Brief 14: The Truth Behind Anonymous Shell Companies
EGAP Researcher: Mike Findley, Daniel Nielson
Other Authors: J.C. Sharman
Research Question:
What is the level of compliance of CSP firms with international corporate transparency standards? Does the compliance rate change in response to risk or to information about international law?
Preparer: Sarah Zimmerman
Background:
Shell companies exist as legal identities that can sue and be sued, hold bank accounts, and own and sell property and other assets. They are beholden to the legal rules of the countries where they reside. While they are often used for legitimate purposes, anonymous shell companies, which cannot be traced back to their real owners, provide the financial secrecy upon which organized crime and other illegal activities depend. Shell companies can be set up by CSPs within days or even hours, and it often costs less than a few thousand dollars to do so. According to the rules laid down by the Financial Action Task Force (FATF), the international standard setter in the domain, CSPs must request certified proof of identity from their customers and be able to furnish information on any shell company’s true owner in a timely fashion. Because of these rules, CSPs, rather than law enforcement agencies or governments, are considered the most realistic option available for registering the actual owner of a shell company. If CSPs do not request proof of identity from their customers, there is no way to identify the shell company’s real owners. For instance, if the company is named in a criminal investigation, the inability to identify the owners often creates insurmountable obstacles for law enforcement. CSPs’ compliance with international standards appears to depend critically on the vigilance of host governments in regulating and auditing them.
Research Design:
Using a randomized field experiment, the research team impersonated a variety of low- and high-risk customers to request incorporation from CSPs. The research team posed as 21 distinct fictitious individuals and sent 7,456 emails to 3,771 CSP firms in 180 countries over two to three rounds. All emails requested anonymous incorporation, but the researchers used different email language as treatments and placebo. The authors compared the experimental treatment conditions listed below in Table 1 to a “placebo” condition where the requester claims to originate from a minor-power, low-corruption wealthy country where the likelihood of being affiliated with organized crime, corruption, or terrorism is assumed to be significantly lower.
| Table 1: Experimental Conditions | |
| Condition | Key Features |
| Placebo | Alias originates from low-corruption, minor-power “Norstralia” country. |
| Corruption | Alias hails from high-corruption “Guineastan” country and works in government procurement. |
| Terrorism | Alias claims citizenship in one of four nations associated with terrorism and purports to work in Saudi Arabia for an Islamic charity. |
| FATF | Alias notes that the Financial Action Task Force requires identification. |
| Penalties | Alias notes FATF standards and invokes the possibility of legal penalties (for international firms only). |
| IRS | Alias notes that the Internal Revenue Service enforces disclosure requirements (for U.S. firms only). |
| Premium | Alias offers to “pay a premium” to maintain confidentiality (for international firms only). |
| U.S. Origin | Alias originates from the United States (for international firms only). |
| Norms | Alias notes FATF standards and appeals to international norms (intn’l firms). |
| ACAMS | Alias attributes identity rule to private Association of Certified Anti-Money Laundering Specialists (intn’l firms). |
| ACAMS+FATF | Alias attributes identity rule to both ACAMS and the FATF (intn’l firms). |
| No Documents | Alias does not mention identity documents (intn’l firms). |
The outcomes of interest were:
- Whether the CSPs responded with an offer of a shell company and
- What identity documents were requested.
If CSPs complied with the international standards set by the FATF, they would have required notarized photo identity documents from customers and seriously scrutinized customers with a high-risk profile.
Research Design:
Overall, the authors found that international policies mandating shell companies collect proof of identity from their customers are ineffective. Half (48%) of all responses to the thousands of emails sent failed to demand proper identification. And half of those (22%) requested no identifying documents of any kind at all. The full results can be found in Table 2 below.
The team found different compliance levels across countries. Firms in poor nations often followed international standards with more diligence than rich countries while CSPs in wealthy nations were the least inclined to comply with the international standards. CSPs in “tax haven” countries, where taxes are levied at very low rates, were much more compliant with international standards compared with companies from both wealthy and developing nations. In fact, it was found to be three times as difficult to obtain an untraceable shell company in tax havens as it was in wealthy, developed countries.
The authors also found effects involving the type of customers they impersonated. When posing as a US citizen, the authors saw a significant decrease in compliance rates: only 9 of the 1,722 US CSPs surveyed asked for proper identification. When posing as a citizen from a corrupt country, there was a lower response rate observed as well as a fall in compliance rates. When premium payments were promised to CSPs, potential legal penalties were mentioned, or norms were invoked, compliance rates also decreased. The only treatment conditions observed that led to better compliance among international CSPs was if the email signaled a terrorist threat. Prompting firms with information about international law had no significant effects on the compliance rate. In the United States, associating the rules with the IRS significantly increased compliance.
Table 2: Results
| INTERNATIONAL SAMPLE | ||||||
| Treatment | Total | Non-Compliant | Part-Compliant | Compliant | Refusal | No response |
| Placebo | 1118 | 97 | 184 | 211 | 124 | 502 |
| 8.68% | 16.46% | 18.87% | 11.10% | 44.90% | ||
| FATF | 391 | 35 | 64 | 66 | 36 | 190 |
| 8.95% | 16.37% | 16.88% | 9.20% | 48.59% | ||
| Premium | 381 | 23 | 67 | 54 | 47 | 190 |
| 6.04% | 17.59% | 14.17% | 12.34% | 49.87% | ||
| Penalties | 383 | 29 | 74 | 61 | 29 | 190 |
| 7.57% | 19.32% | 15.93% | 7.57% | 49.61% | ||
| Corruption | 429 | 38 | 60 | 65 | 36 | 230 |
| 8.86% | 13.99% | 15.15% | 8.39% | 53.61% | ||
| Terrorism | 425 | 23 | 47 | 65 | 43 | 247 |
| 5.41% | 11.06% | 15.29% | 10.12% | 58.12% | ||
| UNITED STATES SAMPLE | ||||||
| Treatment | Total | Non-Compliant | Part-Compliant | Compliant | Refusal | No response |
| Placebo | 829 | 92 | 13 | 3 | 106 | 602 |
| 11.10% | 1.57% | 0.36% | 12.79% | 72.62% | ||
| FATF | 549 | 54 | 11 | 2 | 62 | 417 |
| 9.84% | 2.00% | 0.36% | 11.29% | 75.96% | ||
| IRS | 553 | 42 | 12 | 2 | 54 | 442 |
| 7.59% | 2.17% | 0.36% | 9.76% | 79.93% | ||
| Corruption | 533 | 54 | 8 | 1 | 52 | 417 |
| 10.13% | 1.50% | 0.19% | 9.76% | 78.24% | ||
| Terrorism | 557 | 32 | 8 | 2 | 50 | 458 |
| 5.75% | 1.44% | 0.36% | 8.98% | 82.23% |
Policy Implications:
- Experimental methods such as this should be relied upon more frequently to provide valuable insight regarding critical international problems.
- Untraceable shell companies are a major provider of financial secrecy for organized crime, money laundering, tax evasion, sanctions busting, and terrorism.
- Compliance with international corporate transparency standards is highest when governments regulate and audit corporate service provision; knowledge of international law has little effect on compliance.
- The cost of compliance is not particularly prohibitive since poor countries tend to comply better with international standards than rich countries. This likely shows an unwillingness to comply on the part of rich countries rather than a lack of capacity.
- CSPs and individuals are increasingly responsible for compliance with international standards rather than governments. In addition to financial transparency, the effectiveness of other international agreements increasingly depends on these non-state actors.