Thursday, September 20, 2012

Two fascinating probes into the underbellies of shell companies

Update 1 : NBC has just done another investigation in the very same vein, using offshore shell companies.
Update 2: NPR has now provided some additional text.
Update 3: new study into shell companies 

NPR's Planet Money programme in the U.S. has just published a fascinating first-hand account of what it is like to set up your own offshore shell company, bringing a personal view of some of the steps you might go through to do this.

We have listened to this, and give a short appraisal: these quotes shouldn't be taken as verbatim since we copied them down hurriedly, but they give a pretty good idea

First of all, Planet Money set up two offshore companies a few weeks ago -- Unbelizeable in Belize and Delawho? in Delaware, which we already noted. This time they describe how they receive large  ring binder files through the post containing documents of their Belize and Delaware shell companies, complete with corporate seal and other accoutrements.

NPR consulted some professional offshore lawyers to help them work out what the documents mean. They discover that the nominee director, whose name sounds like "Desiree", had already held a company meeting, which was news to them. The documents say "there being no other business, the meeting was closed at 11am."

They also opted for a nominee shareholder, Umberto, who turns out to be the owner of all the shares for Unbelizeable. 'Do I own the company, or does he?" the reporter asked. The consultants replied: 'No, you do. Umberto will do what you tell him to do, and Umberto will give you back the shares whenever you ask. It is just a way of not putting our name on that form."

Also included in the starter pack was a resignation letter signed by Desiree but without a date, so she could be fired whenever the reporters want to. One reporter, Hannah, said:
"I have never had so much power over two human beings that I don't know. These are real people who are supposed to act like my avatars, who move when I tell them to move."  
There is a whole service industry dedicated to this stuff.

The reporters start to have fun with things they might be able to do. "Can we have Unbelizeable sue Delawho?" one asks. They note that they they have the power tell Desiree to give herself the official title of "fake director," and so on. The radio segment really is fun.

Then what is perhaps the most laughable part of this whole charade. As one reporter put it:
"There is paperwork that says 'promise you will not do anything illegal.' I had a good laugh when I spotted that."
The company makes this request, as described by the reporter, which makes clear that the company formation people in Belize are well aware of the uses that these kinds of things are put to:
"the beneficial owner promises that the company will not be used for the purposes of distributing drugs, money washing, financing of terrorism, production and/or distribution of kiddy porn, and some other activity that you are promising not to run through Unbelizeable."
That is a rock solid guarantee of probity, of course - just as long as you assume that drug dealers and terrorists never lie. As the consultant puts it of the Belize officials:
"They understand that some of their clientele may not be above board, and they want plausible deniability."
Quite so. The reporters then perhaps make too many concessions to the tax havens in a section where they assert - incorrectly - that private equity and other businesses run through tax havens are not there for the illegal stuff: take a look at the final paragraphs of this article to see one place where this reasoning goes wrong. They also did not mention that nominee shareholders and directors can, in some jurisdictions, also be shell companies, typically from  a different jurisdiction (e.g. Panama shells being nominees of BVI companies.)

Interestingly, NPR didn't contact the private practitioners Daniel and David to get them to explain this stuff - the practitioners contacted them. That is because, the programme explains, Daniel and David were concerned that by setting up these secret offshore companies the reporters had got themselves into a minefield of U.S. IRS reporting requirements.

They are legally obliged to pay taxes on activity undertaken by those companies. As soon as they open a company - even if the company does nothing, they are required to inform the IRS, via loads of complex paperwork that takes hours to understand and complete. And failure to report, should they be discovered, incurs large fines. Of course, the nominee structure is designed to ensure the IRS doesn't find out - but as Daniel and David stated, there are many ways that a person's company may be discovered - IRS audits and scorned lovers being among the examples given.

Finally, the reporters came clean to the company service provider in Belize as to the fact that they were reporters, and asked to interview Desiree and Umberto. Access was refused. This was kind of ironic: as owners of the company, they could request all kinds of action from Desiree and Umberto, but as reporters they could not speak to them.

Daniel and David had a solution - execute a company resolution stating that the company's annual meeting be held in Belize, with the owners physically present. They emailed it and received a reply that this was an unorthodox request and the company service provider would get back to them - a cliffhanger.

Fingers crossed, they will be bringing us Episode Three soon.


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