Guest Post: Beneficial Ownership Secrecy–Not All Offshore Financial Centers Are Part of the Problem, and Public Registries Are Not the Solution

Geoff Cook, Chief Executive Officer of Jersey Finance, contributes the following guest post:

The so-called “Panama Papers”—the documents leaked from the Mossack Fonseca law firm by an anonymous whistleblower—have highlighted how certain corporate service providers (CSPs) are able to set up, in offshore international financial centers (IFCs), shell companies for their clients, with bank accounts and other assets then owned by the shell company, so that the identity of the ultimate beneficial owner is hidden. That secrecy enables corruption, tax evasion, money laundering, and other nefarious activity.

While the Panama Papers revelations may have done some good in calling more attention to abuses of the legal and financial system – abuses that can and should be fought – much of the prevailing discussion in the wake of the Panama Papers revelations – much of it driven by moral outrage and salacious headlines about dubious deals – has produced two significant analytical errors, one concerning the diagnosis of the problem, and the other concerning the appropriate prescription. Continue reading

Guest Post: After the Media Circus, What (If Anything) Have We Learned from the Panama Papers?

GAB is pleased to welcome back Professor Jason Sharman, Deputy Director of the Centre for Governance and Public Policy at Griffith University, Australia, who contributes the following guest post:

After the initial flurry of media attention to the Panama Papers, Matthew Stephenson rightly asks how much, if anything, we have really learned from this affair beyond the celebrity gossip.

A notable degree of modesty is in order here, as what we have seen so far is a tiny, almost certainly unrepresentative sample of the vast quantity of information leaked to International Consortium of Investigative Journalists (ICIJ). The initial wave of media coverage related to 140 individuals, including 12 heads of state or government. Since the ICIJ database became searchable on May 9th, we have a few more names, mostly small-time crooks, and it is possible to run individual name searches to your heart’s content. Nevertheless, given that Mossack Fonseca had created 214,000 shell companies, what we have seems to be less than 1% of their clientele, and presumably the most sensational and outrageous cases. If you looked at your average big international bank, took the records of 214,000 accounts, and subjected them to a detailed financial audit, you probably would find at least a few hundred people engaged in crime or some other seriously shady business (putting banks’ own criminal conspiracies like rigging the LIBOR and Forex markets and sanctions-busting to one side).

Matthew’s earlier post asked about the structure of the offshore shell company industry–in particular, whether it was dominated by a few major providers, or whether it was a highly fragmented market with many firms, each with small market share. The answer is both: There are a few big wholesalers of shell companies, four or five, plus a couple in the US. The wholesalers sell to thousands of intermediary retailers, who then sell to the end-users, i.e. the beneficial owners. I was surprised by how many retailers Mossack Fonseca dealt with (14,000), given that the other wholesalers of equivalent size engage with 2,000-3,000 intermediaries. The difficulty keeping track of this number of retailers, let alone their customers, might explain Mossack Fonseca’s otherwise-puzzling suicidal indiscretion in transacting with customers who brought a huge amount of risk for a fairly trivial sum of money, e.g. those on US government sanctions lists.

What does the structure of the industry mean for regulatory solutions? The retailers could take up the slack if the wholesalers were put out of business, although the process of forming shell companies would be less efficient and more expensive. More importantly, the more concentrated the industry, the easier it is to regulate, compared to the whack-a-mole situation of thousands of independent retailers. As Rick Messick rightly points out, for this regulation to work, however, it is necessary for the Eligible Introducer system between wholesalers and retailers to work in identifying beneficial owners. Despite a litany of earlier high-profile failures, a Guardian piece actually suggests that the British Virgin Islands authorities had recently got on top of this problem: in 2015, 90 requests from the local Financial Intelligence Unit to Mossack Fonseca turned up the names of 89 beneficial owners. However, because customer identity documents are now almost always scans rather than paper, there seems to be no good reason why they can’t be held in the jurisdiction of incorporation.

More broadly, with the Panama Papers and the earlier April 2013 offshore leak, we (or at least the ICIJ) now have information on just over 320,000 offshore shell companies, which probably represents something like 15-20% of all the offshore shell companies ever created. You can work out the total number in that BVI has about 40-45% of the worldwide market. It currently has 450,000 active companies, and 950,000 formed in total since the creation of its registry. If we could draw a random sample of these companies and the associated documentation, rather than cherry-picking the worst of the worst, then we could form a much more accurate and robust conclusion on what the typical uses of offshore shell companies actually are.

In just looking at the information we do have from the Panama Papers, two things are fairly apparent, yet don’t seem to have attracted much comment so far: Continue reading

Guest Post: Global Shell Games — Experimenting with Untraceable Shell Companies

GAB is delighted to welcome back guest contributor Professor Jason Sharman of Griffith University, Australia, who contributes the following post:

Among the various mechanisms for hiding and laundering large sums of money associated with corruption, shell companies that cannot be linked with their real owners have proved one of the most troublesome. A 2011 Stolen Asset Recovery Initiative report on laundering the proceeds of grand corruption noted that from a total of 213 cases, 150 involved the use of shell companies (or, more rarely, trusts) to launder $56.4 billion. Since 2003, all those governments bound by the standards of the Financial Action Task Force (FATF) have promised to ensure timely access to information on identity of those owning shell companies, and FATF rates member countries according to their compliance and the overall level of risk they present. Despite (or perhaps because of) a renewed stress on tracing shell companies’ beneficial (i.e. real) owners, most recently at the G20 leaders’ summit in my home state of Brisbane, there are good reasons to be skeptical about whether the standards are really enforced.

Frustrated with the poor measurement of policy effectiveness in this area, Michael Findley, Daniel Nielson, and I decided to try a new approach. We ran a real-world experiment to see whether corporate service providers would comply with the rules on client screening, particularly in cases where the client profile raised “red flags.” Our findings, reported in our book Global Shell Games, were both worrying and counter-intuitive. Continue reading

Guest Post: Hosting Proceeds Down Under — Australia and the G20 Anticorruption Agenda

Professor Jason Sharman of Griffith University, Australia, contributes the following guest post:

On November 15th–two days from now–the latest G20 leaders’ summit kicks off in my home town of Brisbane, Australia, with anticorruption once again on the agenda. Though the G20 Anti-Corruption Working Group has made some important progress, many of the member states have been letting down the side. Specifically, Australia tends to receive less critical scrutiny than it should when it comes to international action against corruption, particularly in terms of hosting stolen assets from other countries in the region. And the G20 leaders’ summit is as good a time as any for the international community to press Australia for its many failures to deal with its status as a regional haven for money laundering in the Asia-Pacific. Continue reading