Key Takeaways

  • A dummy company (or dummy corporation) is a business entity that exists primarily to mask the identity or activity of a real individual or organization.
  • Dummy companies can be used for both illicit purposes (like money laundering or tax evasion) and legitimate strategic reasons, such as anonymous real estate acquisitions or competitor shielding.
  • These entities are often set up in secrecy-friendly jurisdictions and through intermediaries, making it hard to trace true ownership.
  • While often associated with fraud, dummy companies can also serve legal purposes like maintaining privacy in mergers or avoiding market speculation.
  • Understanding the legal implications and risks of setting up a dummy company is critical, and businesses should consult with an attorney before proceeding.

A dummy corporation is a firm that is quickly established so it can act as a front for one company or multiple companies. Such a corporation allows its owner to hide their identity and avoid paying taxes.

What Is a Dummy Corporation?

A dummy corporation, which is also called a dummy company or shell company, is a firm that can be quickly established to act as a front for at least one company. While dummy companies seem real, they are controlled by the companies and entities they're shielding.

Dummy companies are often associated with organized crime, so they receive special attention from the police and FBI agents. As such, the dummy companies enable the following:

  • Bribes
  • Drug smuggling
  • Gaming the stock market
  • Gun running
  • Human trafficking
  • Money laundering
  • Ponzi schemes
  • Tax scams

A dummy corporation is a limited liability company, so it allows the principal (the person who founded it) to hide their identity. Usually, the owner of a dummy company can avoid lawsuits and prosecution, but the principal's name will be revealed if the entity is declared a dummy company in court.

Many shell companies have been set up in countries and territories like the Bahamas, the British Virgin Islands, Panama, and Switzerland. However, Kenya and the United States are the two countries where it is easiest to set up dummy corporations. For example, Mossack Fonseca incorporates dummy corporations in the United States, especially in states like Florida, Wyoming, and Nevada. Mossack Fonseca is a Panamanian law firm that has numerous operations around the world and has been used by a collection of criminals, wealthy individuals, and heads of state.

Legitimate Uses of a Dummy Company

Although commonly linked with fraudulent activity, dummy companies can serve legitimate business purposes, particularly in real estate, mergers, and competitive industries. Some legal uses include:

  • Privacy in Real Estate Deals: Buyers may use a dummy company to avoid price inflation if sellers discover the buyer has significant resources.
  • Corporate Strategy: Companies often use dummy entities to explore potential acquisitions without revealing their identity.
  • Protection from Speculation: A dummy company can shield developing ventures from premature speculation or publicity.
  • Limited Liability Shielding: In some cases, using a dummy company allows owners to insulate themselves from certain liabilities related to experimentation or risky ventures.

These uses are legal when appropriately registered and operated in compliance with corporate transparency laws.

How a Dummy Corporation Is Set Up

In 2014 — over a year before the Panama Papers were leaked — Ken Silverstein incorporated a dummy corporation with Mossack Fonseca and reported on his experience in the December 2014 issue of VICE. Since it was so easy to set up shell companies in the United States, that was where Silverstein's investigation took him.

Silverstein found out that overall process for setting up a dummy company was relatively cheap and quick. It can cost less than $1,000 and the company will be registered in less than a week.

  • First, Silverstein found out that the process could be initiated in 15 minutes online or over the phone. If done in person, it can take an hour to fill out the paperwork.
  • The principal must provide the name of a contact person. Usually, a dummy corporation will be set up by an attorney or representative, so the principal can move money while being undetected. The representative's name will not show up in public records, either.
  • In states like Nevada, a manager or local registered agent will have to be identified. The manager can be an actual person or another anonymous company.

As Silverstein was told, criminals usually “layer” their networks by setting up dummy companies then creating subsidiaries. Additionally, criminals usually set up offshore bank accounts so they can move their money around the world.

Common Jurisdictions for Dummy Companies

Certain jurisdictions are popular for incorporating dummy companies due to relaxed disclosure laws and business-friendly policies. These include:

  • U.S. States like Nevada, Wyoming, and Delaware: These states offer anonymity for business owners and minimal reporting requirements.
  • Offshore tax havens: Locations like the British Virgin Islands, Panama, and the Cayman Islands are notorious for enabling secretive corporate structures.

These jurisdictions often do not require companies to disclose beneficial owners publicly, making them ideal for establishing dummy corporations.

How Dummy Companies Operate Behind the Scenes

Once established, dummy companies often follow these operational strategies:

  • Use of Intermediaries: Agents, law firms, or other businesses act as front-facing representatives.
  • Layered Ownership: Multiple dummy companies may be formed to obscure the final owner in a web of entities.
  • Bank Accounts: Dummy companies often open domestic or offshore accounts to handle transactions and move funds discreetly.
  • Mailing and Physical Addresses: A dummy company may use shared office space or PO boxes to appear more credible while avoiding scrutiny.

These tactics are especially common in illicit scenarios but may also support legal privacy objectives when appropriately disclosed.

How Blackwater Used Dummy Corporations

In 2010, news reports revealed that Blackwater Worldwide, a defense contractor now known as Academi, set up a network of 30 dummy corporations and other incorporated businesses after being scrutinized for its role in the Iraq War. In 2007, guards employed with the contractor killed 17 Iraqi civilians. While it was not clear how many of those shell companies received government contracts, at least three were paid by the Pentagon and the CIA.

All of this was uncovered by an investigation initiated by the Senate Armed Services Committee, which also found that some of the subsidiaries were in tax havens. According to anonymous government officials and former Blackwater employees, the contractor's network allowed it to hide its illegal activities from the government and to fool government officials who were responsible for signing contracts.

In 2009, Leon Panetta, who was the CIA director at the time, ended a contract it had with Blackwater, then known as Xe, to load missiles on Predator drones in Pakistan. However, the contractor used at least two affiliates, XPG and Greystone, to secretly work with the CIA to provide security for CIA operatives.

Risks and Legal Implications of Dummy Companies

Using a dummy company involves significant legal risks if misused:

  • Fraud and Misrepresentation: Failing to disclose the true purpose of a dummy company can lead to fraud charges.
  • Money Laundering: Moving illicit funds through dummy companies is a red flag for regulators.
  • Regulatory Penalties: If discovered, misuse may result in fines, company dissolution, or even criminal prosecution.
  • Breach of Contract: If a dummy company is used to deceive a party during a transaction, it could trigger lawsuits for breach of contract or misrepresentation.

Case Study: Strategic Use in Business Acquisitions

In a fictional example often cited in legal commentary, a developer named Pennybags wanted to acquire multiple real estate lots for a future hotel project. To avoid price surges triggered by speculation, he formed a dummy company—Acme Acquisitions, LLC—and had a trusted associate act as its public face. This approach allowed him to quietly secure properties at fair market value before his identity and plans became public.

This illustrates a key legal use case: preserving negotiation leverage and minimizing costs in high-stakes transactions.

Frequently Asked Questions

1. What is the difference between a dummy company and a shell company? A dummy company is typically inactive and created to conceal ownership or purpose, while a shell company might be active but lacks substantial assets or operations. The terms often overlap.

2. Is it illegal to set up a dummy company? No, forming a dummy company is not inherently illegal. The legality depends on its use—legitimate business strategy is legal, but deception or financial fraud is not.

3. Can dummy companies have bank accounts? Yes, dummy companies can open bank accounts, especially if set up in permissive jurisdictions. These accounts may be used to transfer funds or appear legitimate.

4. Why are dummy companies common in real estate? They help buyers keep their identities private, which can prevent sellers from raising prices due to perceived wealth or competition.

5. How can I tell if a company is a dummy company? Red flags include lack of business activity, anonymous ownership, minimal public presence, and registration in secrecy-friendly jurisdictions.

Legal guidance is essential before forming or transacting with a dummy company. You can find experienced attorneys on UpCounsel to help navigate these complex issues.

If you think you may have come in contact with a dummy corporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.