The Global Shell Game

June 6th, 2013

Originally published at Trust Law.

A shell game is a well-known parlor game in which players try to follow the movement of a ball placed under one of three quickly shuffled shells or cups and then try to correctly guess the shell that covers the ball once they are brought to rest.

When the operator of the game is especially skilled, correctly tracking the ball can prove quite difficult. If a skilled and dishonest operator uses sleight of hand to covertly move the ball to one of the shells not identified by a player, the game becomes impossible to win, a veritable “confidence trick used to perpetrate fraud.”

The use of anonymous shell companies, or “phantom firms”, can be similar to a parlor shell game. Both rely on operators adept at creating misdirection and keeping observers uninformed. Both can be used for legitimate purposes, but in the wrong hands can be used for nefarious purposes.

Phantom firms make it easy for corrupt government officials, drug traffickers, fraudsters, terrorists, and others to secretly and illicitly move money around the globe with virtually no oversight or repercussions.

In much of the world, the actual owners of anonymous shell companies are not legally required to disclose their identities. Instead, they can remain anonymous by listing the name of a stand-in (or “nominee”) director – or even another (often anonymous!) company – as the owner. This enables individuals and companies to shift money around the globe secretly and anonymously, making it nearly impossible for law enforcement and ordinary citizens to follow the money.

Phantom firms have become the world’s most complicated – and common – shell game, one that is played on a global scale with significant gains and losses. Phantom firms played a role in the loss of $859 billion from developing countries in 2010 in the form of illicit financial flows.

Unlike the parlor version of the shell game, however, losers in the phantom firm shell game often aren’t even aware that the game is being played.

The people of Malaysia, for instance, were unaware that key members of the Malaysian government, their families, and close associates own secret offshore shell companies in Singapore and the British Virgin Islands. Similarly, Nigerians were not aware that President Goodluck Jonathan’s special adviser on political matters had links to a secret shell company in the British Virgin Islands that conducted business with the Nigerian government, or that a former petroleum minister – and now respected traditional ruler in Nigeria’s oil-rich Niger Delta – is linked to an offshore shell company.

These are just a few of the revelations stemming from dozens of articles that the International Consortium of International Journalists (ICIJ) published in April as part of an unprecedented investigation into offshore tax havens. The investigation, which was facilitated by 2.5 million leaked files, highlights the widespread use of secret companies and bank accounts to hide and move money around the world.

In addition to the above examples, ICIJ’s investigation reveals that government officials and their families and associates in other countries, including Azerbaijan, Russia, Pakistan, Paraguay, and Thailand, also have used phantom firms to transfer and safeguard money. Several government officials failed to report these assets, as required by their country’s laws, raising questions about their motives for creating or investing in secret offshore firms.

To date, none of these individuals has been formally charged with violating any laws associated with their secret companies, but several governments are keen on getting their hands on the data, including Germany, Greece, South Korea, Canada and the U.S. For its part, ICIJ has refused to release the data, but on May 9 the organization announced that Australia, the U.S., and the U.K. had independently received a large batch of leaked files related to phantom firms. The German press reported that Germany also has access to the data.

If governments are interested in knowing the owners of secret offshore accounts, they should take strong and immediate actions to ensure that they can acquire this information themselves, rather than relying on leaked data. They should require the public disclosure of information about who owns and controls companies (the “beneficial owner”), support the revenue collection capacity of developing country authorities, and encourage greater co-operation between revenue authorities in developing countries and their counterparts in other countries, including offshore financial centres.

The ICIJ reporting has helped to expose the global shell game. It is now up to governments – backed by citizen’s demands – to put an end to it. Leaders of the G8 have an opportunity to do just that at the G8 Summit in June, by taking concrete steps to require that the identities of the actual owners of companies be publicly disclosed.

The global shell game is harmful to both developing and developed countries. It is time for world leaders to say “game over”.

Written by Joseph Kraus, Ph.D.

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