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Shopping for Anonymous Shell Companies: an Audit Study of Anonymity and Crime in the International Financial System

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Shopping for Anonymous Shell Companies: an Audit Study of Anonymity and Crime in the International Financial System Journal of Economic Perspectives—Volume 24, Number 4—Fall 2010—Pages 127–140 Shopping for Anonymous Shell Companies: An Audit Study of Anonymity and Crime in the International Financial System J. C. Sharman hhee llastast ffewew yyearsears hhaveave sseeneen aann iinternationalnternational ccampaignampaign thatthat seeksseeks toto ensureensure tthathat tthehe wworld’sorld’s fi nnancialancial aandnd bbankinganking systemssystems areare ““transparent,”transparent,” meaningmeaning T tthathat eeveryvery aactorctor aandnd ttransactionransaction wwithinithin tthehe ssystemystem cancan bbee ttracedraced ttoo a discrete,discrete, iidentifidentifi ableable individual.individual. TheThe impetusimpetus behindbehind thisthis campaigncampaign isis toto limitlimit internationalinternational fi nnancialancial ccrime,rime, eespeciallyspecially mmoneyoney laundering,laundering, large-scalelarge-scale corruption,corruption, andand taxtax eevasion.vasion. TThus,hus, iinternationalnternational oorganizations,rganizations, pprivaterivate fi nancialnancial institutions,institutions, andand statesstates hhaveave ppromulgatedromulgated rrulesules ooutlawingutlawing aanonymousnonymous pparticipationarticipation iinn ggloballobal fi nancialnancial aandnd bbankinganking nnetworks,etworks, a provisionprovision nownow legislatedlegislated inin overover 180180 countriescountries (Financial(Financial AActionction TTaskask FForce,orce, 22009).009). TThishis articlearticle presentspresents anan auditaudit studystudy ofof compliancecompliance withwith tthehe pprohibitionrohibition oonn anonymousanonymous sshellhell ccompanies,ompanies, bbasedased oonn solicitationssolicitations I mmadeade ttoo a rrangeange ooff fi rrmsms iinn tthehe bbusinessusiness ooff iincorporatingncorporating aandnd ssellingelling sshellhell ccompanies.ompanies. TToo uunderstandnderstand tthehe uusefulnesssefulness ooff aanonymousnonymous sshellhell ccorporationsorporations fforor iinterna-nterna- ttionalional fi nnancialancial ccrime,rime, cconsideronsider tthreehree examples.examples. FFirst,irst, a UU.S..S. SSenateenate rreporteport ((SenateSenate PPermanentermanent SSubcommitteeubcommittee oonn IInvestigations,nvestigations, 22006)006) ddugug iintonto iissuesssues ooff ooverseasverseas ttaxax eevasion.vasion. IItt rrelateselates tthehe sstorytory ooff SSamam CCongdon,ongdon, wwhoho eestablishedstablished ooffshoreffshore ccompaniesompanies fforor roughlyroughly 990000 iindividualndividual cclients.lients. IInn 22005,005, a ppotentialotential cclientlient ee-mailed:-mailed: ““II aamm iinter-nter- eestedsted iinn oopeningpening aann ooffshoreffshore aaccountccount ttoo pprotectrotect mmyy aassetsssets ffromrom mmyy eex-wifex-wife aandnd UUnclencle SSamam . WWhathat ddoesoes tthehe ooffshoreffshore ccorporationorporation tthathat yyouou oofferffer pproviderovide aabovebove tthehe pprotectionrotection oofferedffered bbyy SSwisswiss bbanks?”anks?” CCongdonongdon rreplied:eplied: ““HavingHaving aann ooffshoreffshore aaccountccount wwon’ton’t rreallyeally pprotectrotect yyourour aassetsssets bbecauseecause eeverythingverything iiss sstilltill iinn yyourour ppersonalersonal nname.ame. WWhathat wwillill pprotectrotect yyouou ffromrom llawsuitsawsuits aandnd ssuchuch iiss aann ooffshoreffshore sstructure”tructure” ((p.p. 227).7). IInn aann ee-mail-mail ttoo aanothernother cclient,lient, CCongdonongdon wwrote:rote: ““AsAs llongong aass eeverythingverything iiss ddoneone iinn tthehe ■ J. C. Sharman is a Professor, jointly hosted by the Centre for Governance and Public Policy and the Griffi th Asia Institute, both at Griffi th University, Brisbane, Australia. His e-mail address is 〈 j.sharman@griffi th.edu.au〉. doi=10.1257/jep.24.4.127 128 Journal of Economic Perspectives nnameame ooff thethe offshoreoffshore company,company, thenthen itit isis privateprivate andand nono oneone (including(including InlandInland RRevenue)evenue) cancan getget anyany informationinformation aboutabout it”it” (p.(p. 26).26). TheThe samesame hearingshearings discusseddiscussed aanothernother ooffshoreffshore serviceservice provider,provider, LawrenceLawrence Turpen,Turpen, whowho toldtold hishis clientsclients thatthat “the“the kkeyey toto a successfulsuccessful offshoreoffshore structurestructure waswas toto separateseparate thethe clientclient fromfrom thethe paperpaper oownershipwnership ofof thethe client’sclient’s assets,assets, whilewhile retainingretaining thethe abilityability toto benefibenefi t fromfrom them”them” ((p.p. 30).30). LLegalegal separationseparation betweenbetween thethe clientclient andand thethe fundsfunds waswas achievedachieved usingusing ccompaniesompanies andand truststrusts formedformed inin NevadaNevada andand thethe IsleIsle ofof Man,Man, whilewhile practicalpractical controlcontrol ooff tthehe fl oowsws ooff moneymoney waswas retainedretained viavia fi cctitioustitious consultancyconsultancy arrangementsarrangements betweenbetween tthehe ccompanyompany andand thethe individual.individual. AsAs TurpenTurpen relatedrelated (p.(p. 33):33): “I“I sentsent $60,000$60,000 a yearyear ttoo mmyy offshoreoffshore corporationcorporation forfor advice.advice. TheThe adviceadvice waswas nevernever worthworth a damn,damn, butbut atat tthehe eendnd ofof thethe yearyear I hadhad $60,000$60,000 inin mymy offshoreoffshore [company’s][company’s] account.”account.” MoneyMoney wwasas tthenhen repatriatedrepatriated fromfrom thethe companycompany toto thethe ownerowner throughthrough furtherfurther “consultancy“consultancy wwork”ork” oror fakefake loans.loans. AAss a ssecondecond eexample,xample, cconsideronsider tthehe ccorruptionorruption pproberobe iintonto aann £4433 bbillionillion ((US$US$ 8866 bbillion)illion) aarmsrms ddealeal bbetweenetween tthehe BBritishritish ccompanyompany BBAEAE SSystemsystems aandnd SSaudiaudi AArabia.rabia. TThehe UU.K..K. ggovernmentovernment ccanceledanceled tthishis pproberobe iinn DDecemberecember 22006006 ffollowingollowing tthreatshreats tthathat tthehe SSaudiaudi ggovernmentovernment wwouldould ssuspenduspend aallll iintelligencentelligence ccooperationooperation wwithith tthehe UUnitednited KKingdomingdom aandnd ccancelancel tthehe ddealeal iiff tthehe iinvestigationnvestigation wwereere nnotot qquashed.uashed. TThehe OOECDECD AAnti-Briberynti-Bribery WWorkingorking GGrouproup sstronglytrongly ccondemnedondemned tthishis ddecisionecision ((OECDOECD DDirec-irec- ttorateorate fforor FFinancialinancial aandnd EEnterprisenterprise AAffairs,ffairs, 22008).008). DDetailsetails ooff BBAE’sAE’s iillegalllegal aactivityctivity fi rrstst ccameame ttoo llightight ffromrom a fformerormer eemployeemployee aandnd wwereere ffollowedollowed uupp bbyy iinvestigativenvestigative rreporterseporters RRobob LLeigheigh aandnd DDavidavid EEvansvans ((“BAE’s“BAE’s SSecretecret MMoneyoney MMachine,”achine,” Guardian, JJulyuly 99,, 22007).007). AAfterfter yyearsears ooff ddenials,enials, iinn FFebruaryebruary 22010010 BBAEAE SSystemsystems aagreedgreed ttoo ppleadlead gguiltyuilty iinn tthehe UU.S..S. ttoo llesseresser cchargesharges ooff cconspiracy.onspiracy. IItt aadmitteddmitted ttoo ppayingaying ssecretecret ccommissionsommissions ooff mmoreore tthanhan ££135135 mmillionillion tthathat rreachedeached fforeignoreign ggovernmentsovernments vviaia wwhathat wwereere oostensiblystensibly ““marketingmarketing aadvisors”dvisors” iinn aarrangementsrrangements tthathat wwereere ccruciallyrucially ddependentependent oonn sshellhell ccompanies.ompanies. CCourtourt ddocumentsocuments rrelateelate tthathat ““variousvarious ooffshoreffshore sshellhell eentities”ntities” wwereere uusedsed ““toto cconcealonceal BBAES’sAES’s mmarketingarketing aadvisordvisor rrelationships,elationships, iincludingncluding wwhoho tthehe aagentgent wwasas aandnd hhowow mmuchuch iitt wwasas ppaid;aid; ttoo ccreatereate oobstaclesbstacles fforor iinvestigatingnvestigating aauthoritiesuthorities ttoo ppenetrateenetrate tthehe aarrangements;rrangements; ttoo ccircumventircumvent llawsaws iinn ccountriesountries tthathat ddidid nnotot aallowllow aagencygency rrelationships;elationships; aandnd ttoo aassistssist aagentsgents iinn aavoidingvoiding ttaxax lliabilitiesiabilities fforor ppaymentsayments ffromrom BBAES”AES” ((DistrictDistrict ooff CColumbiaolumbia CCourt,ourt, 22010,010, pp.. 88).). JJustust llikeike TTurpen’surpen’s fi cctitioustitious ““advice”advice” tthathat ““waswas nneverever wworthorth a ddamn,”amn,” tthehe ccourtourt nnotedoted ““thethe mmaterialaterial tthathat wwasas ppurportedlyurportedly pproducedroduced bbyy tthehe aadvisorsdvisors wwasas nnotot uusefulseful ttoo BBAES,AES, bbutut iinsteadnstead wwasas ddesignedesigned ttoo ggiveive tthehe aappearanceppearance tthathat llegitimateegitimate sserviceservices wwereere bbeingeing pprovided”rovided” ((DistrictDistrict ooff CColumbiaolumbia CCourt,ourt, 22010,010, pp.. 99).). A tthirdhird eexamplexample iinvolvesnvolves hhowow corruptcorrupt headsheads ofof statestate andand otherother seniorsenior politi-politi- cciansians ddisguiseisguise thethe iillicitllicit ooriginsrigins ooff (that(that is,is, llaunder)aunder) thethe bribesbribes theythey receive.receive. InIn a WWorldorld BBankank sstudy,tudy, RRichardichard GordonGordon ((2009)2009) analyzesanalyzes 2121 casescases ofof corruption-relatedcorruption-related mmoneyoney llaundering,aundering, ffromrom RRussianussian eenergynergy ccompanyompany GGazprom,azprom, ttoo ccurrenturrent PPakistaniakistani PPresidentresident AAsifsif AAlili ZZadari,adari, ttoo fformerormer UU.S..S. CCongressmanongressman RRandyandy
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