The risks of “Nominee Arrangements”: Costly lessons from placing trust in the wrong partner

In Vietnam’s business environment, particularly for foreigners or first-time investors, the practice of using “nominee arrangements” was once seen as a quick and convenient solution to overcome legal barriers. However, behind this initial convenience lie numerous serious risks that can cause investors to lose control of their businesses or even lose their entire capital investment.

What is a “Nominee Arrangement”?

A nominee arrangement refers to a situation in which an individual or organization legally stands in the name of a company on behalf of the real investor, commonly used in cases where:

• Foreigners do not yet meet the legal requirements to register a company in their own name
• Certain business sectors restrict foreign ownership ratios
• Investors wish to simplify company establishment procedures

On paper, the nominee is the legal owner or legal representative of the company, while the real investor’s interests are “informally agreed” based on trust or internal documents that lack clear legal validity.

When trust becomes the biggest risk

In practice, many serious disputes arise from placing trust in the wrong person. When partnerships break down, the real investor often finds themselves in a disadvantaged position because they:

• Are not named on the business registration certificate
• Have no authority to sign contracts or manage bank accounts
• Lack clear legal grounds to prove ownership rights

In many cases, the nominee has full discretion over the company, including transferring shares, changing the legal representative, withdrawing funds, or even selling the business without the real investor’s consent.

Costly lessons from Real-Life cases

Many businesses have paid a high price for using nominee structures, such as:

• Losing control of the company once it becomes profitable
• Prolonged disputes with little chance of winning, as the agreements are purely civil arrangements and not protected by law
• Criminal risks if authorities determine that the arrangement constitutes an attempt to circumvent investment regulations

More concerning is the fact that, in such disputes, the law typically protects the legal nominee, not the investor who contributed capital “behind the scenes.”

Why do nominee arrangements still exist?

Despite the significant risks, nominee arrangements persist due to:

• Limited legal awareness among investors
• A desire to save time and costs
• Excessive trust in personal relationships friends, acquaintances, or even family members

However, in business, trust cannot replace the law.

Safer alternatives to nominee arrangements

Instead of accepting these risks, investors should consider more lawful and sustainable solutions, such as:

• Establishing a foreign-invested enterprise in full compliance with regulations
• Entering into a clear business cooperation contract (BCC)
• Drafting transparent and well-structured shareholder agreements and company charters
• Consulting lawyers or professional advisory firms from the outset

Although initial costs may be higher, these approaches help investors protect their assets, rights, and long-term legal security.

Nominee arrangements may offer short-term convenience, but their long-term risks are substantial. Real-world lessons clearly show that misplaced trust in business can cost investors the very companies they spent years building. In an environment where laws are becoming increasingly transparent and stringent, choosing a lawful path from the beginning remains the wisest and most sustainable strategy.