The respectable façade of modern shell companies

Tropical island’s and Alpine town’s offshore tax havens have more and more competion in Britain, the US and few European countries. Anonymous shell companies are behind so many crimes and misdemeanours that eliminating them should probably be “a no-brainer”, but today the OECD’s “white list” facilitates the money laundering industry to paint their facades with a new image. It is so easy to set up a company with hidden ownership in Britain and the US that even a dead man can do it: The great thing is that they look more respectable.

Criminals and corrupt politicians have found in offshore havens a tool so perfect that it has permanently changed how business is done in the region. By using offshore laws that stress secrecy over everything else including crime prevention, they have been able to set up networks of offshore companies where they can hide their assets from police, launder their money and evade taxes all at the same time. According to the Tax Justice Network, more than $250 billion is lost each year in tax revenues from wealthy individuals and criminals who hide their money in offshore accounts. That is money that by rights should be going toward better education, health care and infrastructure. On top of that, around $1 trillion — often money that corrupt leaders have stolen — flows out of developing countries into offshore accounts and wealthy banking centres.

Offshore registry firms are one-stop shops that for a fee will do everything from filing tax and annual reports to acting as the director of a client’s company. They often work with a registration firm in the offshore country with connections to local government officials. They may provide proxies to serve as directors. They will help a client issue shares and can find proxy shareholders. They might set up bank accounts. If law enforcement or journalists come sniffing around, the trail often ends with them. They will also help set up companies in other countries that will own, be owned by or work with the client’s company. In this way they set up a network of companies that are seemingly independent — but owned by the same person. This confusing arrangement more thoroughly hides ownership and thwarts accountability. They usually do this over the Internet and within a matter of hours or days and without a question. If they ask for identification, they will almost never verify the information they are given.

Offshore tax havens bring to mind tropical islands or Alpine towns. Today, England, the US and some European countries are replacing the more exotic Caribbean or Indian Ocean Islands as the tax havens of choice. On the Tax Secrecy index, the US state of Delaware is listed as the No. 1 offender by the Tax Justice Network. Delaware earns $700 million per year in company registration fees, a significant part of its budget.

Delaware is becoming the preferred location for organized crime figures and corrupt politicians worldwide. Despite complaints from federal law enforcement officials, congressional testimony, and reports from the Government Accountability Office, procedures in Delaware – and similar processes in other states – still let criminal groups infiltrate the corporate system. Professor Jason Sharman, an expert in offshore havens for the Centre for Governance and Public Policy at Griffith University in Australia agrees: “The US has been pretty robust in making sure that other countries live up to these standards, but they have been lax about applying the same degree of rigor to themselves. It’s nowhere near what the US has signed on to do,” he said. Delaware requires no information on actual ownership when companies fill out incorporating documents. Federal law enforcement agencies complain that this lack of identification makes it difficult at best for investigating suspected wrong-doing.

Criminals simply do not fear a legal crackdown. Hampered by offshore secrecy law enforcement especially in Eastern Europe has no talent working across international boundaries figuring out the real owners of companies cloaked in proxies.

Governments scrutinize the offshore industry and blame it for aiding criminals, but do little about fixing the problem. Organized crime has found common cause with business organizations to squash any efforts to radically change offshore laws. Some countries only pay lip service to efforts to provide greater transparency. Some keep on promising important actions and nothing else.

Numerous companies registered in Delaware by offshore businesses controlled by persons accused of organized criminal activities. For example:

  • Serbian fugitive Stanko Subotic registered the planes in Delaware that Italian prosecutors said were used to ferry stacks of illegally earned cash to banks in Cyprus and Liechtenstein. The money was earned, prosecutors say, from tobacco smuggling between the Montenegrin government and the Italian Sacra Corona Unita mafia group.
  • Fugitive Serbian drug lord Darko Saric, who allegedly tried to move 2.1 tons of cocaine from South America to Montenegro last year, registered many of his companies in Delaware where they are still active.
  • Marian Iancu, a Romanian businessmen charged with organizing a criminal group by Romania prosecutors, used Delaware based companies in his takeover of a state oil refinery through an alleged corrupt privatization and in its eventual resale to controversial Russian businessman Mikhail Chernoy.
  • And romanian offshore consultant Laszlo Gyorgy Kiss used Delaware companies to bill Petrom Service in consulting contracts for work that was never done.

Anonymous shell companies are behind so many crimes and misdemeanours that eliminating them should probably be “a no-brainer,” as a US district attorney recently put it. International law enforcement, justice officials and academics agree that knowing who really is reaping the benefits of offshore shell firms is crucial. Jurisdictions must have a way to find out who the really owns companies and a method to close loopholes that make shells operate, such as use of proxies or bearer shares. A major selling point of offshore registry companies, in fact, it that police can’t identify owners. Authorities basically have to ask information from the very people hiding it.We’re operating in this 19th Century manner, yet the money is moving in seconds. It’s long gone. Griffith University Professor Jason Sharman, who last year used Google and $20,000 to find and pay agents to set up anonymous shell companies in 17 jurisdictions, suggested regulating those agents. Sharman recommended that the US and Britain stipulate that agents not be allowed to set up companies unless they themselves know the actual owner and they keep records of that information. Sharman also suggested that the UK and US restrict non-residents from forming shell companies in their countries. “The most acute problem is non-residents setting up ostensibly respectable companies in these jurisdictions and doing crime around the world,” he said. “The great thing about US and British companies is that they look more respectable, and they’re more secret, so you get the best of both worlds. It might raise eyebrows to have a company from any small obscure island, but New York is respectable.” In fact, urisdictions such as Bermuda and the Cayman Islands require far more certified ID from anyone wanting to establish a company or bank account there than do the US states of Nevada and Wyoming, which at the time require no certified ID documents at all. Member countries of the Organization for Economic Co-Operation and Development (OECD), an international organization that has tried to push for laws to reduce the worst abuses of offshores, should get their own houses in order before pointing fingers at other countries. The OECD’s “white list” is maybe problematic?

 

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