Adummy corporation,dummy company, orfalse company is an entity created to serve as afront 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 fromliability in either contract or import".[1]
Typically, dummy companies are established in an international location—usually by the creator's "attorney orbagman"—to conceal the true owner of the often-illegitimate and empty company.[2]
The multinational security corporationBlackwater 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" inIraq, the security corporation successfully obtained lucrative American contracts under several subsidiaries.[3][4]
Walt Disney World Company's use ofCompass East Corporation, created inDelaware 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 onInterstate 4);Tomahawk Properties, Incorporated; Reedy Creek Ranch, Incorporated; andBay Lake Properties, Incorporated; all Florida corporations, were merged into Compass East Corporation. These corporations collectively purchased large masses of land inCentral Florida that eventually became theWalt Disney World Resort. The dummy corporations were established to prevent "unknowing landowners" from increasing prices of the land by disguising the true plans and owner of the purchased acres.[5] Disney was also criticised for persuading the Florida government to waive municipal jurisdiction over the acquired land, allowing Disney to create anything on the land with little legal restriction.[5][6] Today, that entity is known as theReedy Creek Improvement District (RCID).
Glencairn, Ltd was an American company used by theSinclair Broadcast Group to operate virtualduopolies during the 1990s when legal duopolies were not allowed by theFederal Communications Commission. The initial capital was supplied by Carolyn Smith, wife of Sinclair founderJulian Smith and mother of current Sinclair CEODavid Smith. Carolyn Smith also controlled 70% of Glencairn's stock, eventually reaching 97%.
In 1999, theFCC relaxed its ownership rules and allowed one company to own two stations in the same market starting in 2001. This development brought the Sinclair-Glencairn arrangement to light for the first time. At the time, Glencairn was getting ready to buy Sullivan-ownedKOKH-TV (channel 25) inOklahoma City,Oklahoma, where Sinclair already ownedKOCB (channel 34). When the FCC relaxed its rules, Sinclair simply replaced Glencairn as the buyer for KOKH. Glencairn then announced plans to sell five of its stations to Sinclair outright.[7] It later emerged that Glencairn was to be paid for the proposed purchases with Sinclair stock, and that the Smiths controlled almost all of Glencairn's stock. Eventually, the FCC placed a $40,000 fine against Sinclair for illegally controlling Glencairn.
Glencairn was eventually renamed under its current nameCunningham Broadcasting in 2001, with Sinclair later launching similar sidecars withDeerfield Media andHoward Stirk Holdings once Sinclair began rapid expansion in 2011; the latter two companies are used where both Sinclair and Cunningham already own stations such asBaltimore.
The now-defunctJapan Asia Airways (JAA) was created in 1975 as a fully owned subsidiary company owned byJapan 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.[8] Several other airlines used similarly named subsidiaries to fly into Taiwan without the parent company losing their rights to fly to China; such asBritish Airways (British Asia Airways),Air France andAir France Cargo (Air France Asie andAir France Cargo Asie respectively) andQantas (Australia Asia Airlines).
Packet Monster, Inc. was aSingaporean company in charge of running the popular Japanese forum,2channel, but was discovered to be a dummy corporation "existing only in name".[9] The forum is infamous for sexually explicit content, slander, extremenationalism, 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 corporate secretarial work for Packet Monster, Inc., in combination of 2,000 other "companies" across the globe.
In 1867, theUnion Pacific Railroad set up a dummy company known as Crédit Mobilier. Union Pacific told the federal government that Crédit Mobilier will be the company constructing the eastern portion of theFirst transcontinental railroad. The federal government gave Crédit Mobilier around $150 million to build the railway. Upon receiving the subsidies, Union Pacific took most of the money andbought their own stock. These stocks were subsequently used to bribe politicians, including theVice President of the United States.
To conceal secret missions and operations, governments may create dummy corporations.
Air America was an American passenger and cargo airline covertly owned and operated by theCentral 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 the1954 and1962 Geneva Accords.[10] Air America was most significant for its position in "supplying and supporting covert operations inSoutheast Asia during theVietnam War", and was allegedly reported to have participated in transporting opiates on behalf of Hmong leaderVang Pao during the CIA'ssecret war in Laos.[11]
Air Asia was a CIA proprietary headquartered inTaipei 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 theUnited States Air Force serviced in East Asia, and carried out covert aircraft operations centred in the Pacific.[12] As of 1994, Air Asia is owned by the Taiwan Aerospace Corporation (TAC).
During the 1979Iranian Revolution, the CIA set up a fake Hollywood film studio called Studio Six to aid ina plot to sneak American hostages out of Tehran.[13] This mission was depicted in the 2012 filmArgo starringBen Affleck.
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Dummy corporations may be created toavoid tax through disguising the true profits of a corporation through the use oftax havens. The use of tax havens are particularly popular in theBritish 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 theUnited States under theReagan 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.
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". The sale of securities through a fraudulent corporation is inherently illegal.[15]
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 criminalalias.
Raymond Davis, a formerBlairstown, 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.[16]
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 theirconstructive 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. Gelfand, the plaintiff, was working as a real estate agent forHorizon 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 subsequently sold the land to a third party for a profit of $57,500, and was immediately fired and denied 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".[19]
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]