummy corporation's sole purpose is to protect "an individual or another corporation from liability in either contract or import".[1]
Typically, dummy companies are established in an international location—usually by the creator's "attorney or bagman"—to conceal the true owner of the often-illegitimate and empty company.[2]
Corporate use
Blackwater Worldwide
The multinational security corporation Blackwater Worldwide was reported to have obtained over thirty dummy corporations to secure million dollar contracts from the United States government. After the backlash from Blackwater's "reckless misconduct" in Iraq, the security corporation successfully obtained lucrative American contracts under several subsidiaries.[3][4]
Compass East Corporation
Walt Disney World Company's use of Compass East Corporation, created in Delaware in 1964, is an example of a dummy corporation established to purchase land. On September 30, 1966, Latin-American Development and Management Corporation; Ayefour Corporation (a pun on Interstate 4); Tomahawk Properties, Incorporated; Reedy Creek Ranch, Incorporated; and Bay Lake Properties, Incorporated; all Florida corporations, were merged into Compass East Corporation. These corporations collectively purchased large masses of land in Central Florida that eventually became the
Government use
To conceal secret missions and operations, governments may create dummy corporations.
Air America
Air America was an American passenger and cargo airline covertly owned and operated by the Central Intelligence Agency (CIA) from 1950 to 1976. It was used to secretly carry out American military operations in areas that would result in the United States violating treaty restraints as defined in the 1954 and 1962 Geneva Accords.[10] Air America was most significant for its position in "supplying and supporting covert operations in Southeast Asia during the Vietnam War", and was allegedly reported to have participated in transporting opiates on behalf of Hmong leader Vang Pao during the CIA's secret war in Laos.[11]
Air Asia
Air Asia was a CIA proprietary headquartered in Taipei that once ran the "largest airplane maintenance facility in Southeast Asia" during the Vietnam War.
Other uses
Tax avoidance
Dummy corporations may be created to avoid tax through disguising the true profits of a corporation through the use of tax havens. The use of tax havens are particularly popular in the British Virgin Islands and many dummy corporations are created on the islands as a way to evade taxes.[14] After a treaty enabling the islands to enjoy favourable tax treatment was terminated by the United States under the Reagan administration, the growth of the number of dummy corporations "exceeded beyond our wildest imaginations", according to the Financial Secretary Robert A. Mathavious.[14] Although the tax havens itself are not illegal, the avoidance of taxation through the vehicle of tax havens are inherently illegal.
Defraud
Fraudsters may set up dummy corporations to create the illusion they are an existing corporation with a similar name. Similar to the "pump and dump" scheme, Fraudsters mislead investors in order to sell securities in the dummy corporation, in this case, making investors incorrectly believe "that they are buying shares in the real corporation".
Legal cases
Fraw Realty Co. Inc. v. Natanson,[17] 261 N.Y. 396, was a court case heard before the Court of Appeals in the state of New York concerning the legal usage of dummy corporations to hide the true owner of assets between two companies. The Natanson brothers were the sole stockholders of Normar Real Estate Corporation and Malex Realty Corporation, which faulted when Malex's assets were taken over by Normar, citing that Normar was the "real owner" of the two corporations—although this agreement was only spoken about, not officially stated. The court ruled in favour of Fraw Realty, as the brothers relinquished their constructive trusts as their agreement was not explicitly stated.[17]
Air-Sea Forwarders, Inc. v. Air Asia Company, LTD., and E-Systems, Inc. was a court case concerning the legal legitimacy of the CIA's involvement in Air Asia, a dummy corporation. The owner of Air-Sea Forwarders, Erwin Rautenberg, was awarded $6.2 million after the CIA illegally broke an "oral secret agreement" arranged in 1981. Rautenberg was promised by the airline, a subsidiary of the CIA, that his freight-forwarding company would be its "exclusive forwarding manager", but did not disclose that this exclusivity would be terminated in the case of a "good cause". Rautenberg won against the former dummy corporation, and was compensated for his loss.[18]
Gelfand v. Horizon Corp was a court case challenging the legality of firing an employee over the sale of land through a dummy corporation.
Controversy and problems
A dummy corporation is one way to "cook the books" in a dishonest attempt to hide the true financial status of a company. While the use of dummy corporations is not inherently illegal, the usage of these corporations can go against the ethics of the parent company, which can in turn spark controversy between the organisation and the public.[20]
See also
- Front organization
- Shell corporation
- Straw owner
- MEFO, a dummy company that covertly financed Nazi Germany's rearmament program prior to World War II.
References
- Dummy Corporation Definition www.duhaime.org, retrieved 2015-10-20^
- Ken Silverstein. Setting Up a Bogus Shell Corporation Is Really Easy Vice, December 15, 2014^
- James Risen. 30 False Fronts Won Contracts for Blackwater