The Panama Papers scandal has put shell companies and anonymous business entities back in the spotlight. Many in the world of business incorporation and compliance have long been aware of the dangers of totally anonymous companies, the multitude of opportunities for fraud and deceit, as well as the challenge of working through the chain of records in order to identify and prosecute criminals.
In the past few weeks, dozens of commentators and thousands of regular citizens have asked: if there's so much fraudulent activity conducted by shell companies, why allow them to exist in the first place? A fair question.
Are there legitimate uses for shell companies and anonymous entities? It turns out there are.
Reverse Merger
A reverse merger is the acquisition of a publicly traded company that has usually lain dormant for a number of years. Because the shell company is already listed on the public market, purchasing the entity allows an investor to avoid going through the lengthy and expensive process of setting up an Initial Public Offering (IPO).
In this case, buying a shell company is similar to buying a shelf corporation. The company has value because it already exists, and the purchase provides a significant shortcut. For new startups, the reverse merger can present a major savings.
Obviously, a reverse merger comes with possible pitfalls, such as an “unclean” shell that has a hidden history of lawsuits, fraudulent behavior, or unmet liabilities.
Avoiding Corrupt Governments
While shell companies are often discussed as being the cause of corruption, there are scenarios in which they can help avoid corruption. For example, there are numerous countries around the world that lack legitimate legal protection for both citizens and businesses. In these countries, it is not unusual for the assets of wealthy individuals to be seized by government officials. Often, this happens because the individual is seen as a political threat.
Entrepreneurs attempting to establish businesses in these nations may choose to hide their assets and wealth behind the screen of a shell company, thereby protecting those assets from being illegally seized.
Stable Capital
In our interconnected world, investors from multiple countries often come together and pool their capital for future business investments. Because these entrepreneurs come from different countries, all with different tax and business laws, the use of an offshore shell company can create a stable investment entity.
This is a highly attractive option when investors come from countries with volatile economies. Imagine an entrepreneur from Greece who wants to place his money somewhere for a future business venture. Holding those funds in the Greek economy would have been a dangerous (and likely disastrous) bet in recent years. A much more appealing option would be to invest the money in an offshore shell company located far outside the Greek economy.
Avoiding Criminal Targeting
On the extreme end, shell companies are used around the world to hide the ownership of assets in order to avoid being targeted by kidnappers, thieves, and con artists. While this is certainly not used by ordinary entrepreneurs, it remains a sad reality.
In Latin American countries, for example, wealthy individuals have been using shell companies for years to hide their assets in order to avoid being targeted by kidnappers. And in the world of high-end art, many large-scale collectors use offshore shell companies to mask the true owners of world masterpieces.
How Shell Companies Go Wrong
The great strength of a shell company is that it can shield its owner's identity. As we've seen in the cases above, this can be utilized for legitimate reasons. But this same feature makes it the perfect vehicle for fraud and corruption.
Avoiding taxation is one of the primary unscrupulous-though not necessarily illegal-goal when setting up a shell company. On the legal end, for example, major corporations regularly place billions of dollars of assets into offshore shell companies. In America, these profits remain untaxed until they “return to shore.”
In reality, the actual funds are generally right here onshore in American banks, but the assets are earmarked as the property of a foreign shell company. This is the best of both worlds: no taxation and the stability of American banks. The U.S. Public Interest Research Group and Citizens For Tax Justice estimated that between 2008 and 2014, some $2.1 trillion of American firms' untaxed assets rested in offshore accounts.
Expensive assets can be placed into a shell company and sold as a way of avoiding taxation and registration fees. A millionaire's yacht, for example, can be listed as the property of a shell company. Instead of selling the vessel itself, the company can be sold as a whole. No new registration fees, and no new taxes.
Criminal operations use shell companies to launder money throughout the world. So-called dirty money can be shuffled through a series of shell companies, coming out “clean” on the other end in the form of investments, bearer bonds, commodities, and other assets. Since these companies can be set up with nominee directors (usually lawyers and accountants), there is no way to trace the laundered assets back to the illegal activity that generated them.
A Mixed Bag
Shell companies clearly have a role to play in the world of international business. But what is also evident is that current business law in the U.S. and elsewhere allows for a tremendous amount of corruption and tax avoidance. Stronger laws that close tax loopholes and remove total anonymity would likely curtail corruption instead of letting it run rampant.
The post The Truth About Shell Companies: The Good, the Bad, and the Ugly appeared first on AllBusiness.com
The post The Truth About Shell Companies: The Good, the Bad, and the Ugly appeared first on AllBusiness.com.
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