Shell companies and money laundering: U.S. law firms offer the best deals

"Shell companies” — those companies that exist only on paper and possess no real employees or assets — can be used legitimately, but a new study reveals just how easy it is to set up a shell company for illegal purposes.

The Centre for Governance and Public Policy at Australia's Griffith University has published new research by three academics — Michael Findley, Daniel Nielson and Jason Sharman — entitled "Global Shell Games: Testing money launderers' and terrorist financiers' access to shell companies.” The study clearly demonstrates that it is easy to set up untraceable shell companies that can be used to launder money, evade taxes or fund terrorism.

Findley, an assistant professor at the University of Texas; Nielson, an associate professor at Brigham Young University; and Sharman, a professor and director of the Centre for Governance and Public Policy at Griffith posed as consultants and asked 3,700 incorporation agents in 182 countries to form companies for them under varying degrees of suspiciousness. The researchers sent three types of emails to their prospective incorporators, posing as low-, medium- and high-risk applicants. The low-risk applicant would be writing from a country such as Australia or Norway, the medium-risk applicant from a politically less stable region, and a high-risk applicant from the Middle East.

"The experiment allows us to test whether international rules are actually effective when they mandate that those selling shell companies must collect identity documents from their customers,” wrote the authors. "Shell companies that cannot be traced back to their real owners are one of the most common means for laundering money, giving and receiving bribes, busting sanctions, evading taxes, and financing terrorism.”

The Financial Action Task Force (FATF) sets the international standard governing the use of shells, but merely states that countries should take "all measures” to ensure that shell companies present accurate information to "competent authorities” regarding their beneficial owners. It appears all too many providers do not meet the international standard.

"Overall, 48% of the replies received failed to comply with international rules on customer identification,” noted the researchers, "and 22% failed to require any proof of identity at all.”

The results of the study are interesting not just because of the ease of incorporating a shell company, but because it also seems that the easiest place to do so is not in a traditional tax haven, but in the United States. In fact, although it is required by the FATF, only 10 out of 1,722 providers in America required notarized documents.

"Running directly counter to conventional policy wisdom on the subject, providers based in tax haven countries were significantly more likely to follow the rules,” reported the authors, "to apply the ‘Know Your Customer' principle, than those in non-tax haven countries. Another surprise was that providers in poorer, developing countries were at least as compliant as those in rich, developed countries.”

It may be comforting to learn that the level of acceptance for these applicants was higher for the seemingly less dangerous sources, but some, regardless of any applicable rules, accepted even the highly suspicious. When the researchers offered to pay a premium to circumvent these rules demands for identification and proof of beneficial ownership ceased.

U.S. Senator Carl Levin of Michigan is attempting to push through U.S. legislation that would require U.S. providers to register beneficial owners. The Incorporation Transparency and Law Enforcement Assistance Act was introduced in early August and purports to combat acts of terrorism, money laundering, tax evasion, and other wrongdoing facilitated by U.S. corporations with hidden owners. The bill would end the practice of the 50 States forming corporations for unidentified persons, and instead require the States to obtain the identities of the persons behind them.