For those wanting to launder money, give or receive a bribe, evade taxes or finance terrorism there is an easy to use tool that can facilitate the process: the shell company. Through a quick and easy process it is possible to set up a company for no other purpose than to funnels funds. What is more, the system allows for complete anonymity: meaning the funds may never be traced back to the real owner.
In an attempt to control these lucrative tools international rules were put in place by the Financial Action Task Force, which has the support of 180 nation states. Those rules stipulate that those selling shell companies must collect identity documents from their customers to ensure they are legitimate.
But rules were made to be broken.
Intrigued by the process, a handful of academics from Australia’s Griffith University set out to see how and if these rules are implemented. The result was a kind of clinical study of shell companies, comparing the reactions to a set of neutral ‘placebo’ approaches with those from riskier-sounding clients. The conclusions were worrying.
The research team impersonated 21 interested parties, from low-risk customers to would-be money launders, corrupt officials and terrorist financiers. In their fake guises they approached more than 3,700 Corporate Service Providers: those responsible for making and selling shell companies.
Nearly half of all the replies to the team’s solicitation emails did not ask for their identity, breaking the international standards. 22% never asked for any identification at all in the process of forming a shell company.
There were some surprises. Those selling shell companies from tax havens were more likely to comply with the rules on providing identity documents than those providing companies registered in OECD countries.
In a similar reversal of assumptions, those providers in developing countries were more likely to follow the rules than those in developed nations.
Indeed, one of the most populous locations for shell companies is found in the USA. Delaware is home to more corporate entities than people. Many are nothing more than shell companies: despite registering a Delaware address they have no business dealings, or even employees in the state.
An investigation by the New York Times found that registering a shell company in Delaware is a quick and easy process. It takes less than an hour to incorporate a company and involves less paperwork than applying for a driver’s license.
Related article: Delaware: the US tax haven of choice
It is not just small time crooks that use shell companies- they are also a tool of choice for multinational businesses. An investigation by the Bureau found telecommunications giant Vodafone using a branch in Switzerland with just one part-time bookkeeper, suggesting its main purpose was tax avoidance.
Using a shell as a holding company is completely legal and can provide companies with a easy means to holding on to their cash.
Related article: Vodafone: Undercover investigation exposes Swiss branches
But the research from Griffith University found you do not need embossed business cards and a well-known brand to get the application process going. Posing as obviously unsavory characters the researchers found ‘providers were remarkably insensitive to even very obvious corruption risks’.
There are numerous examples of crimes being perpetrated through shell companies. For example, the Mexican Sinaloa Drug Cartel used shell companies registered in New Zealand, among others, to launder their cocaine profits, (tens of millions of dollars) through Latvian banks.
The anonymity provided by the ‘corporate veil’ of a shell company may mean countless other crimes are going un-checked.
Terrorist check
In some cases the researchers sent emails masquerading as a client from ‘one of four nations associated with terrorism [who] purports to work in Saudi Arabia for an Islamic charity.’
The study found that, on the whole, corporate service providers were less likely to immediately respond to these approaches. However those that did reply were less likely to ask for identity documentation, when compared to the neutral or ‘placebo’ approaches to the same targets.
This report makes for chilling reading. In a world where crimes are increasingly committed by webs of organised criminals, shell companies can provide an easy facade of legitimacy, making it almost impossible for investigators to get to the truth.
Through laborious methods this report proves the system is ripe for exploitation, the current international standards are not working, and that it is the OECD countries that are the failing to regulate the process. As more shell companies are set up everyday, this academic exercise has worrying real-world consequences.
This story was originally published by the Bureau of Investigative Journalism.