Panama is long known for its reputation as having strict banking secrecy tracing back to General Noriega’s power in the 1980s.1 So when Panama-based law firm Mossack Fonseca was hacked, and eleven million confidential documents made their way onto the International Consortium of Investigative Journalists or ICIJ, website, it wasn’t surprising to many.2 What was surprising was the number of well-known banks, politicians and celebrities that were named in the breach. These so-called ‘Panama Papers’ shined a light on the murky underworld of offshore shell companies and their role in the hiding of assets.
What is a Shell Company?
A ‘shell’ company is basically a company with no real operations or assets. In other words, it is a mere ‘shell’ compared to a traditional company (with employees, office space, etc.). Shell companies are often used to hide ownership of assets and maintain anonymity. Shells sometimes list mansions, stocks, yachts and art as the only assets of the company, with ownership remaining anonymous.
Over a 40 year period, Mossack Fonseca had, for a fee, registered nearly 15,600 shell companies on behalf of various entities whose activities and identities wished to remain anonymous.3 While it’s not illegal to register shell companies, the emergence of some of the names behind the companies is certainly interesting. The list included heads of state including Iceland’s Prime Minister and the King of Saudi Arabia, celebrities from Jackie Chan to Emma Watson, drug kingpins, convicted money launderers and 29 members of the Forbes Billionaires List.4,5
Firms like Mossack Fonseca and other trust and corporate service companies can create and register a shell company for a client easily and with few questions asked. They often charge anywhere from $800 to $6,000 depending on the services they provide, such as anonymity, address and mail services, shareholder services and nominee directors. The use of nominee directors can hide the beneficial owners as they ‘stand in’ for the real owners and the same nominee directors are sometimes listed for many different companies. The Guardian newspaper reported that just 28 nominee directors have some type of representation on over 21,000 different companies.6 Either they have amazing organization skills or they do nothing once they sign their name.
One way criminals commit fraud is through these shell companies. Shells are primarily used to 1- hide the identity of the beneficial owner (sometimes for tax avoidance) and 2- mask the source of the funds in the account (money laundering). Fraud investigators have their hands full trying to follow the money trail among shell companies that are intertwined and domiciled all across the globe.
Legitimate Shell Companies
But just because a company is domiciled offshore or is a shell, doesn’t mean it harbors nefarious activity. There are legitimate reasons for the existence of shell companies. Small companies can sometimes go public directly into an existing shell company through a reverse merger, avoiding onerous regulatory and underwriting costs. In certain mergers & acquisitions transactions, shells are utilized to create a brand new corporate entity. Shells can also be used for several other purposes including deferring taxes and protection from creditors.7
Even when there is intent to conceal true ownership, it isn’t necessarily for illegal purposes like tax avoidance or money laundering. In Latin America, many wealthy businessmen set up shells to hide their ownership of assets because kidnappings and ransom are rampant. In this example, the cloak of secrecy is for the protection of themselves and their families.
Get in the Financial Crime Fight
The illegal siphoning of funds through the use of shell companies increases the costs for everyone. Governments receive less tax revenues, which hinder the general population. Essential services ranging from infrastructure to police and fire departments feel the pinch. And the shortfall can extend for generations as public sector legacy costs like pensions and health care benefits soar. These financial crimes eventually lead to elevated borrowing costs for all.
Given the fallout from the Panama Papers, we expect increased regulation and re-enforcement of the 1977 Foreign Corrupt Practices Act (especially the books and records section requiring maintaining flawless accounting records). Expect strict penalties to continue to be levied for failure to comply.
Compliance departments are busy hiring staff to meet the increasing regulatory requirements. According to the Wall Street Journal, there is ‘a hiring spree for risk and compliance staff and Paul McDonald, a senior executive director at Robert Half, says the outlook is “very bright for anyone entering into compliance as a career.”8 Compliance officer’s average salary is $64,950 according to the BLS but the top 10% in the field earned $101,260 in 2014.9
A financial crime compliance degree could open the door for these high paying compliance jobs. The curriculum covers topics including identity theft, fraud management risk and compliance. The degree also provides a foundation for a whole host of financial career options including bank examiner, revenue agent and fraud investigator. Utica College’s Masters in Financial Crime and Compliance Management program offers a course titled ‘The Manager in a Global Environment’.10 Given the global nature of financial crimes, this type of course is extremely valuable and gives a much-needed skeptical perspective, especially for multi-national firms.