ACFCS Conference

Who Owns What Now? Uncovering Beneficial Ownership by Tim Michetti

As I was browsing the internet the other day, I came across this little gem created by the International Consortium of Investigative Journalists:

It is a short animated clip entitled, “Tax Havens 101: The High Cost of Going Offshore”. The video provides good insight into the world of offshore tax havens, shell corporations, and the ways in which they may be used to illicit activities.

As the video describes, shell companies do not require the beneficial owner to have their name associated with the entity, even though they are ultimately in control. However, shell companies are not illegal and serve many legitimate purposes as well. For example, if Budweiser wanted to sell a discounted product, like Keystone, it could do this through a shell company without ruining its reputation for quality (not to say Budweiser has a reputation for quality in the first place). Another example would be the use of a shell corporation to hide the identity of an investor as s/he builds up a controlling stake in a company through multiple shell corporations s/he controls. However, the aspect of anonymity makes the shell company a useful tool for illicit activities as well.

The shell company is a common tool amongst those looking to commit fraud, launder money, or avoid paying tax. An example includes the buying and selling through a shell company to hide true profits from the tax man or using a shell companies to pay off the family members of Emirati princes so they will purchase a new squadron of jet fighters (see The Shadow World, by Andrew Feinstein). Additionally, shell companies can issues shares of penny stocks and then issue false or misleading press releases and paid-for analyses to pump up the price per share and then dump them before the stock crashes, commonly known as a Pump and Dump scheme. The beneficial owners, who are unknown, get away scot free.

Thankfully, regulation is catching up. In January 2014, the Basel Committee, a group of bank supervisory authorities from 27 countries, issued new guidelines for banks to address risks emanating from tax havens and shell companies. Several of the guidelines address the need to know your customer (KYC) by requiring official documentation of the beneficial owner for an account to be established. A bank should also vet the customer based on publicly available information and engage in enhanced due diligence if necessary. National governments are catching up as well, the U.K. said it will require a central registry for all businesses incorporated in its territories and list beneficial ownership for anyone with a 5 percent stake.

It is imperative that national and international bodies continue to move forward and shut off these mechanism which seem to provide little public good. The biggest loser will be nefarious criminals, and if it stops Budweiser from selling terrible beer, then we all win.