How broad secrecy draws criminals to offshore tax havens

Broad secrecy attracts many to offshore jurisdictions. John Kamau spoke to Porter McConnell, director of the Financial Transparency Coalition, a global alliance of civil society groups and governments working to address inequalities in the financial system that penalises billions of people.

Question: Why would a company opt to have its holding company in Panama?

Answer:  Panama has long been one of the favourite secrecy jurisdictions of the Americas, and lax financial laws make it extremely attractive for those looking to move money anonymously. As a foreign firm, you can move money into the country untaxed, and the utter lack of transparency makes it appealing for those looking to skirt the law.

A 2014 IMF report rated Panama’s progression on implementing 40 recommendations from the Financial Action Task Force: the government had only fully implemented one.

This not only makes the jurisdiction a safe haven for corporate tax evasion, but also for those looking to launder money or finance criminal activity.

Why, in general, are shell companies created?

Answer:  Not all shell companies are anonymous. However, in most jurisdictions around the world, you can create a shell company anonymously, which allows you to hide the beneficial owner — the real person or people ultimately in control or benefiting from the company.

Jurisdictions like Panama don’t require full disclosure of beneficial ownership information, which makes the system incredibly susceptible to abuse.

Unfortunately, Panama isn’t the only place with lax laws.

A recent academic study showed that the US state of Delaware was the second easiest place in the world to open an anonymous company.

We’ve seen how these companies are used too — arms dealer Victor Bout moved money by opening Delaware LLCs, and the most recent attempt by the US Department of Justice to track down money stolen by Nigeria’s former leader, Sani Abacha, led them to companies set up in the British Virgin Islands.

The unfortunate reality is that far too many jurisdictions around the world allow you to set up a shell company and do so under complete anonymity.

As a matter of fact, Kenya ranked as the easiest place in the world to do so in the same academic study.

Anonymous companies often have very few or no employees at all, and most don’t conduct any real business.

They can be used to hide illegal business or to facilitate illegal activity, like tax evasion and Ponzi schemes that can rob billions from unsuspecting citizens.

Are shell companies all that bad, or some are just created as holding companies and consolidate wealth?

Answer:  Whether or not there are legitimate reasons to create a shell company, the fact is that they are the favourite vehicle for all sorts of criminal activity — from money laundering and embezzlement to corporate tax evasion, because there simply isn’t enough transparency around them.

This has devastating repercussions. Almost any time there is large-scale embezzlement, corruption, or corporate malfeasance, shell companies are a central piece of the puzzle.

A 2011 World Bank report estimated that of the cases of grand corruption they researched, 70 per cent used anonymous shell companies to help get away with the crime.

But the good news is the fix is fairly straightforward. Countries can set up public registers that collect information on the real — beneficial — owners of a company when it’s incorporated.

If ownership information was available, investigators, journalists, and civil society could peel back the layers of anonymity that shell companies create.

It would also deter criminals and the corrupt from using shell companies as a vehicle for crime in the first place.

What legal regimes attract them to countries such as Panama, BVI, etc.?

Answer:  Chiefly, it’s the broad secrecy of these jurisdictions that is so appealing to many.