Thursday, January 17, 2013

Global shell games

Or Testing Money Launderers’ and Terrorist Financiers’ Access to Shell Companies

For criminals moving large sums of dirty money internationally, there is no better device than an 
untraceable shell company. 

A recent paper reports the results of an experiment soliciting offers for these prohibited anonymous shell corporations. 

Our research team impersonated a variety of low- and high-risk customers, including would-be money launderers, corrupt officials, and terrorist financiers when requesting the anonymous companies. 

Evidence is drawn from more than 7,400 email solicitations to more than 3,700 Corporate Service Providers that make and sell shell companies in 182 countries. 

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. 

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 of course financing terrorism.

The results provide the most complete and robust test of the effectiveness of international rules 
banning untraceable, anonymous shell companies. 

Furthermore, because the exercise took the form of a randomized experiment, it also provides unique insight into what causes those who sell shell companies to either comply with or violate international rules requiring them to collect identity documents from customers. 

Just as the random assignment to control (placebo) and treatment groups in drug trials isolates the effect of a new drug, so too the random assignment of low-risk “placebo” emails and different high-risk “treatment” emails isolated the effects of different kinds of risk on the likelihood of (a) being offered a shell company, and (b) being required to provide proof of identity. 

Key findings include:

1. Overall, international rules that those forming shell companies must collect proof of customers’ identity are ineffective. 

Nearly half (48 percent) of all replies received did not ask for proper identification.

And 22 percent did not ask for any identity documents at all to form a shell company.

2. Against the conventional policy wisdom, those selling shell companies from tax havens were 
significantly more likely to comply with the rules than providers in OECD countries like the 
United States and Britain. 

Another surprise was that providers in poorer, developing countries were also more compliant with global standards than those in rich, developed nations.

3. Defying the international guidelines of a “risk-based approach,” shell company providers were often remarkably insensitive to even obvious criminal risks. 

Thus, although providers were less likely to reply to clear corruption risks, those that did respond were also less likely than in the placebo condition to demand certified identity documents of potential customers from high corruption countries who claim to work in government procurement.

4. Corporate service providers were significantly less likely to reply to potential terrorists and 
were also significantly less likely to offer anonymous shell companies to customers who are 
possibly linked to terror. 

However, compared to the placebo a significantly decreased share of firms replying to the terrorist profile also failed to ask for identity documentation or refused service.

5. Informing providers of the rules they should be following made them no more likely to do so, 
even when penalties for non-compliance were mentioned. 

In contrast, when customers offered to pay providers a premium to flout international rules, the rate of demand for certified identity documentation fell precipitously compared to the placebo

Michael Findley, Daniel Nielson and Jason Sharman

Is anyone surprised?

Is anyone doing anything about this?

Well yes and no.

Yes various government agencies huff and puff.

No because many powerful individuals and organisations have need of them.

Any chance of serious efforts to change this state of affairs?

Not much.

Sad really shell companies and tax havens are not exactly invisible.

So one has to conclude that it's same old same old.

Meaning follow the money and you soon see why not.

Then hold your nose next time you hear politicians talking about how everyone must pay their fair share of taxes.

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