Journal of Economic Perspectives—Volume 24, Number 4—Fall 2010—Pages 127–140

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

J. C. Sharman

hhee lastlast fewfew yearsyears havehave seenseen anan internationalinternational campaigncampaign thatthat seeksseeks toto ensureensure tthathat thethe world’sworld’s fi nancialnancial andand bankingbanking systemssystems areare “transparent,”“transparent,” meaningmeaning T tthathat eeveryvery aactorctor aandnd ttransactionransaction withinwithin thethe systemsystem cancan bebe tracedtraced toto a discrete,discrete, iidentifidentifi ableable individual.individual. TheThe impetusimpetus behindbehind thisthis campaigncampaign isis toto limitlimit internationalinternational fi nnancialancial crime,crime, especiallyespecially moneymoney laundering,laundering, large-scalelarge-scale corruption,corruption, andand taxtax eevasion.vasion. TThus,hus, iinternationalnternational organizations,organizations, privateprivate fi nancialnancial institutions,institutions, andand statesstates hhaveave ppromulgatedromulgated rrulesules ooutlawingutlawing aanonymousnonymous pparticipationarticipation iinn ggloballobal fi nancialnancial aandnd bankingbanking networks,networks, a provisionprovision nownow legislatedlegislated inin overover 180180 countriescountries (Financial(Financial AActionction TaskTask Force,Force, 2009).2009). ThisThis articlearticle presentspresents anan auditaudit studystudy ofof compliancecompliance withwith tthehe pprohibitionrohibition onon anonymousanonymous shellshell companies,companies, basedbased onon solicitationssolicitations I mademade toto a rrangeange ooff fi rmsrms inin thethe businessbusiness ofof incorporatingincorporating andand sellingselling shellshell companies.companies. TToo understandunderstand tthehe uusefulnesssefulness ooff aanonymousnonymous sshellhell ccorporationsorporations fforor iinterna-nterna- ttionalional fi nnancialancial crime,crime, considerconsider threethree examples.examples. FFirst,irst, a UU.S..S. SenateSenate reportreport ((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 ofof thethe offshoreoffshore ,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 offshoreoffshore 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). LegalLegal 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 thethe fl owsows ofof moneymoney waswas retainedretained viavia fi ctitiousctitious consultancyconsultancy arrangementsarrangements betweenbetween tthehe companycompany andand thethe individual.individual. AsAs TurpenTurpen relatedrelated (p.(p. 33):33): “I“I sentsent $60,000$60,000 a yearyear ttoo mymy offshoreoffshore corporationcorporation forfor advice.advice. TheThe adviceadvice waswas nevernever worthworth a damn,damn, butbut atat tthehe endend ofof thethe yearyear I hadhad $60,000$60,000 inin mymy offshoreoffshore [company’s][company’s] account.”account.” MoneyMoney wwasas thenthen repatriatedrepatriated fromfrom thethe companycompany toto thethe ownerowner throughthrough furtherfurther “consultancy“consultancy wwork”ork” oror fakefake loans.loans. AAss a secondsecond example,example, considerconsider tthehe ccorruptionorruption pproberobe iintonto aann £4433 billionbillion ((US$US$ 8866 billion)billion) armsarms dealdeal betweenbetween thethe BritishBritish companycompany BAEBAE SystemsSystems andand SaudiSaudi AArabia.rabia. TheThe U.K.U.K. governmentgovernment canceledcanceled thisthis probeprobe inin DecemberDecember 20062006 followingfollowing 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, JulyJuly 99,, 2007).2007). 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 ostensiblyostensibly “marketing“marketing aadvisors”dvisors” inin arrangementsarrangements thatthat werewere cruciallycrucially dependentdependent onon shellshell companies.companies. CourtCourt 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; toto createcreate obstaclesobstacles forfor investigatinginvestigating authoritiesauthorities toto penetratepenetrate thethe arrangements;arrangements; 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 ctitiousctitious ““advice”advice” tthathat ““waswas nneverever wworthorth a ddamn,”amn,” tthehe ccourtourt nnotedoted ““thethe mmaterialaterial tthathat wwasas purportedlypurportedly 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 thirdthird exampleexample involvesinvolves howhow corruptcorrupt headsheads ofof statestate andand otherother seniorsenior politi-politi- cciansians disguisedisguise thethe illicitillicit originsorigins ofof (that(that is,is, launder)launder) thethe bribesbribes theythey receive.receive. InIn a WWorldorld BankBank study,study, RichardRichard GordonGordon (2009)(2009) analyzesanalyzes 2121 casescases ofof corruption-relatedcorruption-related mmoneyoney llaundering,aundering, fromfrom RRussianussian eenergynergy companycompany GGazprom,azprom, ttoo ccurrenturrent PakistaniPakistani PPresidentresident AsifAsif AliAli ZZadari,adari, ttoo fformerormer UU.S..S. CCongressmanongressman RRandyandy ““Duke”Duke” CCunningham.unningham. TThehe keykey featurefeature identifiidentifi eded inin thethe reportreport isis thethe involvementinvolvement ofof anonymousanonymous shellshell ccompaniesompanies (for(for example,example, pp.pp. 1515 aandnd 222).2). EEchoingchoing others,others, GordonGordon (p.(p. 18)18) notesnotes tthathat tthehe mmostost ccommonommon aalibilibi fforor ffundsunds ttransferredransferred ttoo aandnd ffromrom ssuchuch sshellhell ccompaniesompanies iiss ““consultancyconsultancy ffees.”ees.” J. C. Sharman 129

TThehe iissuessue ooff aanonymousnonymous ccorporationsorporations hhasas bbeeneen wwidelyidely iidentifidentifi eded inin a paradeparade ooff reportsreports andand studiesstudies asas crucialcrucial inin combatingcombating a rangerange ofof high-priorityhigh-priority internationalinternational pproblems:roblems: tthehe ddrugrug ttrade,rade, organizedorganized crime,crime, terrorism,terrorism, moneymoney laundering,laundering, taxtax eevasion,vasion, corruption,corruption, corporatecorporate crime,crime, andand systemicsystemic fi nancialnancial instability.instability.1 AsAs a rresult,esult, a slewslew ofof globalglobal standardsstandards mandatemandate thethe imperativeimperative forfor fi nancialnancial institutionsinstitutions toto “Know“Know YYourour Customer,”Customer,” meaningmeaning thatthat benefibenefi cialcial ownershipownership ofof corporatecorporate vehiclesvehicles mustmust bebe aascertained.scertained. TheseThese includeinclude standardsstandards inin relationrelation toto corporatecorporate governancegovernance (OECD(OECD PPrinciplesrinciples ofof CorporateCorporate Governance,Governance, ChapterChapter V A3);A3); moneymoney launderinglaundering (Financial(Financial AActionction TaskTask ForceForce RecommendationsRecommendations 5,5, 33,33, andand 34);34); bankingbanking supervisionsupervision (Basel(Basel CCoreore PPrinciplerinciple 118);8); ccorruptionorruption ((UNUN CConventiononvention AgainstAgainst CCorruption,orruption, ArticleArticle 52);52); aandnd ssecuritiesecurities rregulationegulation ((InternationalInternational OrganizationOrganization ofof SSecuritiesecurities CommissionsCommissions MMultilateralultilateral MMemorandumemorandum ooff UUnderstanding,nderstanding, pparagrapharagraph 7(b)ii).7(b)ii). ThereThere isis nnoo qques-ues- ttionion tthathat tthehe fformalormal rrulesules aarere iinn pplace;lace; tthehe ggreatreat uunknownnknown iiss ttheirheir eeffectiveness.ffectiveness. IInn thisthis paper,paper, I describedescribe mymy attemptsattempts toto foundfound anonymousanonymous corporatecorporate vehiclesvehicles wwithoutithout proofproof ofof identityidentity andand thenthen toto establishestablish corporatecorporate bankbank accountsaccounts forfor thesethese vvehicles.ehicles. TransactionsTransactions processedprocessed throughthrough thethe corporatecorporate accountaccount ofof suchsuch a “shell“shell ccompany”ompany” becomebecome effectivelyeffectively untraceable—anduntraceable—and thusthus veryvery usefuluseful forfor thosethose lookinglooking ttoo hidehide criminalcriminal profiprofi ts,ts, paypay oror receivereceive bribes,bribes, fi nancenance terrorists,terrorists, oror escapeescape taxtax oobligations.bligations. TheThe rresearchesearch ddesignesign involvedinvolved solicitingsoliciting offersoffers ooff aanonymousnonymous ccorporateorporate vvehiclesehicles fromfrom 5544 ddifferentifferent ccorporateorporate sserviceervice pprovidersroviders inin 2222 ddifferentifferent ccountries,ountries, aandnd ccollatingollating thethe rresponsesesponses ttoo ddetermineetermine wwhetherhether tthehe eexistingxisting llegalegal aandnd rregulatoryegulatory pprohi-rohi- bbitionsitions onon anonymousanonymous corporatecorporate vehiclesvehicles actuallyactually workwork inin practice.practice. ToTo foreshadowforeshadow tthehe resultsresults ofof thisthis study,study, 4545 providersproviders respondedresponded toto offeroffer theirtheir services,services, ofof whichwhich 1177 offeredoffered toto setset upup anan anonymousanonymous corporatecorporate vehicle.vehicle. ThirteenThirteen ofof thethe 1717 successfulsuccessful aapproachespproaches werewere toto serviceservice providersproviders inin OECDOECD countries,countries, comparedcompared withwith onlyonly fourfour ooff 2288 iinn countriescountries oftenoften labeledlabeled asas “tax“tax havens.”havens.” EstablishingEstablishing a corporatecorporate bankbank aaccountccount whilewhile ppreservingreserving aanonymitynonymity pprovedroved mmuchuch mmoreore ddiffiiffi cult.cult. Nevertheless,Nevertheless, fi veve ooff thethe solicitationssolicitations werewere successfulsuccessful inin obtainingobtaining offersoffers forfor anan anonymousanonymous corporatecorporate vvehicleehicle withwith anan associatedassociated bankbank accountaccount withoutwithout havinghaving toto provideprovide anyany certificertifi eded iidentifidentifi cationcation documentationdocumentation asas toto thethe truetrue ownerowner ofof thethe companycompany andand account.account. AnAn ooptimistptimist mmightight llookook aatt tthesehese rresultsesults aandnd pperceiveerceive thethe cupcup asas 9090 percentpercent full:full: thatthat is,is, eexistingxisting prohibitionsprohibitions onon anonymityanonymity werewere effectiveeffective almostalmost 9090 percentpercent ofof thethe time.time. A ppessimistessimist mmightight ppointoint ooutut tthathat tthosehose sseekingeeking aanonymitynonymity iinn ttheirheir iinternationalnternational fi nan-nan- ccialial transactionstransactions cancan trytry toto setset upup a shellshell companycompany manymany differentdifferent times—andtimes—and byby mmakingaking ddozensozens oorr hhundredsundreds ooff eefforts,fforts, aass wwellell aass sseekingeeking ooutut mmoreore wwillingilling pprovidersroviders ooff aanonymity,nonymity, ttheyhey aarere llikelyikely toto succeed.succeed. Furthermore,Furthermore, criminalscriminals areare likelylikely toto bebe oftenoften bbetter-resourcedetter-resourced andand almostalmost alwaysalways lessless boundbound byby ethicalethical andand legallegal considerationsconsiderations

1 For examples of prominent reports on this subject, see the IRS (1981) report Tax Havens and their Use by United States Tax-Payers; the United Nations (1998) report Financial Havens, Banking Secrecy and ; the Transcrime (2000) study Euroshore: Protecting the EU Financial System from the Exploitation of Financial Centers and Offshore Facilities by Organized Crime; the OECD (2001) study Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes; and the study from the Financial Action Task Force (2006), an intergovernmental body that focuses on these issues, titled The Misuse of Corporate Vehicles, Including Trust and Corporate Service Providers. 130 Journal of Economic Perspectives

tthanhan I wwasas iinn iinteractingnteracting withwith serviceservice providers.providers. Finally,Finally, withwith a couplecouple ofof exceptions,exceptions, tthehe serviceservice providersproviders selectedselected hadhad a relativelyrelatively highhigh publicpublic profiprofi le,le, andand itit maymay wellwell bbee ttheyhey areare thusthus moremore rule-compliantrule-compliant thanthan thosethose lessless visiblevisible toto regulatorsregulators oror thosethose aattractingttracting theirtheir businessbusiness throughthrough personalpersonal contactscontacts throughthrough intermediaries.intermediaries. AsAs ddiscussediscussed below,below, thisthis kindkind ofof a fortiori llogicogic ((ifif oonene sstatementtatement iiss ddemonstrated,emonstrated, tthenhen ““withwith eveneven strongerstronger reason”reason” itit cancan bebe inferredinferred thatthat anotheranother statementstatement holdsholds true)true) ssuggestsuggests tthathat wwee sshouldhould bbee rrelativelyelatively ppessimisticessimistic aaboutbout hhowow eeffectiveffective ccurrenturrent rrulesules aarere iinn ppreventingreventing ccriminals’riminals’ aaccessccess ttoo aanonymousnonymous sshellhell ccompanies.ompanies.

SSettingetting upup AnonymousAnonymous ShellShell CompaniesCompanies

MMyy fi rrstst ssteptep wwasas ttoo ccomposeompose a sstandardtandard sshorthort aapproachpproach ee-mail-mail ttoo ccorporateorporate sserviceervice pproviders.roviders. TThishis lletteretter wwasas ddesignedesigned ttoo eemulatemulate tthehe pprofirofi llee ooff a rrepresen-epresen- ttativeative would-bewould-be miscreant,miscreant, basedbased onon recurringrecurring elementselements identifiidentifi eded inin thethe variousvarious rreportseports referredreferred toto aboveabove andand mymy ownown interviewsinterviews withwith offshoreoffshore serviceservice providersproviders iinn thethe BritishBritish VirginVirgin Islands,Islands, ,Liechtenstein, Samoa,Samoa, Seychelles,Seychelles, ,Panama, andand else-else- wwhere.here. TheThe e-maile-mail stressedstressed thethe needneed forfor conficonfi dentialitydentiality andand taxtax minimizationminimization asas ppartart ofof anan internationalinternational consultancyconsultancy project.project. AsAs alreadyalready noted,noted, consultingconsulting feesfees areare ooftenften a usefuluseful covercover storystory forfor illicitillicit cross-bordercross-border fl oows.ws. TheThe approachapproach alsoalso indicatedindicated a fairlyfairly modestmodest levellevel ofof businessbusiness andand thusthus relativelyrelatively lowlow feesfees forfor thethe provider.provider. ThisThis iiss signifisignifi ccantant asas interviewsinterviews indicateindicate that,that, unsurprisingly,unsurprisingly, providersproviders andand banksbanks areare ooftenften willingwilling toto showshow muchmuch moremore fl exibilityexibility inin applyingapplying standardsstandards forfor clientsclients whowho ccanan crediblycredibly promisepromise toto investinvest tenstens ofof millionsmillions ofof dollarsdollars andand thusthus generategenerate a lucra-lucra- ttiveive streamstream ofof fees.fees. AAfterfter designingdesigning thethe approachapproach letter,letter, thethe nextnext stepstep waswas toto identifyidentify relevantrelevant corpo-corpo- rrateate sserviceervice pprovidersroviders wwhosehose bbusinessusiness iiss ttoo eestablishstablish aandnd pproviderovide bbasicasic aadministrationdministration fforor sshellhell companies.companies. ThisThis searchsearch tooktook placeplace inin thethe periodperiod fromfrom earlyearly 20072007 untiluntil latelate 22008.008. WhileWhile inin offshoreoffshore jurisdictions,jurisdictions, serviceservice providersproviders areare generallygenerally licensed,licensed, andand tthushus areare possiblepossible toto count,count, thisthis isis usuallyusually not tthehe casecase inin OECDOECD countries.countries. InIn thethe OOECDECD ccountries,ountries, lawlaw fi rms,rms, accountants,accountants, oror privateprivate individualsindividuals maymay offeroffer incorpo-incorpo- rrationation services.services. TheThe largestlargest providerprovider administersadministers upup toto 80,00080,000 shellshell companiescompanies atat aanyny oneone timetime (probably(probably betweenbetween 5 andand 1010 percentpercent ofof thethe totaltotal ofof activeactive companiescompanies ffromrom ooffshoreffshore jurisdictions,jurisdictions, meaningmeaning thosethose ooutsideutside tthehe OOECDECD ccountries).ountries). OOtherther pprovidersroviders ccreatereate ccompaniesompanies oonn aann iincidentalncidental bbasis.asis. TThehe aaimim iinn ccompilingompiling a listlist ofof providersproviders toto bebe contactedcontacted waswas toto includeinclude serviceservice pprovidersroviders fromfrom a rrangeange ooff ccountriesountries thatthat areare regardedregarded (or(or atat leastleast regardregard themselves)themselves) aass lleaderseaders iinn KKnownow YYourour CCustomerustomer sstandardstandards llikeike tthehe UUnitednited SStatestates aandnd BBritain,ritain, aass wwellell aass ccountriesountries tthathat hhaveave ccommonlyommonly bbeeneen sstigmatizedtigmatized aass ooffshoreffshore fi nancialnancial centers.centers. TheThe fi rrstst half-dozenhalf-dozen providersproviders werewere identifiidentifi eded throughthrough advertisementsadvertisements inin The Economist. TThehe bulkbulk ofof thethe offshoreoffshore providersproviders werewere thenthen takentaken fromfrom thethe directorydirectory sectionsection ofof tthehe sspecialistpecialist ttraderade ppublicationublication Offshore Investment. BelizeBelize waswas overrepresentedoverrepresented inin thethe ddirectory,irectory, andand soso toto ensureensure diversitydiversity inin jurisdictions,jurisdictions, onlyonly fourfour ofof thosethose listedlisted werewere iincluded.ncluded. WhileWhile ninenine ofof thethe onshoreonshore providersproviders werewere listedlisted inin tthehe aabovebove ssources,ources, tthehe Shopping for Anonymous Shell Companies 131

rremainderemainder werewere ffoundound uusingsing GGoogleoogle ssearchearch fforor ““companycompany iincorporation,”ncorporation,” ttakingaking tthosehose fi rstrst onon thethe list.list. TThehe serviceservice providersproviders onon thethe listlist thatthat resultedresulted werewere atypicallyatypically largelarge andand highhigh pprofirofi le.le. MyMy interviewsinterviews withwith thosethose inin thethe industryindustry indicateindicate thatthat whilewhile largerlarger fi rmsrms relyrely oonn aadvertisingdvertising toto attractattract business,business, smallersmaller andand moremore privateprivate concernsconcerns usuallyusually relyrely oonn wword-of-mouthord-of-mouth rreferralseferrals aandnd iintroductionsntroductions throughthrough trustedtrusted intermediariesintermediaries likelike pprivaterivate bankers,bankers, lawyers,lawyers, oror iinvestmentnvestment aadvisors.dvisors. AAdvertisingdvertising ((includingincluding ssecuringecuring a hhighigh rrankinganking iinn GGoogleoogle searches)searches) isis eexpensive.xpensive. AdvertisingAdvertising isis alsoalso public,public, makingmaking pprovidersroviders andand theirtheir wareswares knownknown toto potentialpotential clientsclients butbut alsoalso toto regulatorsregulators andand lawlaw eenforcementnforcement aagencies.gencies. BBecauseecause tthehe pprovidersroviders ccontactedontacted forfor thisthis sstudytudy ttendedended ttoo bbee aatypicallytypically largelarge aandnd mmoreore ccomfortableomfortable wwithith a ppublicublic pprofirofi le,le, theythey werewere probablyprobably lessless llikelyikely ttoo oofferffer aanonymousnonymous ccompaniesompanies aandnd bbankank aaccountsccounts tthanhan oothers.thers. FFifty-fourifty-four serviceservice providersproviders werewere contacted,contacted, ofof whichwhich 4545 returnedreturned validvalid repliesreplies ((validvalid forfor tthehe ppurposesurposes ofof tthishis sstudy).tudy). TTwowo ooff tthehe nnonvalidonvalid repliesreplies statedstated thatthat theythey diddid nnotot pproviderovide companycompany incorporationincorporation services.services. TheThe otherother sevenseven eithereither providedprovided nono rreply,eply, oror promisedpromised toto respondrespond withwith detailsdetails ofof theirtheir servicesservices butbut thenthen failedfailed toto dodo so.so. I cconsideredonsidered thethe replyreply ttoo bbee vvalidalid iiff tthehe sserviceervice pprovidersroviders rrecommendedecommended oonene oorr mmoreore ccorporateorporate structuresstructures thatthat couldcould achieveachieve thethe goalsgoals setset outout inin thethe approachapproach letter,letter, ttogetherogether withwith a pricingpricing schedule.schedule. FirstFirst responsesresponses werewere usuallyusually brief,brief, commonlycommonly iincludingncluding anan attachmentattachment oror linklink toto a brochurebrochure specifyingspecifying furtherfurther services,services, andand eencouragedncouraged furtherfurther contact,contact, whichwhich waswas carriedcarried outout viavia e-maile-mail soso asas toto preservepreserve a rrecordecord ooff aallll eexchanges.xchanges. TThushus ttwowo eexamples:xamples:

Dear Mr. Sharman Thank you for your email. Please fi nd enclosed our brochure on company forms in Liechtenstein. An Establishment or a Company Limited by Shares is probably the best vehicule [sic] for setting up a commercially active company. Please do not hesitate to contact me if you need further information.

Dear Mr. Sharman Thank you for contacting [Service Provider X] regarding setting up of an off- shore structure for your commissions that you are looking to receive, I would suggest that as you are in Australia that you consider using a TCI [Turks and Caicos Islands] Hybrid Company. Should you have any questions please do not hesitate to contact me [An explanation of TCI Hybrid Companies and an order form were attached to the message].

SSubsequentubsequent correspondencecorrespondence revolvedrevolved aroundaround sspecifyingpecifying tthehe jjurisdictionurisdiction ooff tthehe ccompanyompany ttoo bebe formed,formed, andand continuedcontinued asas longlong asas necessarynecessary toto elicitelicit whatwhat identityidentity ddocumentation,ocumentation, iiff aany,ny, hhadad ttoo bbee pprovidedrovided fforor tthehe ttransactionransaction ttoo ggoo aahead.head. WWherehere tthehe rresponseesponse mmadeade pprovisionrovision ooff tthehe ccompanyompany aand/ornd/or bbankank aaccountccount ccondi-ondi- ttionalional oonn nnotarizedotarized ccopiesopies ooff a ppassportassport ttogetherogether wwithith bbankank rreferences,eferences, uutilitytility bbills,ills, aandnd tthehe llikeike toto establishestablish identityidentity andand residence,residence, tthishis wwasas codedcoded asas “not“not anonymous.”anonymous.” IItt mmayay bbee ppossibleossible ttoo ffalsifyalsify oorr fforgeorge ssuchuch ddocuments,ocuments, bbutut ddoingoing ssoo iiss a sseriouserious ooffenseffense 132 Journal of Economic Perspectives

Table 1 Overview of Letters Sent and Responses

Other OECD Offshore Centers United States Countries

Contacted 35 4 15 Valid reply 28 4 13 Required ID for company 24 0 4 No ID for company 4 4 9 Solicited bank account 4 4 9 Notarized ID for account 3 2 7 Unnotarized ID for account 1 2 2

((),fraud), aandnd I wwasas uunwillingnwilling ttoo bbreakreak tthehe llawaw iinn tthishis mmanner.anner. CCriminalsriminals aarere aalmostlmost bbyy ddefiefi nnitionition llessess ppusillanimous.usillanimous. WWherehere tthehe ccorporateorporate sserviceervice pproviderrovider rrequiredequired oonlynly nname,ame, aaddress,ddress, ccreditredit ccardard ddetails,etails, aandnd tthehe llikeike ttoo bbee eenteredntered iintonto aann oonlinenline fformorm wwithoutithout aanyny ssupportingupporting ddocumentation,ocumentation, tthishis wwasas ccodedoded aass aanonymousnonymous ((becausebecause ccreditredit ccardsards ccanan bbee iissuedssued fforor ccorporateorporate vvehiclesehicles oorr ssuppliedupplied bbyy a tthirdhird pparty).arty). OOff tthehe 4455 ccorporateorporate sserviceervice pprovidersroviders iindicatingndicating a wwillingnessillingness ttoo pproviderovide a sshellhell ccorporation,orporation, 2288 rrequiredequired ooffiffi cialcial iidentifidentifi ccation:ation: ttypicallyypically a nnotarizedotarized ccopyopy ooff a ppassport,assport, uusuallysually ccomplementedomplemented bbyy uutilitytility bbillsills aass pproofroof ooff rresidentialesidential aaddress,ddress, aass wwellell aass ssome-ome- ttimesimes bbankank oorr pprofessionalrofessional rreferences.eferences. HHowever,owever, 1177 wwereere ccontentontent ttoo fformorm tthehe ccompanyompany wwithoutithout aanyny iindependentndependent cconfionfi rmationrmation ofof identity,identity, requiringrequiring onlyonly a creditcredit cardcard andand a sshippinghipping aaddressddress fforor ddocuments.ocuments. TTableable 1 pprovidesrovides aann ooverviewverview ooff tthehe rresponses.esponses. AAlthoughlthough thethe ccostost vvaried,aried, eestablishingstablishing aann aanonymousnonymous sshellhell ccorporationorporation iiss a rrela-ela- ttivelyively cheapcheap proposition,proposition, rangingranging fromfrom $800$800 toto $3,000$3,000 asas anan up-frontup-front costcost followedfollowed bbyy a slightlyslightly smallersmaller amountamount onon anan annualannual basis.basis. TheThe costcost variationvariation isis generallygenerally eexplainedxplained byby thethe optionaloptional extras,extras, inin particularparticular thethe extraextra layerslayers ofof secrecy,secrecy, butbut alsoalso vvariousarious corporatecorporate accessoriesaccessories andand accoutrementsaccoutrements likelike mail-mail- andand phone-forwarding,phone-forwarding, bbrassrass plate,plate, rubberrubber stamp,stamp, letterhead,letterhead, embossedembossed seal,seal, andand thethe like.like. RelativeRelative toto thethe ccorporationsorporations rrequiringequiring iidentifidentifi cationcation checks,checks, thethe anonymousanonymous vehiclesvehicles werewere slightlyslightly ccheaper,heaper, aagaingain ddependingepending onon thethe accessoriesaccessories purchased.purchased. RatherRather thanthan reflrefl ectingecting anyany llesseresser quality,quality, thisthis priceprice differencedifference seemedseemed toto reflrefl ectect thethe laxerlaxer regulatoryregulatory require-require- mmentsents tthathat aallowedllowed pprovidersroviders ttoo iincorporatencorporate ccompaniesompanies mmoreore qquicklyuickly wwithith llessess wworkork ((GAO,GAO, 22006,006, pp.. 66;; NNationalational AAssociationssociation ooff SSecretariesecretaries ofof State,State, 2009).2009).

A SShorthort DDigression:igression: WWhyhy AAnonymity,nonymity, aandnd NNotot JJustust a TTangledangled LLegalegal TTrail?rail?

IInn ssixix ccases,ases, sserviceervice pprovidersroviders rrecommendedecommended hholdingolding tthehe oownershipwnership ooff tthehe sshellhell ccompanyompany iinn aann ooverarchingverarching ccommonommon llawaw ttrustrust oorr ccivilivil llawaw ffoundation.oundation. EEitherither llegalegal sstructuretructure wouldwould presentpresent investigatinginvestigating aauthoritiesuthorities wwithith oonene moremore obstacleobstacle inin seekingseeking ttoo fi ndnd tthehe bbenefienefi cialcial oowner:wner: ttrackingracking tthehe bbankank aaccountccount ttoo tthehe ccompany,ompany, tthehe ccompanyompany ttoo tthehe ttrustrust oorr ffoundation,oundation, aandnd tthenhen ccontrolontrol ooff tthehe ttrustrust oorr ffoundationoundation ttoo mmee vviaia tthehe J. C. Sharman 133

sserviceervice pprovider,rovider, ppresumablyresumably wwithith eeachach llinkink iinn a ddifferentifferent jjurisdiction.urisdiction. FFollowingollowing tthehe mmoneyoney ttrailrail iinn ssuchuch ccasesases wwouldould bbee ddiffiiffi ccult,ult, ttime-consuming,ime-consuming, aandnd eexpensive.xpensive. HHowever,owever, iinn thisthis exerciseexercise I chosechose toto focusfocus notnot onon thethe abilityability toto createcreate a tangledtangled iinterjurisdictionalnterjurisdictional webweb ofof interlockinginterlocking legallegal ,ownership, butbut insteadinstead toto stickstick withwith wwhetherhether outrightoutright anonymityanonymity waswas possible.possible. EvenEven ifif thethe legallegal trailtrail isis complex,complex, asas longlong aass tthehe sserviceervice pproviderrovider hhasas pproofroof ooff tthehe iidentitydentity ooff tthehe uultimateltimate bbenefienefi ciaryciary ofof a fi rm,rm, tthehe veilveil ofof secrecysecrecy isis vvulnerableulnerable toto beingbeing pierced.pierced. First,First, hostinghosting jurisdictionsjurisdictions areare ooftenften vvulnerableulnerable toto ppressureressure ffromrom ooutsidersutsiders ttoo hhandand ooverver cclientlient iidentitydentity ddocumenta-ocumenta- ttion.ion. FForor eexample,xample, aafterfter tthehe CCaymanayman IIslandsslands rrepeatedlyepeatedly aannouncednnounced tthathat iitt wwouldould nnotot jjoinoin tthehe ttaxax iinformationnformation eexchangexchange pprogramrogram ooff tthehe EEuropeanuropean UUnion,nion, BBritainritain fforcedorced rreversaleversal ofof thatthat decisiondecision byby threateningthreatening toto suspendsuspend thethe Caymans’Caymans’ self-governmentself-government aandnd ttoo ppassass tthehe llegislationegislation ffromrom LLondonondon ((Sharman,Sharman, 22008).008). SSecond,econd, fi nancialnancial intermediariesintermediaries cancan alsoalso bebe vulnerablevulnerable toto outsideoutside pressure.pressure. TThehe UnitedUnited StatesStates governmentgovernment successfullysuccessfully tooktook VISAVISA andand MasterCardMasterCard toto courtcourt toto oobtainbtain detailsdetails onon 230,000230,000 offshoreoffshore creditcredit andand debitdebit cardscards heldheld byby U.S.U.S. residentsresidents ((SharmanSharman aandnd RRawlings,awlings, 22005).005). TThird,hird, serviceservice providersproviders maymay disregarddisregard theirtheir ownown adviceadvice aboutabout keepingkeeping cconfionfi dentialdential documents.documents. OffshoreOffshore serviceservice providerprovider TurpenTurpen hadhad advisedadvised hishis clientclient HHolliday:olliday: “You“You shouldshould readread thesethese documentsdocuments andand destroydestroy them.them. ItIt wouldwould notnot serveserve yyourour bestbest interestsinterests forfor themthem toto bebe foundfound inin youryour possession.”possession.” ButBut TurpenTurpen himselfhimself llefteft nnumerousumerous documentsdocuments inin hishis NevadaNevada offioffi cece namingnaming Holliday—whichHolliday—which werewere thenthen ffoundound whenwhen thethe InternalInternal RevenueRevenue ServicesServices executedexecuted a searchsearch warrant.warrant. AccordingAccording ttoo thethe U.S.U.S. SenateSenate (2006,(2006, p.p. 4040 ) report,report, afterafter beingbeing informedinformed ofof thethe situationsituation byby TTurpen:urpen: “Mr“Mr HolidayHoliday toldtold thethe SubcommitteeSubcommittee thatthat hehe respondedresponded toto thethe effecteffect of,of, ‘‘YouYou iidiot!diot! TThathat iiss eexactlyxactly wwhathat yyouou ttoldold mmee nneverever ttoo ddo.’”o.’” FFinally,inally, roguerogue employeesemployees ofof thethe serviceservice providerprovider likelike HeinrichHeinrich KieberKieber ofof Liech-Liech- ttenstein’senstein’s LGTLGT bankbank maymay stealsteal andand sellsell sensitivesensitive material.material. InIn 2006,2006, KieberKieber soldsold thethe ddetailsetails ooff 44,500,500 aaccountsccounts iinn eexchangexchange fforor €€4.24.2 mmillionillion ffromrom tthehe GGermanerman iintelligencentelligence sservice,ervice, wwhichhich thenthen on-soldon-sold thethe informationinformation toto thethe taxtax authoritiesauthorities ofof manymany otherother ccountriesountries (“Banking(“Banking ScandalScandal UnfoldsUnfolds likelike Thriller,”Thriller,” New York Times, AugustAugust 14,14, 2008,2008, bbyy LynnleyLynnley Browning).Browning). (Kieber(Kieber waswas providedprovided withwith a newnew identityidentity afterafter thethe Liechten-Liechten- ssteintein governmentgovernment issuedissued a warrantwarrant forfor hishis arrestarrest andand variousvarious formerformer LGTLGT accountaccount hholdersolders beganbegan searchingsearching forfor him.)him.) However,However, ifif nono informationinformation isis collectedcollected byby thethe sserviceervice pproviderrovider iinn tthehe fi rstrst place,place, nothingnothing cancan bebe discloseddisclosed later.later.

IInn WWhathat JurisdictionsJurisdictions IsIs anan AnonymousAnonymous CorporationCorporation Easiest?Easiest?

EEvenven fforor someonesomeone likelike me,me, wwhoho isis llookingooking forfor corporatecorporate serviceservice providersproviders inin wwantant aadvertisementsdvertisements aandnd tthroughhrough IInternetnternet ssearches,earches, aandnd wwhoho ddoesoes nnotot fforgeorge iidentitydentity ddocuments,ocuments, formingforming aann aanonymousnonymous sshellhell ccompanyompany iiss aann eeasyasy pproposition,roposition, rrequiringequiring llittleittle mmoneyoney aandnd ttime.ime. BButut pperhapserhaps eevenven mmoreore sstrikingtriking tthanhan tthehe eeasease wwithith wwhichhich tthishis rruleule ccanan bbee violatedviolated isis thethe patternpattern ofof jurisdictionsjurisdictions thatthat routinelyroutinely violateviolate thisthis rule.rule. AAttemptsttempts ttoo iincorporatencorporate anonymouslyanonymously withwith providersproviders inin thethe Bahamas,Bahamas, thethe BritishBritish 134 Journal of Economic Perspectives

VVirginirgin Islands,Islands, thethe CaymanCayman Islands,Islands, Dominica,Dominica, Nauru,Nauru, Panama,Panama, andand thethe SeychellesSeychelles aallll mmetet wwithith ffailure.ailure. AgentsAgents inin thesethese placesplaces refusedrefused toto proceedproceed withoutwithout proofproof ofof iidentity.dentity. MMoreover,oreover, iinn nearlynearly allall casescases thesethese agentsagents explicitlyexplicitly notednoted thatthat anti–moneyanti–money llaunderingaundering regulationsregulations necessitatednecessitated theirtheir keepingkeeping thisthis informationinformation onon fi le.le. ThisThis aappliedpplied eevenven wwhenhen pprovidersroviders iindicatedndicated ttheyhey ppromisedromised ttotalotal cconfionfi dentiality.dentiality. Thus,Thus, ffromrom oonene ee-mail-mail rresponseesponse I rreceived:eceived:

The anonymous structure we offer is totally secure since we manage the bank account on behalf of the owner. The owner’s name appears nowhere. Using this structure, no investigator could determine the true ownership of the structure . . . We offer additional security by the fact that we could change the nature of the structure and relocate it to other jurisdictions literally within minutes if required . . . Having said that, we should make it clear that we will not engage in any illegal practices on behalf clients. However, what is illegal in one country may not be illegal in another.

YYetet inin thisthis case,case, thethe serviceservice providerprovider requiredrequired notarizednotarized passportpassport copiescopies andand ootherther iidentitydentity documentation.documentation. EvenEven thethe LLiechtenstein-basediechtenstein-based agentagent ofof thethe SomaliSomali IInternationalnternational FinancialFinancial CenterCenter requiredrequired notarizednotarized passportpassport copiescopies (though(though theythey wwereere mmuchuch llessess sstringenttringent aaboutbout bbankank aaccounts,ccounts, aass ddiscussediscussed bbelow).elow). OOnene pproviderrovider iinn BBelizeelize oofferedffered ttoo iincorporatencorporate a BBelizeelize shellshell ccompanyompany wwithoutithout iidentitydentity ddocuments,ocuments, asas ddidid anotheranother inin UruguayUruguay forfor SeychellesSeychelles companies,companies, andand oneone eacheach fromfrom HongHong KongKong aandnd SSingaporeingapore rregardingegarding DDelawareelaware aandnd ootherther ttaxax haven-domiciledhaven-domiciled ccompanies.ompanies. YYetet ofof thethe 1717 providersproviders inin high-incomehigh-income countriescountries thatthat werewere approached,approached, nono llessess tthanhan 1133 aagreedgreed toto formform sshellhell ccompaniesompanies wwithoutithout requiringrequiring identifiidentifi cationcation docu-docu- mments:ents: sevenseven fromfrom thethe UnitedUnited Kingdom,Kingdom, fourfour inin thethe UnitedUnited States,States, oneone inin Spain,Spain, aandnd oneone inin CanadaCanada (the(the solesole SwissSwiss andand CzechCzech providersproviders respondingresponding werewere moremore sscrupulous).crupulous). OfOf thesethese 1313 providers,providers, onlyonly oneone limitedlimited itsits stockstock toto offshoreoffshore shellshell ccompaniesompanies ((fromfrom BBelize),elize), tthreehree ooff tthehe UU.S..S. pprovidersroviders oofferedffered oonlynly AAmericanmerican ccompa-ompa- nnies,ies, wwhilehile tthehe rremainingemaining UU.S..S. ccompanyompany aalonglong wwithith tthehe CCanadiananadian aandnd aallll tthehe BBritishritish pprovidersroviders soldsold a mixmix ofof onshoreonshore andand offshoreoffshore vehicles,vehicles, inin somesome casescases fromfrom moremore tthanhan 3300 jjurisdictions.urisdictions. IInn ccombination,ombination, tthesehese fi nndingsdings ccastast sstrongtrong ddoubtoubt oonn tthehe propositionproposition tthathat tthehe pproblemroblem ooff fi nancialnancial opacityopacity isis causedcaused byby palm-fringedpalm-fringed tropicaltropical islands,islands, ratherrather tthanhan largelarge high-incomehigh-income eeconomiesconomies llikeike tthehe UUnitednited SStatestates aandnd BBritain.ritain. TThishis fi ndingnding ccontradictsontradicts cconventionalonventional wwisdom.isdom. OOnlynly a hhandfulandful ooff ootherther ssourcesources ccastast ddoubtoubt oonn tthehe ppresumedresumed ssuperiorityuperiority ooff OOECDECD ccountryountry rregulationegulation rrelativeelative ttoo ooffshoreffshore ccentersenters ((Tran-Tran- sscrime,crime, 22000,000, pp.. 115;5; IIMF,MF, 22005,005, pp.. 33).). AAlthoughlthough nnearlyearly aallll ooffshoreffshore ccentersenters rregulateegulate ccorporateorporate sserviceervice pproviders,roviders, BBritainritain aandnd tthehe UUnitednited SStatestates hhaveave cchosenhosen ttoo lleaveeave tthemhem uunregulated.nregulated. IInn tthehe UUnitednited SStatestates iinn pparticular,articular, tthishis rresultesult mmayay rreflefl ectect thethe ppoliticalolitical ppowerower ooff iincorporatorsncorporators ooverver rregulatorsegulators iinn sstatestates llikeike DDelawareelaware aandnd NNevada.evada. AAnn exampleexample ofof oneone shellshell companycompany setset upup forfor thisthis paper,paper, AndréAndré PascalPascal EEnterprises,nterprises, maymay proveprove illustrative.illustrative. TheThe companycompany waswas anan EnglandEngland andand WalesWales PPrivaterivate CompanyCompany LLimitedimited bbyy SShareshares ssetet uupp bbyy a UU.K..K. pprovider.rovider. UUponpon ppaymentayment Shopping for Anonymous Shell Companies 135

aandnd ssubmissionubmission ooff tthehe oorder,rder, tthehe providerprovider electronicallyelectronically llodgedodged tthehe applicationapplication wwithith UUKK CCompaniesompanies HHouse.ouse. TThehe pproviderrovider bbecameecame tthehe iinitialnitial sshareholderhareholder ooff tthehe ccompanyompany andand ssubscriberubscriber ttoo tthehe MMemorandumemorandum aandnd AArticlesrticles ooff AAssociationssociation fforor tthehe ppurposesurposes ofof thethe governmentgovernment records.records. UponUpon receiptreceipt ofof signedsigned documentsdocuments fromfrom mmee (once(once again,again, withoutwithout thethe needneed forfor supportingsupporting identifiidentifi cation),cation), thethe providerprovider iissuedssued “bearer“bearer share”share” warrants,warrants, erasingerasing thethe provider’sprovider’s namename fromfrom thethe shareshare rregistryegistry wwithoutithout ssubstitutingubstituting aanyny oother.ther. BBearerearer sshareshares mmeanean tthathat wwhoeverhoever hholdsolds tthehe pphysicalhysical ssharehare ccertifiertifi ccateate oownswns tthehe ccompany.ompany. AAndréndré PPascalascal EEnterprisesnterprises hhadad a nnomineeominee directordirector andand nomineenominee secretarysecretary (once(once moremore courtesycourtesy ofof thethe provider),provider), aagaingain pprovidingroviding sseparationeparation ffromrom tthehe bbenefienefi ccialial oownerwner ((me).me). TThehe iincorporationncorporation pprocessrocess ttookook llessess tthanhan a dday,ay, fi llinglling ooutut tthehe oonlinenline fformsorms ttookook 4455 mminutesinutes aandnd tthehe totaltotal costcost wwasas ££515.95.515.95. MMoreover,oreover, aass a UU.K..K. ccorporation,orporation, AAndréndré PPascalascal aavoidsvoids tthehe tainttaint associatedassociated withwith offshoreoffshore companiescompanies whilewhile securingsecuring muchmuch tightertighter secrecy.secrecy. UUntilntil 2006,2006, thethe samesame U.K.U.K. providerprovider offeredoffered corporatecorporate accountsaccounts atat a LatvianLatvian bankbank wwithoutithout thethe nneedeed fforor aanyny ssupportingupporting iidentitydentity ddocumentation.ocumentation.

FFromrom AnonymousAnonymous ShellShell CorporationCorporation toto AnonymousAnonymous BankBank AccountAccount

FFocusingocusing onon thethe 1717 providersproviders offeringoffering anonymousanonymous ,corporations, I thenthen tooktook tthehe nnextext stepstep andand soughtsought toto setset upup a bankbank accountaccount associatedassociated withwith anan anonymousanonymous ccompany.ompany. I ssoonoon rranan iintonto rrequirementsequirements fforor pproperroper (notarized)(notarized) identityidentity documenta-documenta- ttionion ffromrom aallll bbutut fi veve providers.providers. TThehe pproviderrovider mostmost fl agrantlyagrantly inin breachbreach ofof internationalinternational standardsstandards offeredoffered a WWyomingyoming LimitedLimited LiabilityLiability CorporationCorporation withwith a U.S.U.S. bankbank account.account. TheThe providerprovider oofferedffered toto useuse theirtheir employees’employees’ ownown SocialSocial SecuritySecurity NumbersNumbers inin applyingapplying forfor anan EEmployermployer IIdentifidentifi cationcation NumberNumber (EIN),(EIN), thethe taxtax identifiidentifi cationcation numbernumber forfor thethe ccorporateorporate vehicle.vehicle. AsAs thethe providerprovider breezilybreezily informedinformed meme iinn aann ee-mail.-mail. ““YouYou ccanan oopenpen a bbankank accountaccount inin anyany statestate inin thethe nation.nation. ItIt doesdoes notnot havehave toto bebe inin Wyoming.Wyoming. YouYou wwillill needneed anan EINEIN numbernumber forfor thethe LLC,LLC, whichwhich wewe maymay bebe ableable toto getget forfor you,you, ifif youyou eelectlect tthehe nnomineeominee ttaxax IIDD sservice.ervice. TTherehere areare nono supportingsupporting documentsdocuments requiredrequired atat tthishis ttime,ime, ooutsideutside ooff yyourour ccontactontact iinformation.”nformation.” IInn tthehe mmonthsonths bbetweenetween rreceivingeceiving tthishis ee-mail-mail aandnd ggoingoing aaheadhead wwithith aann aattemptttempt ttoo bbuyuy tthishis sstructure,tructure, tthehe llawsaws iinn WWyomingyoming cchangedhanged ttoo ppreventrevent tthishis sserviceervice bbeingeing ooffered.ffered. YYetet ooff tthehe ccountriesountries eexamined,xamined, tthehe UUnitednited SStatestates aappearsppears ttoo bbee iinn llastast pplacelace iinn ttermserms ooff ccorporateorporate aandnd bbankinganking ddueue ddiligence.iligence. A rrevealingevealing ccomparisonomparison ccharthart ffromrom a sserviceervice pproviderrovider sspecifipecifi eses tthehe ddocumentationocumentation nnecessaryecessary ttoo oopenpen a bbankank aaccountccount iinn vvariousarious ccountries,ountries, aalonglong wwithith aann ooverallverall ddiffiiffi ccultyulty rratingating oorr ““DueDue DDiligenceiligence LLevel”:evel”: ⟨hhttp://www.offshoreinc.net/new_bankcomparison.shtmlttp://www.offshoreinc.net/new_bankcomparison.shtml⟩. TThishis rrangesanges ffromrom ““veryvery hhigh”igh” ((SeychellesSeychelles aandnd JJersey),ersey), ttoo ““high”high” ((HongHong KKongong aandnd SSingapore),ingapore), ttoo ““medium”medium” ((CyprusCyprus aandnd DDominica);ominica); tthehe UUnitednited SStatestates iiss tthehe oonlynly ccountryountry rrankedanked aass ““low,”low,” aallowingllowing aaccountsccounts ttoo bbee oopenedpened wwithith aann uunnotarizednnotarized ccopyopy ooff a ddriver’sriver’s llicense.icense. TToo ttestest thisthis rankingranking directly,directly, I establishedestablished twotwo companiescompanies withwith accountsaccounts inin 2009:2009: a classicclassic offshoreoffshore structurestructure andand anan onshoreonshore equivalent.equivalent. TheThe fi rstrst exampleexample involvedinvolved 136 Journal of Economic Perspectives

aapproachingpproaching a sserviceervice pproviderrovider iinn SSingaporeingapore andand bbuyinguying tthehe mmostost ssecretecret vvehicleehicle aandnd bbankank accountaccount available.available. ThisThis waswas a SeychellesSeychelles companycompany (Gruppo(Gruppo 2020 Enterprises)Enterprises) fformedormed withwith a nomineenominee director,director, authorizedauthorized shareshare capitalcapital ofof $1$1 million,million, andand bearerbearer sshares.hares. TheThe SingaporeanSingaporean offshoreoffshore serviceservice providerprovider actedacted asas retailer,retailer, buyingbuying thethe SSeychelleseychelles companycompany fromfrom aanothernother wwholesaleholesale sserviceervice pproviderrovider iinn HHongong KKongong bbeforeefore ssellingelling iitt oonn ttoo mme.e. TThehe aaccompanyingccompanying bbankank aaccountccount wwasas iinn CCyprusyprus ((andand tthushus wwithinithin tthehe EEuropeanuropean Union),Union), pickedpicked onon thethe adviceadvice ofof thethe fi rstrst serviceservice providerprovider becausebecause ofof tthehe bank’sbank’s willingnesswillingness toto acceptaccept bearerbearer shareshare companies.companies. DespiteDespite beingbeing thethe mostmost llaissezaissez fairefaire offshoreoffshore bankbank available,available, thethe CypriotCypriot bankbank stillstill requiredrequired a notarizednotarized pphysicalhysical passportpassport copy,copy, originaloriginal bankbank reference,reference, anan originaloriginal utilityutility bill,bill, andand a longlong qquestionnaireuestionnaire asas toto thethe likelylikely useuse toto whichwhich thethe bankbank accountaccount wouldwould bebe putput beforebefore oopeningpening thethe corporatecorporate bankbank account.account. TheThe bankbank alsoalso insistedinsisted onon takingtaking physicalphysical ppossessionossession ofof thethe solesole bearerbearer shareshare issued.issued. EstablishingEstablishing thethe companycompany andand openingopening tthehe aaccountccount costcost €1,754,€1,754, paidpaid intointo a HongHong KongKong bankbank accountaccount ofof thethe SingaporeanSingaporean sserviceervice pprovider.rovider. IInn contrast,contrast, thethe second,second, onshoreonshore vehicle,vehicle, BCPBCP ConsolidatedConsolidated Enterprises,Enterprises, wwasas a NevadaNevada corporationcorporation setset upup byby a NevadaNevada serviceservice providerprovider withwith a nomineenominee ddirectorirector andand nomineenominee shareholders.shareholders. AsAs such,such, mymy namename appearsappears nowherenowhere onon thethe iincorporationncorporation documents,documents, butbut inin anyany case,case, NevadaNevada refusesrefuses toto shareshare taxtax informationinformation wwithith taxtax authoritiesauthorities eithereither atat thethe federalfederal levellevel oror inin relationrelation toto foreignforeign inquiriesinquiries ((SenateSenate PermanentPermanent SubcommitteeSubcommittee onon Investigations,Investigations, 2006,2006, pp.pp. 37,37, 48).48). (There(There aappearsppears toto bebe a vigorousvigorous disputedispute betweenbetween corporatecorporate serviceservice providersproviders inin NevadaNevada aandnd inin WyomingWyoming asas toto whowho offersoffers thethe mostmost secretsecret companies.)companies.) BCPBCP ConsolidatedConsolidated tthenhen openedopened anan onlineonline bankbank accountaccount withwith oneone ofof thethe fi vve-largeste-largest U.S.U.S. banks.banks. TheThe ccostost ofof establishingestablishing thethe companycompany andand thethe bankbank accountaccount waswas $3,695.$3,695. NeitherNeither thethe ooriginalriginal serviceservice providerprovider nornor thethe bankbank requiredrequired moremore thanthan anan unnotarizedunnotarized scanscan ooff mymy driver’sdriver’s licenselicense (showing(showing anan outdatedoutdated address).address). TheThe U.S.U.S. NationalNational Asso-Asso- cciationiation ofof SecretariesSecretaries ofof State,State, responsibleresponsible forfor settingsetting andand policingpolicing incorporationincorporation sstandardstandards havehave conficonfi rmedrmed inin SenateSenate testimonytestimony thatthat serviceservice providersproviders dodo notnot trytry toto vverifyerify driver’sdriver’s licenseslicenses andand thatthat thethe AssociationAssociation believedbelieved anyany suchsuch efforteffort wouldwould bebe pprohibitivelyrohibitively expensiveexpensive (Marshall,(Marshall, 2009).2009). ThisThis lacklack ofof knowledgeknowledge asas toto thethe personperson rreallyeally inin controlcontrol ofof thethe companycompany andand bankbank accountaccount isis clearlyclearly inin violationviolation ofof inter-inter- nnationalational standards.standards. WhileWhile U.S.U.S. lawlaw enforcementenforcement agenciesagencies havehave robustrobust investigativeinvestigative ppowers,owers, theythey cannotcannot gaingain accessaccess toto informationinformation thatthat hashas notnot beenbeen collectedcollected inin thethe fi rrstst place.place. Thus,Thus, eveneven a laxlax offshoreoffshore bankbank hashas duedue diligencediligence standardsstandards higherhigher thanthan tthosehose appliedapplied byby U.S.U.S. institutions.institutions. OOnene otherother example,example, FirstFirst OceanicOceanic Bank,Bank, isis unusualunusual inin havinghaving stricterstricter require-require- mmentsents fforor eestablishingstablishing a ccompanyompany ccomparedompared wwithith openingopening anan account.account. FirstFirst OceanicOceanic BBankank cclaimslaims ttoo bbee llicensedicensed byby thethe SomaliSomali government,government, enjoyingenjoying thethe “liberal,“liberal, proac-proac- ttiveive bbusinessusiness eenvironment”nvironment” SomaliaSomalia ssupposedlyupposedly provides,provides, whilewhile beingbeing administeredadministered ffromrom LLiechtenstein.iechtenstein. AlthoughAlthough settingsetting upup a SSomaliomali sshellhell ccompanyompany eexplicitlyxplicitly rrequiresequires a notarizednotarized passportpassport copy,copy, bothboth thethe provider’sprovider’s websitewebsite andand e-maile-mail communicationscommunications rrepeatedlyepeatedly notenote that,that, althoughalthough theythey requirerequire a scannedscanned copycopy ofof somesome piecepiece ofof photophoto iidentifidentifi cation,cation, therethere isis nono needneed toto getget thisthis notarizednotarized oror certificertifi eded asas a truetrue copycopy inin J. C. Sharman 137

oopeningpening a corporatecorporate bankbank account.account. A repeatedrepeated emphasisemphasis onon thisthis lastlast pointpoint suggestssuggests tthathat thethe providersproviders areare broadlybroadly hintinghinting atat thethe possibilitypossibility ofof a dede factofacto anonymousanonymous aaccount.ccount. I testedtested thisthis byby establishingestablishing fi rstrst a personalpersonal accountaccount (€300),(€300), andand thenthen a ssecondecond UU.S.-dollar.S.-dollar corporatecorporate accountaccount forfor BCPBCP ConsolidatedConsolidated EnterprisesEnterprises (Nevada)(Nevada) iinn SomaliaSomalia viavia wirewire transferstransfers hostedhosted byby twotwo ItalianItalian banks,banks, forfor anotheranother €300.€300. ThisThis rrequiredequired onlyonly a scanscan ofof mymy unnotarizedunnotarized driver’sdriver’s licenselicense (again,(again, showingshowing anan oldold aaddress)ddress) andand thethe company’scompany’s ArticlesArticles ofof AssociationAssociation (which,(which, toto repeat,repeat, includesincludes onlyonly tthehe nnominees’ominees’ nnamesames rratherather tthanhan mmine).ine). TThehe rresultingesulting aaccounts,ccounts, hhowever,owever, hhaveave a ccuriouslyuriously oone-wayne-way quality:quality: mymy attemptsattempts ttoo ttransferransfer mmoneyoney iintonto tthemhem vviaia tthehe IItaliantalian bbanksanks alwaysalways succeed,succeed, whilewhile allall effortsefforts toto transfertransfer moneymoney outout fail.fail. ThisThis illustratesillustrates aanothernother reasonreason asas ttoo wwhyhy bbothoth lliciticit aandnd iillicitllicit ccustomersustomers mmayay ppreferrefer oonshorenshore jjurisdic-urisdic- ttionsions toto offshore.offshore. A serviceservice providerprovider seeminglyseemingly aimingaiming atat thethe leastleast scrupulousscrupulous endend ofof tthehe mmarket,arket, andand legallylegally (if(if notnot physically)physically) basedbased inin a jurisdictionjurisdiction wherewhere consumersconsumers hhaveave zzeroero cchancehance ooff rredressedress tthroughhrough tthehe ccourts,ourts, maymay ssimplyimply bbee a sscam.cam. TThehe greatergreater diffidiffi cultyculty ofof obtainingobtaining anonymousanonymous corporatecorporate bankbank accountsaccounts doesdoes mmarkark aann iimportantmportant changechange fromfrom thethe situationsituation a decadedecade oror moremore agoago (IRS,(IRS, 1981;1981; UUnitednited NNationsations OffiOffi cece forfor DrugDrug ControlControl andand CrimeCrime Prevention,Prevention, 1998).1998). ButBut eveneven wwithoutithout directdirect accessaccess toto thethe bankingbanking system,system, havinghaving anonymousanonymous vehiclesvehicles cancan bebe uusefulseful iinn fi nancialnancial crime.crime. AAttemptsttempts ttoo eestablishstablish tthehe pprovenancerovenance ooff a plane-loadplane-load ofof NorthNorth KoreanKorean weaponsweapons iinterceptedntercepted iinn TThailandhailand wwereere ddefeatedefeated wwhenhen tthehe ttrailrail ooff sshellhell ccompaniesompanies iinvolvednvolved ppeteredetered outout inin NewNew ZealandZealand (“New(“New ZZealandealand BBusinessmanusinessman UUnawarenaware ooff NNorthorth KKoreaorea WWeapons,”eapons,” Wall Street Journal, DecemberDecember 118,8, 22009,009, bbyy CChrishris HHutchingutching aandnd SSimonimon LLouisson).ouisson). ForFor 3030 yearsyears afterafter thethe revolution,revolution, thethe IranianIranian governmentgovernment successfullysuccessfully ddisguisedisguised iitsts oownershipwnership ooff a 336-story6-story bbuildinguilding iinn MManhattananhattan vviaia sshellhell companiescompanies ((“Why“Why UU.S..S. LLawaw HHelpselps SShieldhield GGloballobal CCriminality,”riminality,” Time, FFebruaryebruary 22,, 22010,010, bbyy KKenen SStier).tier). OOnn a mmoreore qquotidianuotidian llevel,evel, ppropertyroperty aandnd sshareshares mmayay bbee hheldeld bbyy sshellhell ccompaniesompanies ttoo eevadevade ttaxax oobligations.bligations. IInn aaddition,ddition, iinn a cchainhain ooff corporatecorporate eentitiesntities eevenven oneone anonymousanonymous vvehicleehicle ((forfor eexample,xample, a ccompanyompany aactingcting aass tthehe ssoleole sshareholderhareholder oorr ddirectorirector ooff aanothernother ccompany)ompany) ccanan ddisruptisrupt tthehe eeffortffort ttoo eestablishstablish tthehe ttruerue oownerwner aatt tthehe eendnd ooff tthehe cchain.hain.

OOnshorenshore versusversus OffshoreOffshore

OOutrightutright fraudfraud toto oneone side,side, probablyprobably thethe moremore importantimportant generalgeneral advantageadvantage eenjoyednjoyed byby onshoreonshore overover offshoreoffshore jurisdictionsjurisdictions hashas toto dodo withwith reputation.reputation. InIn corre-corre- sspondingponding withwith me,me, itit waswas commoncommon forfor serviceservice providersproviders toto offeroffer adviceadvice onon thethe rreputationaleputational prospros andand conscons ofof thethe variousvarious jurisdictions.jurisdictions. ForFor example,example, oneone providerprovider ssuggesteduggested thatthat becausebecause “folks“folks mightmight looklook askanceaskance ifif youyou formedformed youryour companycompany inin LLabuan,abuan, Vanuatu,Vanuatu, PanamaPanama oror a similarsimilar jurisdictionjurisdiction ofof illill repute,”repute,” DelawareDelaware waswas a betterbetter option.option. TheThe providerprovider thenthen appliedapplied thethe samesame logiclogic appliedapplied toto thethe bankbank aaccount:ccount: “We“We believebelieve thatthat thethe bankbank accountaccount wewe cancan helphelp youyou openopen inin HongHong KongKong wwouldould bebe thethe directiondirection toto go.go. Again,Again, wewe areare talkingtalking aboutabout a jurisdictionjurisdiction withwith a highhigh llevelevel ooff llegitimacy.”egitimacy.” TThehe ccontradictionontradiction wwherebyhereby ccompaniesompanies fformedormed oonshorenshore rrequireequire 138 Journal of Economic Perspectives

llessess informationinformation onon thethe owner,owner, butbut aarere nneverthelessevertheless perceivedperceived asas beingbeing moremore strictlystrictly rregulatedegulated andand thusthus moremore rreputable,eputable, hashas beenbeen notednoted byby World-CheckWorld-Check (2008,(2008, p.p. 9),9), tthehe wworld’sorld’s bbiggestiggest pproviderrovider ooff aanti–moneynti–money llaunderingaundering ssoftware:oftware:

There is a false sense of security when carrying out due diligence on or dealing with an onshore company, trust, foundation or charity, in comparison to the equivalent offshore vehicles. The registration of a company in most onshore jurisdictions carries little or no KYC [Know Your Customer] requirements on the benefi ciaries, owners or company directors. The knowledge that a com- pany is registered in the United Kingdom, the United States or in the EU, as opposed to some small island nation, for some reason would appear to make us think it must be above board.

TThehe reasonreason whywhy itit isis commonlycommonly assumedassumed thatthat onshoreonshore companiescompanies areare above-above- bboardoard isis nnotot aatt aallll hhardard ttoo ddiscerniscern ggiveniven tthehe cconstantonstant presumptionpresumption ofof onshoreonshore ddiligenceiligence aandnd vvirtueirtue versusversus offshoreoffshore laxitylaxity andand vicevice tthathat uunderpinsnderpins bothboth thethe kindkind ooff iinternationalnternational rreportseports ccitedited eearlierarlier aandnd tthehe aassociatedssociated mediamedia ccoverage.overage.

CConclusiononclusion

BBarriersarriers ttoo tthehe ccross-borderross-border eexchangexchange ooff fi nancialnancial informationinformation havehave beenbeen wwidelyidely linkedlinked toto a varietyvariety ofof fi nancialnancial crimes.crimes. ProgressProgress inin respondingresponding toto thesethese threatsthreats ddependsepends iinn pparticulararticular oonn tthehe aabilitybility ttoo eestablishstablish tthehe rrealeal oownerswners ooff sshellhell ccompanies.ompanies. PPolicymakersolicymakers inin tthehe lleadingeading iinstitutionsnstitutions ooff ggloballobal eeconomicconomic ggovernanceovernance hhaveave cconsis-onsis- ttentlyently actedacted onon thethe basisbasis thatthat offshoreoffshore “tax“tax havens”havens” posepose thethe greatestgreatest threatthreat toto thethe iintegrityntegrity ofof thethe fi nancialnancial systemsystem byby providingproviding strictstrict fi nancialnancial secrecy.secrecy. ThisThis presump-presump- ttionion hashas existedexisted forfor atat leastleast a decadedecade (for(for somesome olderolder examples,examples, seesee OECD,OECD, 1998;1998; UUnitednited NationsNations OffiOffi cece onon DrugDrug ControlControl andand CrimeCrime Prevention,Prevention, 1998;1998; FinancialFinancial SStabilitytability Fund,Fund, 2000,2000, IRS,IRS, 1981;1981; forfor recentrecent examples,examples, seesee G20,G20, 2009a,2009a, p.p. 4;4; G20,G20, 22009b,009b, ppp.p. 334–36;4–36; OECD,OECD, 2009;2009; EEuropeanuropean Commission,Commission, 22008;008; SSenateenate PPermanentermanent SSubcommitteeubcommittee oonn IInvestigations,nvestigations, 22008).008). TThehe smallsmall ssampleample ssizeize ooff tthishis eexercisexercise necessitatesnecessitates a degreedegree ofof modestymodesty aboutabout tthehe strengthstrength ofof thesethese fi ndings;ndings; ofof course,course, a largelarge andand carefully-structuredcarefully-structured exerciseexercise wwouldould provideprovide moremore support.support. ButBut itit isis worthwhileworthwhile consideringconsidering thethe a fortiori llogicogic aatt wworkork inin tthishis aarticle.rticle. IIff oonene llaw-abidingaw-abiding iindividualndividual wwithith a mmodestodest bbudgetudget ccanan eestablishstablish aanonymousnonymous companiescompanies andand bankbank accountsaccounts viavia thethe InternetInternet usingusing relativelyrelatively high-high- pprofirofi lele corporatecorporate serviceservice providers,providers, howhow muchmuch simplersimpler isis itit likelylikely toto bebe forfor criminals,criminals, wwhoho aarere notnot boundbound byby anyany ofof thesethese restrictions,restrictions, toto replicatereplicate thisthis feat?feat? TheThe degreedegree ooff nnoncomplianceoncompliance wwithith iinternationalnternational sstandardstandards discovereddiscovered eveneven inin rresponseesponse ttoo tthehe rrelativelyelatively easyeasy testtest representedrepresented byby thisthis studystudy isis thusthus especiallyespecially signifisignifi cant.cant. WithWith thisthis ppointoint inin mmind,ind, tthehe evidenceevidence herehere suggestssuggests thethe possibilitypossibility thatthat smallsmall islandisland offshoreoffshore ccentersenters havehave standardsstandards forfor corporatecorporate transparencytransparency andand disclosuredisclosure thatthat areare higherhigher tthanhan mmajorajor OOECDECD eeconomiesconomies llikeike tthehe UUnitednited SStatestates aandnd tthehe UUnitednited KKingdom.ingdom. Shopping for Anonymous Shell Companies 139

IInn tthehe UUnitednited StatesStates andand thethe UnitedUnited Kingdom,Kingdom, anonymousanonymous companiescompanies areare ffreelyreely availableavailable toto anyoneanyone withwith anan InternetInternet connectionconnection andand a fewfew thousandthousand dollars.dollars. TThehe rulesrules barringbarring anonymousanonymous entitiesentities fromfrom thethe internationalinternational bankingbanking systemsystem areare bbetteretter enforced.enforced. YetYet eveneven here,here, high-incomehigh-income OECDOECD countriescountries laglag offshoreoffshore centers.centers. NNotot onlyonly dodo thethe world’sworld’s majormajor fi nancialnancial centerscenters offeroffer tightertighter secrecy,secrecy, butbut corporatecorporate eentitiesntities formedformed thereintherein enjoyenjoy a sstatus,tatus, sstanding,tanding, aandnd llegitimacyegitimacy tthathat aarere ffarar llessess llikelyikely ttoo aarouserouse ssuspicionuspicion tthanhan tthosehose ffromrom sstigmatizedtigmatized ooffshoreffshore llocales.ocales.

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