One of the trickier aspects of life heading up an international terror network, global drug smuggling organization, or as a corrupt official in a kleptocracy is personal finance. While you might be eager to drop a few million on gold-plated sneakers and platinum epaulettes, or buy a dollar-shaped island off the coast of Dubai, before you start shopping you need to clean up your cash. For that, you will need an untraceable ‘‘shell’’ company—an ideal front if you want to spend some money that may be less than strictly licit.
In his article for the July double-issue of the New Yorker, staff writer and Century Foundation senior fellow Patrick Radden Keefe examined a case of alleged government corruption in Guinea, involving mining rights and the company of an Israeli billionaire. According to Keefe, companies that facilitate international crimes such as these are a symptom of a wider global banking system that increasingly shelters wrongdoing:
The international financial system has evolved to accommodate a wide array of illicit activities, and shell companies and banking havens make it easy to camouflage transfers, payment orders, and copies of checks.
But surely circumventing the international rules against these practices still has to involve some subterfuge? Forging a passport? A trip to a Zurich vault in sunglasses and a wig? In their paper ‘‘Global Shell Games: Testing Money Launderers’ and Terrorist Financiers’ Access to Shell Companies,’’ the academics Michael Findley, Daniel Nielson, and Jason Sharman sent out ‘‘7,400 emails to 3,700 Corporate Service Providers (CSPs) that make and sell shell companies in 182 countries.’’ Their intention was to see how just how easy it was to set up a shell company. They also wanted to examine how much more reluctant CSPs were when allusions were made to increasingly suspicious activity, including likely links to terrorist organizations, and when proper identification wasn’t provided. In addition, they sought to find out whether the offer of extra compensation would decrease qualms CSPs might have over their lack of credentials.
In the e-mails, the academics posed as consultants, or simply as wealthy individuals concerned about taxes. These kinds of justifications are perfectly generic and inoffensive, so are a favorite of the legitimate businessman and the “legitimate businessman” alike. For example, a terrorist with cash flow problems might pose as the business arm of ‘‘a number of Muslim aid organizations’’ (a line used by a fictional Saudi Arabian consultant in the study). The researchers also sent e-mails from different groups of nationalities—the control ‘‘placebo’’ group were e-mails sent from ‘‘low-corruption, minor power’’ countries: Australia, Austria, Denmark, Finland, the Netherlands, New Zealand, labeled the ‘‘Norstralia’’ countries. The rest were e-mails sent from citizens of countries perceived to have a high risk of corruption: Guinea, Guinea-Bissau, Equatorial Guinea, Papua New Guinea, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan, abbreviated as the ‘‘Guineastan’’ countries.
With e-mails sent from the ‘‘Guineastean’’ countries, different versions were used that ratcheted up risk factors by such methods as the fictional consultant mentioning that he works in government procurement, an area heavily associated with corruption. Another tactic was emphasizing secrecy or privacy as an extremely high priority. The researchers wanted to know how many CSPs would still take the money—and how many would agree to take extra funds for waiving certain procedures—as the risk factors piled up?
Perhaps the most striking single piece of information to emerge from the study was the pattern of responses from U.S. Corporate Service Providers, as contrasted with international CSPs. The number of CSPs in the United States who replied to the initial communication and did not ask for any proof of identity whatsoever was 41.5 percent, which is two-and-a-half times the portion of international CSPs who didn’t ask for papers, at 16.5 percent.
Overall, the study found that only a ‘‘tiny proportion’’ of U.S. providers met the international requirements for notarized identity documents, with a worrisome 10 of 1,722 in the sample of only U.S. companies. In addition, certain states had far poorer records than others. Wyoming, Nevada, and Delaware had a particular tendency to strike these anonymous, undetectable deals, which the paper notes as especially concerning, given that the CSPs in these states most often deal with foreign clients.
While tax havens are typically seen as high on security and lax on regulations, the findings actually showed that havens rated high on enforcement compared to developed countries. Jersey, the Cayman Islands, and the Bahamas did far better in pressing their clients for proof of address, residency, and identity before moving forward than providers in the United Kingdom, Australia, Canada, and the United States.
The fact that ‘‘it is easier to obtain an untraceable shell company from incorporation services (though not law firms) in the United States than in any other country save Kenya’’ sums up how the study’s findings upturn common assumptions about which countries are most accommodating to corruption. A tiny tax haven principality like Liechtenstein rated twenty-six places higher in its observance of regulations than U.S. providers. The Chinese gambling capital of Macau was nineteen places higher than the United States.
The findings illustrate that compliance is hardly a matter of funding or of resources. Albania—a nation with a per capita GDP that is one-tenth that of the United States— can still afford to comply with international stipulations for forming shell companies: its companies ranked thirty-one places higher than U.S. providers.
What U.S. companies lack is the willingness to face the challenge of policing this type of arrangement. Granted, these transactions often involve a labyrinth of cross-country dealings and sham corporations—the Mexican Sinaloa Drug Cartel, for example, engaged shell companies in New Zealand to launder cocaine profits of tens of millions of dollars through banks in Latvia. But U.S. companies should not allow paper-thin screens of anonymity and see-no-evil justifications to excuse funding cartels and dictators. Hollywood has it wrong. That dollar-shaped island isn’t funded out of a bank in the Caymans. It’s coming through a post office box in Delaware.