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Harry Cassin
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Julie DiMauro
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Thomas Fox
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Bill Waite
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Shruti J. Shah
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Russell A. Stamets
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Richard Bistrong
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Eric Carlson
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Shruti Shah: Every big corruption story features anonymous companies

Since my initial post for the FCPA Blog on the Paradise Papers, I have read a lot of arguments against requiring increased transparency of anonymous companies, including a recent post on this blog, so I thought it would be useful to address some of these arguments and present another perspective.

It is true that there are legitimate uses for shell companies. One often cited example is that of a multinational corporation looking to buy property. The corporation may be concerned that a seller may increase the price due to brand recognition, and therefore may incorporate a shell company to conduct the transaction. 

While there are legitimate uses of shell companies, the issue is that the secrecy offered by these offshore structures makes them a favorite tool for just about any criminal from tax evaders and money launderers to drug traffickers and kleptocrats. As Max Heywood of Transparency International so eloquently said,

Even if some or even most secret shell companies were being used for legitimate purposes, the direct benefits of these uses mostly go to private individuals and single corporations. However, the costs of the misuse of secret shell companies, in terms of large-scale tax evasion, corruption and crime, are borne by society as a whole and mostly affect developing countries.

How much do “ordinary folk” in BVI and the Cayman Islands benefit from these secret offshore structures when the main beneficiaries are a wealthy minority, often expats? What about the “ordinary folk” in places like Congo, Angola and Kazakhstan, who see the revenues from natural resources disappear into complex offshore structures rather than going into the public coffers, where they could fund schools, hospitals, and roads? The ability to conceal illicitly obtained funds fuels corruption, breeds instability and diverts resources from those who should benefit.

Another argument against making beneficial ownership information publicly available is the right to privacy. No right is absolute and a right to privacy must be balanced against the cost to society from crimes facilitated by anonymous companies. Additionally, as Alison Taylor’s recent excellent post for the FCPA Blog pointed out, it is important to not falsely equate the confidentiality of financial information with disclosure of ownership.

Second, it is important to understand the difference between what a registry would collect and what would be public. For example, the UK’s registry of beneficial ownership collects for each beneficial owner the full name, birth date, place of residence, and nationality, as well as a description of how the ownership/control is exercised. However, the owner’s entire birth date is not disclosed. Also, if there are legitimate security concerns like the protection of identity in dangerous hot spots throughout the world, a tightly worded exemption could address such concerns. In fact, the UK register addresses this concern on a case by case basis. And no register contemplates the public display of any document such as a passport that can be used to verify identity.

In reality, registers have to be consistently updated and information needs to be verified to maintain accuracy. Verification is something that takes time, money, and trained personnel. Opening the register would increase the chances that errors, omissions, and deceptions would be spotted by interested journalists and civil society. 

Open registers would also level the playing field for businesses. I constantly hear about the challenges businesses face in terms of managing their supply chain and conducting adequate due diligence. Company ownership transparency would aid in risk management and corporate due diligence efforts.  Several business leaders agree and have already lent their support to beneficial ownership transparency, including  the CEO of Unilever, the CEO of Dow Chemical Company, Virgin Group founder Richard Branson, and Celtel founder Mo Ibrahim.

I agree that no register of beneficial ownership will be the answer to all concerns. Just as any good internal control system has multiple checks and balances, we need many reforms to truly stem the flow of illicit money. Beneficial ownership registers and requiring financial institutions to collect and verify beneficial ownership information of their legal entity customers are key, but additional reforms are needed.

For example, law firms and other intermediaries who set up offshore companies and trusts should conduct due diligence and screening of their clients and report suspicious activities to authorities. When these actors fail to meet their obligations, authorities should hold them accountable and impose appropriate sanctions.

The real estate industry, which is well positioned to detect schemes that use real estate to conceal the true source, ownership, location or control of funds generated illegally, should be required to conduct due diligence on buyers’ identities and the sources of their funds.

Finally, for those who think that the Paradise Papers are all about tax avoidance, our friends at Transparency International have helpfully posted a summary of stories with red flags of corruption. There is a difference between tax evasion and avoidance; several stories in the Paradise Papers relate to avoidance and not outright evasion. But in practice, it can be highly challenging to determine the boundary between tax evasion and tax avoidance and the line is becoming more blurred. As the Economist magazine has noted, “It is not correct to say, as many do, that tax evasion is illegal but tax avoidance is legal. The lawyers and accountants who manage avoidance schemes — which often exploit loopholes to gain a tax advantage that legislators never intended — work in a legal grey area.”

The Panama Papers have already resulted in several reforms which we have detailed before. For example, the BVI commitments on beneficial ownership information exchange with the UK government happened in the run-up to the London Anti-Corruption Summit, and just a couple of days after the Panama Papers broke. As a result of the Panama Papers leaks, investigations or inquiries have been launched into the activities of 6,520 companies and individuals in 79 countries.

We do not need another leak to close the loopholes identified. We already know that anonymous companies facilitate corruption because every large corruption story in recent times, including IMDB, Petrobras, FIFA, and VimpelCom has featured anonymous companies. It is time to take a bold step toward transparency rather than timid measures with limited impact.


Shruti Shah, pictured above, is a contributing editor of the FCPA Blog. She’s the Vice President of Programs and Operations at Coalition for Integrity (formerly Transparency International-USA). She can be contacted here.

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  1. There are a number of "elephants in the room" that are being ignored in all of these discussions.

    1. As we see the tax policies being developed in the US, the message seems to be quite clear – corporate taxes are bad for everyone because it takes money away from companies that will create jobs if left with the company. Thus, taking this message to its full conclusion, moving to tax havens is a laudable act.

    2. Paying taxes in many jurisdictions is unethical – for example, when tax dollars go to funding genocide in Burma, Turkey or other countries where genocide is said to be taking place, paying taxes is perhaps wrong? Tax havens may permit the company to avoid these evil?

    3. In other countries, tax revenues are stolen by the government officials so companies are facilitating corruption by paying taxes. In other countries, money is spent on "bridges to nowhere" or purchasing nuclear weapons to destroy the world, etc.

    Yet, as we read about the tax haven issue, nobody raises these issues. IN other words, paying taxes can help the world if the taxes are used to better the people in the country (health care, education, care for the homeless etc) and can greatly hurt the world when they are used for improper purposes.

    Part of the "war on tax havens" needs to include concepts regarding use of funds for public good, which so far, is greatly missing. There seems to be an assumption made in all of this that governments always use tax revenues for good – a very bad assumption!!

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