A shell company is a business with no actual employees or assets. It exists only on paper, as a purely legal artifact, and is sometimes what’s used when a company incorporates offshore.
Shell companies have their legitimate uses, such as addressing brand concerns. But their uses can also be less savory (such as tax avoidance) as well as blatantly illegal: fraud, money laundering, tax evasion, and terrorism financing. And according to a new paper, opening a shell company in America and other rich nations is easier and subject to less scrutiny than anywhere else on the globe.
Corporate service providers (CSPs) register companies — including shell companies — around the world. The international rules laid down by the Financial Action Task Force (FATF) require them to ensure authorities have “adequate, accurate, and timely” information on company ownership. The study, carried out by a professor and two assistant professors for Griffith University in Australia, contacted over 3,700 CSPs in 182 countries. The results, which The Economist flagged on Saturday, were not pretty:
Overall, 48% of the agents who replied failed to ask for proper identification; almost half of these did not want any documents at all. Contrary to conventional wisdom, providers in tax havens, such as Jersey and the Cayman Islands, were much more likely to comply with the standards than those from the OECD, a club of mostly rich countries. Even poor countries had a better compliance rate, suggesting the problem in the rich world is not cost but unwillingness to follow the rules (see chart). Only ten out of 1,722 providers in America required notarised documents in line with the FATF standard.
The United States performed a bit better than OECD countries over all, a bit worse than developing countries, and all of them did much worse than the “tax haven” countries.
The study contacted CSPs using a standardized set of fake applicant profiles — some of these profiles were innocuous, but some were meant to raise red flags of either corruption or terrorism risks. According to the study’s authors, the reaction to the terrorism-risk applications was mixed, but the risk of corruption actually led to even less compliance with international standards. American CSPs refused less of the corruption-risk applicants , and internationally they made less effort to acquire proper documentation from them.
There were some meager bright spots. Some applications were worded in such a way to remind CSPs of non-compliance’s legal risks, and this seemed to inspire a meaningful uptick in compliance within the United States, suggesting a respect for the IRS’ authority. Offering to outright bribe service providers to not follow the rules was generally unsuccessful. Finally, the number of CSPs who simply didn’t respond at all to the study’s applications was quite high: 49 percent internationally and 77 percent in the United States.