Query: Is it a violation of the Anti-Dummy Law if a Filipino owns 60% and a Chinese owns 40%, but the beneficial owner is the Chinese?

The Anti-Dummy Law, formally known as Commonwealth Act No. 108 as amended by Republic Act No. 7042, is a crucial piece of legislation in the Philippines designed to enforce the constitutional and statutory restrictions on foreign equity in specific economic activities. This law aims to prevent circumvention of these restrictions through indirect means.

Key Provisions and Purpose

The Anti-Dummy Law was enacted to uphold the constitutional mandate that certain economic activities and natural resources must be reserved for Filipino citizens or entities with a majority Filipino ownership. Specifically, it targets situations where foreign nationals might use Filipino citizens as fronts or dummies to own and control businesses or land that, by law, should be under Filipino control.

Definition of Beneficial Ownership

A significant concept in the Anti-Dummy Law is "beneficial ownership," which refers to the true owner of the property or business interest, regardless of who holds the legal title. This means that even if a Filipino citizen or corporation legally owns the majority shares, if a foreigner is found to have control or beneficial ownership, it constitutes a violation of the law.

Common Violations

Nominee Arrangements: One of the most common methods of violating the Anti-Dummy Law is through nominee arrangements, where Filipinos hold title to property or shares on behalf of foreigners. Even if the shares are legally held by Filipinos, if the foreigner exerts control, the arrangement is considered a dummy setup.
Management and Control: Another violation occurs when foreigners, despite owning a minority of the shares, have significant control over the company's management or operations. This control could be through contractual agreements, side letters, or other informal arrangements.
Simulated Transactions: Transactions that are simulated to appear as though Filipinos have control, when in reality the control is with foreigners, are also violations. This includes situations where the foreign national provides the capital, takes the profits, or otherwise controls the business decisions.

Penalties for Violations

Violating the Anti-Dummy Law carries severe penalties, including:

Imprisonment: Persons found guilty can face imprisonment for up to five years.
Fines: Monetary fines can also be imposed, often substantial enough to serve as a deterrent.
Forfeiture: The law also provides for the forfeiture of the properties or shares involved in the dummy arrangement.

Case Law and Enforcement

The Philippine courts and regulatory bodies, such as the Securities and Exchange Commission (SEC), actively enforce the Anti-Dummy Law. They scrutinize corporate structures, shareholder agreements, and other arrangements to ensure compliance. High-profile cases have reinforced the seriousness with which the government views violations of this law.

Conclusion

The Anti-Dummy Law remains a critical legal framework in the Philippines to protect national interests and ensure that Filipinos maintain control over strategic sectors of the economy. Understanding the nuances of beneficial ownership and the law’s provisions is essential for both Filipino citizens and foreign investors to ensure compliance and avoid severe penalties.