The Economist Exposes Shell Corporations, and the Agents Who Create Them

April 4th, 2012

The Economist came out today with two great investigative articles on shell corporations. Shell, or anonymous, corporate structures are used to do business without the real actor behind the activity being known. While we usually associated shell corporations with, to quote one of the articles, “sunny places for shady business”, the reality is that the United States and the United Kingdom are some of the world’s worst offenders. Cottage industries have developed in many of the  U.S. states where incorporation is easiest.

The first article documents this quickly-growing new business around the world,

As in any industry, incorporation includes a mix of wholesalers and retailers. The wholesalers, such as Hong Kong-based Offshore Incorporations Ltd (OIL), sell companies to legal and accounting firms, banks, corporations and also (often in bulk) to web-based resellers. Martin Crawford, the chief executive, says reputation is crucial in this market segment.

The two largest providers offshore may each have 10% of the global market, estimates Jason Sharman, an Australian professor who studies the industry. Onshore markets are more concentrated. Two firms handle two-thirds of all Delaware companies: CT Corporation (part of Wolters Kluwer of the Netherlands) and CSC—though both companies’ websites give little hint of this, focusing on their less controversial compliance services.

The second looks at some of the (many) harms that shell corporations bring with them,

Shell companies are perfectly legal and have many above-board uses. Firms may use them during mergers, to park assets during complicated transactions, or to fend off lawsuits in countries with predatory governments or corrupt courts. They can usefully protect trade secrets or safeguard directors from kidnappers or busybodies. They offer flexibility for entrepreneurs needing to move quickly. “Every company starts out as a shell,” says Richard Geisenberger, head of Delaware’s Division of Corporations, which registered 133,297 new corporate vehicles last year.

But they can also be misused—for tax evasion, money laundering, sanctions-busting or terrorism. A World Bank report last year, “The Puppet Masters”, investigated 817 big cases of corruption between 1980 and 2010. Almost all used shells. “It’s a basic launderer’s tool,” says Robert Palmer of Global Witness, a campaigning group.

I find that cynics often approach the shell corporation problem with a bit of weak nihilism. “Even if we fix this, they’ll find another way around it.” While The Economist certainly documents a group of profitable, creative businesses who have become experts at finding ways around the law, it is not inevitable that legal structures will grant anonymity. Just as the United States quickly and decisively eliminated shell banks (banks with anonymous accounts) shortly following the 9/11 terrorist attacks, it can do the same with shell corporations.

The Economist didn’t even list out all the horrible places we see shell corporations popping up these days. They’ve been used to hide a seven-figure campaign contribution to a U.S. Presidential candidate, commit bank fraud, steal money from Medicare, and evade tough U.S. sanctions against Iran. They are truly a problem that can be found across the policy spectrum, and are long overdue to be eliminated.

Written by EJ Fagan

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