The Anti-Dummy Law That Sent My Friend to Prison - Don't Make This Mistake

I never imagined I'd be at the center of a legal storm because of a "helpful" arrangement. My friend wanted to start a small foreign-partnered company in the Philippines. To make it easy, he asked a local acquaintance to be the registered owner on paper - a so-called "dummy". Months later, the authorities came. He was arrested and eventually convicted under the Anti-Dummy Law. Seeing him lose his freedom changed how I look at foreign investment and compliance forever.

If you're an entrepreneur, foreign investor, or a Filipino asked to hold title for someone else, read this. This article explains what the Anti-Dummy Law is, common traps people fall into, and practical steps you can take to avoid the same fate.

What is the Anti-Dummy Law?

The Anti-Dummy Law (Commonwealth Act No. 108) is a Philippine statute that protects national patrimony by preventing foreigners from secretly controlling businesses reserved for Filipino citizens. In short: if a law requires Filipino ownership or control in a business, a foreigner cannot use a Filipino "dummy" or agent to hide actual foreign control.

This law covers sectors where statutory restrictions exist (like land ownership, certain public utilities, mass media, and industries listed in the Foreign Investment Negative List). It's not only about who's on paper - courts look at who really calls the shots, provides capital, or manages the business.

Why people still take the risk

• Lack of knowledge. Many entrepreneurs don't realize the company they're forming falls under restricted ownership rules.
• Pressure to move fast. Starting operations quickly can make owners cut corners.
• Trust in friends/family. Filipinos sometimes act as "holders" for a foreign partner out of trust.
• Cost-savings or perceived simplicity. Some believe using a local name avoids regulatory headaches.

But the cost of being "helpful" or evasive can be severe: arrests, criminal prosecution, fines, and possible business closures.

Common mistakes that lead to arrest

1. Allowing your name to be the registered owner while a foreigner manages and funds operations. Paper ownership alone won't protect you.
2. Signing documents that give the foreigner effective control (power of attorney, management agreements, or secret compensation).
3. Accepting "loan" repayments or unofficial compensation that reveal the foreigner is the real employer or owner.
4. Failing to register correctly with the SEC, DTI, or other regulators, especially in restricted industries.
5. Not documenting transactions or funding sources - lack of transparency raises suspicion.

Signs you might be unconsciously acting as a dummy

• You're the legal shareholder but do not invest capital.
• Major strategic decisions are made by someone else who isn't listed in official records.
• You sign papers you haven't read because "it's just formalities."
• You receive money from a foreign source without clear employment or loan documents.
• The company operates in sectors with foreign ownership limits (check the DTI/FINL).

If several of these describe your situation, stop and get advice now.

What the law looks for (how authorities establish a dummy arrangement)

Authorities and courts examine substance over form. Key indicators include:

• Where the funds come from - who paid for capital expenditures and operations?
• Who makes managerial and operational decisions?
• Existence of secret agreements (side deals, undisclosed profit-sharing).
• Control over bank accounts and payroll.
• Who actually benefits economically from the enterprise.

If the foreign party provides the capital, handles management, and takes profits while a Filipino holds title merely in name, that is classic anti-dummy territory.

Penalties and consequences (what you risk)

Conviction under the Anti-Dummy Law can lead to criminal penalties, administrative sanctions, and civil consequences. Penalties often include imprisonment and fines, and businesses may be dissolved or lose permits. Beyond official penalties, the reputational damage and personal consequences - loss of employment, strained relationships, and financial ruin - are common.

Because criminal cases can be drawn-out, even an investigation disrupts business operations and can result in months or years of legal costs.

How to protect yourself

• Know the law: Read Commonwealth Act No. 108 and check the Foreign Investment Negative List via DTI. Ignorance is not a defense.
• Seek legal counsel BEFORE signing anything. A lawyer can draft clear, lawful agreements and point out hidden risk.
• Be transparent with regulators: register ownership correctly with SEC, DTI, and other agencies. Full disclosure reduces suspicion.
• Avoid informal arrangements: don't accept money as "repayment" with no paperwork. Create proper employment contracts, loans, or shareholder agreements.
• Keep records: document funding sources, board minutes, bank statements, contracts, and communications.
• Use corporate structures properly: consider lawful joint ventures, technical service agreements, or franchising structures that comply with foreign investment rules.
• If you are a Filipino nominee or asked to be one - decline. Politely refuse to be a registered owner if you don't truly control or fund the business.

If you or someone you know is under investigation

• Immediately contact a lawyer experienced in corporate and criminal law, preferably familiar with Anti-Dummy cases.
• Preserve documents and communications. Don't destroy evidence - that can lead to obstruction charges.
• Avoid public statements without legal advice. Media comments can be used against you.
• Consider cooperating with authorities through counsel if that's the strategic approach recommended by your lawyer.

Real-life lessons from my friend's case

• My friend thought "we're just helping" and that the foreign partner would return the shares once the business was established. That didn't matter. The prosecution focused on real control and benefit.
• Lack of written agreements and suspicious money flows made the situation look intentional.
• Legal defense costs were high and the emotional toll was worse. Family and business relationships were strained.
• Had we sought a lawyer early - and structured the arrangement lawfully - the whole mess could have been avoided.

Your next steps

• Confirm whether the business activity has foreign ownership restrictions (DTI/FINL).
• Get an initial legal consultation before entering into ownership or funding arrangements.
• Keep clean books and formal agreements for any cross-border funding or technical support.
• If already involved and worried, stop taking any actions that enhance suspicion and seek counsel immediately.

The Anti-Dummy Law exists to protect the Philippines' national interests. It's strict because control of key resources and industries matters. But with the right knowledge and legal structure, legitimate foreign participation is possible and encouraged. Don't let a shortcut or misplaced trust land you - or someone you love - in prison. Be smart, be transparent, and get advice.

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