In my short time here with the Task Force, I’ve learned that shell corporations show up around every corner when trying to fix problems in the developed and developing world alike. This was proven true again last night, when I attended an event sponsored by Task Force member Global Witness. The event was to present their new report, Dealing With Disclosure: Improving Transparency in Decision-Making Over Large-Sale Land Acquisitions, Allocations, and Investments.
Large-scale land acquisition is an enormously important issue for many developing countries. These acquisitions are surging in many countries, as globalization push up the value of owning large tracts of land for agriculture, the extractive industries, and the like. While this kind of economic activity can be good for people in developing countries, it can also bring significant negative trade-offs. If improperly managed and governed, large scale land acquisitions can negatively impact the environment, local property rights, food security, and human rights.
The report prescribes an important medicine to help cure these problems: transparency. I don’t want to go into the details, but the report convincingly makes the case that by opening up information about the large-scale land acquisitions of multinationals and major economic actors and domestic investors in a way that allows governments and civil society to effectively understand the deals, we can solve a lot of these problems. The report makes four important recommendations about how to bring about effective transparency.
This is where we run into problems with shell corporations and beneficial ownership. Even if a developing country passes and effectively enforces the transparency initiatives prescribed by the report, they will struggle with shell corporations. Local and community governments would know which companies are buying what land, what contracts they are signing, and what they at least plan on using it for. This would no doubt be a big step forward in transparency for the country, and will produce real results on the ground as civil society and concerned citizens help keep all parties accountable. However, they would not know who ultimately owns the company making the deal. The report itself makes this point,
Limited liability is a privilege granted by the State to promote free enterprise. It means that if a company goes bust, its owners and investors lose only what they put into it in the first place. The mechanism enabling this is that a company is a separate legal entity from the people behind it – a “legal person” in the jargon, rather than a “natural” (i.e. real, breathing) person.
But a legal person can also be used as a shield, hiding the real people behind it. When companies are set up for this purpose, they are often called front companies, or shell companies. They do not conduct any real business, in the sense of selling products or services, or employing staff who attend a place of work. They exist as a piece of paper in the filing cabinet of a lawyer or company service provider, who may act as a “nominee” shareholder or director or company secretary. In this way, the privilege of limited liability is misused on an industrial scale for tax evasion, money laundering, corruption, and secretly purchasing land or natural resource concessions.
An organized criminal group might use acquired land for an illegal logging operation. Or they might use it to grow drugs. Or a shady business from out of the country might acquire that land to do more traditional commerce, but might use their anonymity to violate vital environmental regulations with impunity. While the lack of beneficial ownership information will not undermine all of the benefits of transparency, it will leave a gaping hole open that people will exploit if given the chance.
Disclaimer: Unless specifically stated to be the views of the Task Force, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Task Force on Financial Integrity & Economic Development.