Dummy corporation

A dummy corporation or dummy 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, the dummy companies are established in an international location, usually by the "attorney or bagman" of the creator in order to conceal the true owner of the often-illegitimate and empty company.[2]

Corporate use

Blackwater Worldwide

The international securities corporation, Blackwater Worldwide were reported to have obtained over thirty dummy corporations in order to secure million dollar contracts from the United States government. After the backlash from Blackwater's "reckless misconduct" in Iraq, the securities corporation successfully obtained lucrative American contracts under several subsidiaries.[3][4]

Compass East Corporation

Walt Disney World was made possible by the acquisition of land through several entities.

Walt Disney World Company's use of Compass East Corporation, created in Delaware in 1964, is an example of a dummy corporation established in order 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 Florida that would eventually become the Walt Disney World Resort. The dummy corporations were established in order to prevent "unknowing landowners" from increasing prices of the land by disguising the true plans and owner of the purchased acres.[5] While Disney's use of dummy corporations are within the confines of the law, the debate of whether the land was fairly obtained is still argued. Disney was also criticised for persuading the Floridian government to waiver municipal jurisdiction over the acquired land, basically allowing Disney to create anything on the land with little restriction from the law.[5][6]

Japan Asia Airways (JAA)

The now-defunct Japan Asia Airways (JAA) was created in 1975 as a fully owned subsidiary company owned by Japan Airlines (JAL) designed to specifically fly the Japan-Taiwan route. As the Chinese government threatened to eliminate Japan Airlines Co., Ltd.'s (JAL) airport traffic rights coming to and from China, JAA was a solution to help decompress the politically sensitive issue.[7] Several other airlines used similarly named subsidiaries to fly into Taiwan without the parent company losing their rights to fly to China; such as British Airways (British Asia Airways), Air France and Air France Cargo (Air France Asie and Air France Cargo Asie respectively) and Qantas (Australia Asia Airlines).

Packet Monster, Inc.

Packet Monster, Inc. was a Singaporean company in charge of running the popular Japanese forum, 2Channel, but was discovered to be a dummy corporation "existing only in name".[8] The forum is infamous for sexually explicit content, slander, extreme nationalism, and allegedly "facilitating drug deals". While the company was registered in an office building in central Singapore, the Singaporean Metropolitan Police Department discovered that Rikvin Pte Ltd. was the true firm working in the rented space. An employee of the firm admitted to conducting "liaison work" for Packet Monster, Inc., in combination of 2,000 other "companies" across the globe. The true management of 2Channel is yet to be discovered.[8]

Turner Entertainment

Main article: Turner Entertainment

Turner Entertainment self-distributed much of its library for the first decade of its existence, but on 10 October 1996, Turner Broadcasting System was purchased by Time Warner and its distribution functions were largely absorbed into Warner Bros. and as a result, Turner now largely serves merely as a copyright holder for a portion of the Warner Bros. library.

Government use

In order to conceal the true nature of their missions and operations, governments may create dummy corporations.

Air America

Former Iran hostage holding his fake Studio 6 card.

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.[9] 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.[10]

Air Asia

Not to be confused with AirAsia.

Air Asia was a CIA proprietary headquartered in Taipei that once ran the "largest airplane maintenance facility in Southeast Asia" during the Vietnam War. Although the CIA sold the subsidiary in February 1975, it once served all of the United States Air Force serviced in East Asia, and carried out covert aircraft operations centred in the Pacific.[11] As of 1994, Air Asia is owned by the Taiwan Aerospace Corporation (TAC).

Other CIA use

During the 1979 Iranian Revolution, the CIA set up a fake Hollywood film studio called Studio Six to aid in a plot to sneak American hostages out of Tehran.[12] This mission was depicted in the 2012 film Argo.

Other uses

Tax avoidance

British Virgin Islands, a popular location to set up dummy companies.

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.[13] 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.[13] Although the tax havens itself are not illegal, the avoidance of taxation through the vehicle of tax havens are inherently illegal.

Defraud

Dummy corporations may be created by fraudsters to create the illusion of being 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". The selling of risky securities through a fraudulent corporation is inherently illegal.[14]

Hiding identity

Another use is to prevent speculators from intruding on imminent plans of the parent organisation. Dummy corporations may also be used in crime to hide the identity of a criminal, similar to the use of a criminal alias.

Raymond Davis, a former Blairstown, New Jersey committee member diverted $46,000 in public funds into a dummy corporation. The self-created dummy corporation was a vehicle to conceal his identity while stealing funds from a municipal complex project.[15]

Legal cases

Fraw Realty Co. Inc. v. Natanson,[16] 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.[16]

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 a "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 will be terminated in the case of a "good cause". Rautenberg won against the former-dummy corporation, and was compensated for his loss.[17]

Gelfand v. Horizon Corp was a court case challenging the legality of firing an employee over the sale of land through a dummy corporation. Gelfand, the prosecutor, was working as a real estate agent for Horizon Corporation, and sold a large tract of land to a dummy corporation he set up in collaboration with his wife, and two interest holders, without the knowledge of the real estate company. Gelfand consequently sold the land to a third party for a profit of $57,500, and was immediately fired and denied of his commission after his actions came to surface. Gelfand won the case against Horizon Corporation, and the company was entitled to pay Gelfand's commission of his sales excluding his sale with the third party, despite Gelfand's "breach of fiduciary duty".[18]

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 aren't 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.[19]

See also

References

  1. ↑ "Dummy Corporation Definition". www.duhaime.org. Retrieved 2015-10-20.
  2. ↑ Silverstein, Ken (December 15, 2014). "Setting Up a Bogus Shell Corporation Is Really Easy". Vice.
  3. ↑ Risen, James (September 3, 2010). "30 False Fronts Won Contracts for Blackwater". The New York Times.
  4. ↑ "Blackwater Won Contracts Via Dozens Of Dummy Corporations". The Huffington Post. September 3, 2010.
  5. 1 2 Hanton, Alex (July 8, 2015). "The CIA Spies Behind Disney World’s Secretive, Fake Cities".
  6. ↑ "That time Walt Disney bought his own Autonomous Utopian City of the Future". June 26, 2014.
  7. ↑ "日本アジア航空から日本航空、エアーニッポンから全日空へバトンタッチ - 台日交流 - 台北駐日経済文化代表処 台北駐日經濟文化代表處". www.taiwanembassy.org. Retrieved 2015-11-04.
  8. 1 2 Tanaka, Y. (2012, Mar 27). 2channel managed by a dummy corporation. McClatchy - Tribune Business News Retrieved from http://search.proquest.com/docview/943250310?accountid=14511
  9. ↑ Declaration on the Neutrality of Laos. U.S.A-Burma-Canada-Republic of China-Vietnam. July 23, 1962.
  10. ↑ "Air America and Drugs in Laos". Los Angeles Times. Retrieved July 16, 2013.
  11. ↑ "C.I.A. Funny Businesses". The New York Times. 1993-06-08. ISSN 0362-4331. Retrieved 2015-11-01.
  12. ↑ Bearman, Joshuah (April 2007). "How the CIA Used a Fake Sci-Fi Flick to Rescue Americans From Tehran". Wired 15 (04).
  13. 1 2 Bailey, Jeff (22 September 1989). "Birth of a Haven: In the British Virgin Islands, Dummy Corporations Are Becoming as Prevalent as Tourists". Wall Street Journal.
  14. ↑ "http://www.hg.org/securities-fraud-law.html". www.hg.org. Retrieved 2015-11-04. External link in |title= (help)
  15. ↑ FORMER BLAIRSTOWN COMMITTEE MEMBER SENTENCED TO PRISON FOR STEALING MORE THAN $46,000 BY DIVERTING FUNDS FROM MUNICIPAL COMPLEX PROJECT TO DUMMY CORPORATION. (2008, Nov 21). US Fed News Service, Including US State News Retrieved from http://search.proquest.com/docview/470899204?accountid=14511
  16. 1 2 Fraw Realty Co. Inc. vs. Natanson. 33 Columbia Law Review 1066. State of New York. Apr. 1933. Online.
  17. ↑ RAMOS, GEORGE (1986-08-06). "Suit Over CIA Deal Nets Freight-Firm Owner $6.2 Million". Los Angeles Times. ISSN 0458-3035. Retrieved 2015-11-01.
  18. ↑ Agency and Partnership: Keyed to Course Using Hynes and Loewenstein's Agency, Partnership, and the LCC. Aspen Publishers. 2007. p. 23. ISBN 0735569843.
  19. ↑ "Social Networks, Dummy Corporations and the Many Faces of the CIA". Newsvine. August 21, 2007.
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