THE DANGERS OF "BORROWING NAMES" (NOMINEE):
WHY REGISTERING ASSETS IN ANOTHER PERSON'S NAME CARRIES HIGH RISK
Authored by:
Juventhy M. Siahaan, S.H., M.H.
Managing Partner, JBD Law Firm
I. Introduction
A foreign national buys a villa in Bali for three billion rupiah. To possess full ownership of the land, he asks his Indonesian (WNI) colleague to be the name recorded on the certificate, with an under-hand written agreement that control and economic benefits remain in his hands. Ten years later, the colleague passes away. The heirs claim that the land is a legitimate inheritance. The court, based on the existing certificate, cannot prove otherwise.
This is the most tangible risk of the scheme known as a nominee agreement or "borrowing a name": a practice where the name legally recorded as the asset owner is not the actual owner. The motives vary—avoiding foreign ownership restrictions, maintaining ownership privacy, or meeting formal corporate requirements. However, behind the apparent ease, this scheme harbors legal risks far more serious than most parties realize: loss of assets, annulment of agreements, disputes that are difficult to prove, and even criminal implications. This article reviews why the nominee scheme is so dangerous and what safer alternatives exist.
II. What is a Nominee and How Does It Work?
A. Basic Concept: Legal Ownership vs. Beneficial Ownership
A nominee agreement is an agreement in which a person (nominee) holds rights to an asset formally on behalf of another person (beneficial owner). In practice, this relationship is usually governed through written agreements or even mere oral arrangements, where the nominee states that their ownership is purely formal, while all economic benefits and control reside with the other party. However, legally, what is recognized by the state administrative system is the name listed in official documents, certificates, deeds, or registers of shareholders.
This seemingly simple difference has enormous implications. Legal ownership is what the law recognizes and can be enforced in court. Beneficial ownership is who actually enjoys the economic benefits of the asset. In a nominee scheme, both reside in different people, and Indonesian law, in most cases, only recognizes the former.
B. Three Most Common Forms of Nominee in Indonesia
Nominee schemes are found in at least three different contexts. First, land and property ownership: land or buildings are registered in the name of a WNI, while a foreign party is the actual owner who finances and controls the property. Second, ownership of shares in a Limited Liability Company (PT): a person is recorded as a shareholder to meet the minimum requirement of two founders, while the shares are actually fully controlled by another party. Third, financial instruments: bank accounts or investment instruments are put in the name of another party even though the actual control lies with a different individual. These three forms share the same root motive: circumventing legal restrictions that should apply, and that is why Indonesian law views them with suspicion.
III. Legal Status of Nominee in Indonesia
A. Three Relevant Laws
Indonesia does not yet have a specific regulation that explicitly governs nominee agreements. However, three sectoral laws provide a clear foundation regarding their status and limitations.
First, Law Number 5 of 1960 concerning Basic Regulations on Agrarian Principles (UUPA). The UUPA affirms land ownership restrictions based on citizenship: Foreign Nationals are only permitted to hold Right of Use (Hak Pakai) and Right of Lease for Buildings (Hak Sewa untuk Bangunan), as regulated in Articles 41 and 42 of the UUPA and reinforced by Government Regulation Number 103 of 2015. A land nominee scheme that places a WNI's name on the certificate for the interest of a foreigner substantively constitutes a legal smuggling of these provisions.
Second, Law Number 25 of 2007 concerning Investment (UUPM). The UUPM regulates ownership requirements in foreign investment. Using a nominee to control 100% of a PT's shares by a foreign party violates this provision, as the UUPM requires foreign investment to be conducted through recognized structures, including a Foreign Investment Company (PT PMA).
Third, Law Number 40 of 2007 concerning Limited Liability Companies (Company Law). Article 48 paragraph (1) of the Company Law states that shares are issued in the name of their owner. Using a nominee shareholder means that legally, the valid owner of the shares is the party whose name is recorded, not the party behind the scenes who feels like the actual owner. A share nominee agreement designed to circumvent this provision is a legal smuggling that contradicts the principle of corporate transparency and risks being declared void by the court.
B. Legal Consequence: Void by Law
Nominee agreements that contradict laws and regulations risk being declared void by law (batal demi hukum) by the court. This is not merely an agreement that is not binding; void by law means the agreement is considered to have never existed from the beginning and cannot be used as a basis for any claim. If a nominee agreement is declared void, the actual owner not only loses the asset but also lacks a legal basis to claim compensation for that loss.
IV. Real Risks of the Nominee Scheme
A. Risk of Asset Loss and Misuse
The most fundamental risk is the loss of control over the asset juridically. Because the asset is registered in the nominee's name, they hold all legal authority: they can sell, transfer to a third party, or even refuse to recognize the informal agreement between them. The actual owner who is not recorded in formal documents is in a very weak legal position when a dispute is brought to court; the judge will prioritize formal evidence showing who the state-recognized right holder is, rather than under-hand agreements that are difficult to verify.
This risk becomes even more real in unexpected situations: the nominee passes away and their heirs claim the asset as a legitimate inheritance; the nominee undergoes a divorce and the asset enters marital property to be divided; the nominee has debts and their creditors target the asset as collateral for repayment; or the nominee simply changes their mind and denies the entire initial agreement. In all these scenarios, the actual owner faces a heavy legal battle without certainty of the outcome.
B. Additional Risks that are Equally Serious
Besides the risk of asset loss, there are three additional risks often ignored. First, the nominee bears legal obligations they are unaware of. The party formally recorded as the owner can be held accountable for tax obligations, disputes with third parties, or even criminal liability arising from the management of the asset, even if they never truly controlled or enjoyed its benefits. Second, the potential for highly complex disputes. Since nominee agreements are generally closed and lack strong legal force, proof in court becomes very difficult. The situation is further complicated when the asset value increases significantly, the relationship between parties deteriorates, or regulatory changes occur affecting the status of the agreement. Third, potential criminal implications. In certain conditions, especially when a nominee scheme is used to evade tax obligations or hide ownership that should be reported, the parties may face criminal provisions in tax laws, money laundering laws, or capital market laws.
V. Safer Legal Alternatives
A. For Property Ownership by Foreign Nationals
Foreign nationals wishing to own property in Indonesia do not have to be trapped in a nominee scheme; there are legitimate paths that provide much stronger legal certainty. Right of Use (Hak Pakai) based on Article 41 of the UUPA grants a foreigner the right to use and collect products from the land for a certain period (extendable). This right can be officially registered and provides valid legal protection. Right of Lease for Buildings is another alternative for long-term use of buildings. Both paths indeed grant different types of rights than Right of Ownership (Hak Milik), yet both provide genuine certainty and legal protection, which can never be provided by a nominee scheme.
B. For Investment and Business Ownership
For foreign parties wishing to invest in or control a business in Indonesia, the establishment of a Foreign Investment Company (PT PMA) is the most appropriate path. A PT PMA allows official foreign ownership within the limits permitted by the Investment Priority List, with a structure fully recognized by Indonesian law, capable of conducting official commercial activities, and possessing strong legal protection in any dispute.
For transparency of ownership, the obligation to report the beneficial owner as regulated in Presidential Regulation Number 13 of 2018 provides an official mechanism for beneficial owners to be identified without having to use a nominee scheme. This provision is precisely designed to replace nominee practices with a valid transparency system, and compliance with it provides much more solid legal protection.
IX. Closing
A. Conclusion
The nominee scheme offers short-term administrative ease at a very high price: permanent legal uncertainty, unpredictable risk of asset loss, and potential disputes that are difficult to win. Indonesian law does not recognize substantive ownership that is not formally recorded, and when conflict occurs, the actual owner whose name is absent from official documents is almost always in a disadvantageous position.
The principle applicable here is simple yet fundamental: legal protection is only granted to legitimate ownership. Schemes designed to circumvent legal boundaries not only fail to receive protection but also bear compounded legal risks for all parties involved.
B. What Can You Do?
If you are currently involved in a nominee scheme, whether as the actual owner or as a nominee, or are considering one, there are concrete steps that need to be taken immediately.
First, evaluate all assets you own or control. Are there assets not recorded in your own name even though you feel like the owner? Or are there assets formally recorded in your name but which actually do not belong to you? Both situations harbor serious legal risks. Second, if you are a foreign national owning property through a nominee scheme, consult immediately with an advocate to discuss conversion to Hak Pakai or other legal paths providing stronger certainty. Third, if you use a nominee in a company structure, consider restructuring into a PT PMA or officially reporting beneficial ownership in accordance with Presidential Regulation No. 13 of 2018. Fourth, if you are a nominee whose name is used for an asset that is not yours, understand that you bear legal obligations for that asset, including tax obligations and other potential legal liabilities, and seek adequate legal protection immediately. Fifth, in all the above situations, engage an advocate who understands agrarian law, company law, and tax law simultaneously, because nominee issues almost always involve these three legal fields at once.
Asset ownership that is not legally protected is ownership waiting to be disputed. Helping you build a correct and resilient ownership structure, that is what we do every day.
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JBD Law FirmThis article is prepared for legal education purposes and does not constitute legal advice. For further consultation, contact the JBD Law Firm team.