flickr / James & Villja

An anonymous shell company is a corporation where it is impossible to know who the beneficial owners are. Beneficial owners are those people who ultimately benefit from, and are responsible for, the operations of the company. The result is a new corporate entity that can open bank accounts, sign contracts, receive payments, and perform all sorts of business without anyone knowing who they are actually doing business with.

Corporations serve a very important role in the economy. They allow multiple parties to work together without individually being liable for the potential failure of the joint venture. However, anonymous shell corporations are not formed to limit liability. They are formed one purpose and only one purpose: to hide the identity of the real people responsible for an action. This is a historical accident, not something that society would ever have a reason to intend.

There is no good reason to allow corporations hide the identities of the real people doing business. We see tremendous negative consequences as a result of anonymous shell corporations. Some recent cases include:

• A man in Miami used a shell company to commit $4.5 million in Medicare fraud.
• The SEC froze trading with 379 shell companies which were accused of creating shady ‘pump and dump’ schemes to manipulate the stock market.
• A shell company called W Spann LLC donated $1 million to Mitt Romney’s Super PAC, then immediately dissolved.
• The Central Bank of Iran used a shell company called Assa to own a 36-story Manhattan skyscraper near Rockefeller Square despite sanctions, funneling millions in rent back to Iran which may have been used to help fun their nuclear program.
• Arms dealer Viktor Bout, the real-life subject of the 2005 Nicholas Cage movie Lord of War, used 12 U.S. shell companies to launder the proceeds of illegal weapons trafficking.
• Teodorin Obiang, son of the kleptocrat dictator of Equatorial Guinea, used shell corporations to funnel as much as $70 million of corrupt money into the United States.
• Swiss bank Wegelins used shell companies to help their high-end clients hide their identities and evade taxes.

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flickr / Pablo Manriquez

What do you do when your eldest son, already well-known for his reckless spending and extravagant lifestyle, becomes the focus of a corruption investigation in France?

Well, if you’re the world’s longest-ruling leader, President Teodoro Obiang Nguema of Equatorial Guinea, you brazenly attempt to thwart justice and the rule of law by appointing him to a position at UNESCO, a position that comes with a convenient perk: diplomatic immunity.

One doesn’t survive in power for 33 years without having a few tricks up the sleeve.

Over the past year, French authorities have become rather fond of President Obiang’s eldest son, Teodoro Nguema Obiang Mangue (commonly referred to as “Teodorín”). During that time, they have twice stopped by the six-story, $100 million mansion where he stays in Paris. In September 2011 they seized 11 of his luxury cars, valued at more than $5 million. On February 14, 2012 they revisited the mansion and stayed for ten days, eventually hauling away three truckloads of valuable artwork, furniture, and antiquities reportedly valued at more than 40 million Euros. In April 2012, a French prosecutor approved an international arrest warrant for Teodorín on charges of money-laundering. The case is part of a broader corruption investigation into the alleged ill-gotten gains of three African Heads-of-State, including President Obiang.

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flickr / Nir Nussbaum

When we talk about economic growth and corruption, it is often in one direction: corruption hurts economic growth. One of the major reasons for this is that corruption increases risk and uncertainty for businesses and investors and provides a distinct disincentive for their investments. Lower investment levels lead to less economic growth.

Less frequently, we say economic growth is an antidote to corruption. But this is also almost certainly true. The reasoning is somewhat complex and indirect, though. Economic growth does not directly ameliorate corruption. Rather, economic growth leads to better access to education, awareness of rights, empowerment of citizens, and then sometimes leads to improvements in human development indicators and therefore less corruption.

There may also be one other direct link. In a recent paper studying the relationship between economic growth and corruption in India, Bhattacharyya and Jha (2011) argue “economic growth creates additional resources which allow a country or a state to fight corruption effectively.”[1]

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flickr / MREBRASIL

“If you don’t know how to fix it, please stop breaking it,” was the press headline when Severn Suzuki addressed heads of states in Rio de Janeiro in 1992. She was twelve years old, at what was then the world’s biggest-ever political gathering. In an impassioned critique of unfettered industrialism, Severn lamented the decline of the natural world, and the many injustices that man has wrought upon it. “I’m fighting for my future,” she said.

Two decades have since passed and a child could still give the same speech. Perhaps they will, in one month when world leaders will again descend on Brazil. The UN Rio+20 Conference on Sustainable Development will serve as both an appraisal of progress (or regress) made during those twenty intermittent years, and a renewed study of how best to tackle poverty and forge the transition to a green economy.

Sustainability is one of those clumsy words that is flung about but eludes most of us. At its core, it means preserving our planet so that future generations can live safely and happily on it. One of the triumphs of the 1992 UN Earth Summit was that for the first time world leaders jointly and publicly acknowledged that sustainability was not a conundrum for environmentalists alone, but required serious thought about we how develop economically and socially.

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Tax Haven Secrecy Facilitates Transnational Crime, Financial Fraud and International Terrorism, Writes Robert Morgenthau in the New York Times

David Shankbone/Flickr*

On Sunday, The New York Times published an op-ed by Robert Morgenthau, the legendary former Manhattan District Attorney, who oversaw law-enforcement in the world’s financial capital for more than three decades.  Mr. Morgenthau, who retired from public life in late-2009, highlights the systemic risks posed by tax haven secrecy around the world.

Tax havens, with little to no taxes, of course, facilitate tax avoidance and tax evasion in countries like the U.S., but it is the secrecy they provide that is the real problem.  As Mr. Morgenthau, a member of Global Financial Integrity’s Advisory Board, explains:

The favorable tax rates encourage corporations to avoid paying American taxes by structuring complicated international transactions, like Apple’s “Double Irish With a Dutch Sandwich,” recently described by The New York Times. But it’s not just the low tax rates that make these jurisdictions attractive to those following the rules. The secrecy of offshore jurisdictions allows some individuals and corporations to engage in outright tax fraud, costing America at least $40 billion each year.

And that secrecy makes offshore tax fraud almost impossible for law enforcement to detect. When I was the Manhattan district attorney, we learned of offshore accounts only through whistle-blowers, cooperators and serendipity.

And this secrecy is not just about tax fraud.  Indeed, as Morgenthau puts it:

The secrecy laws in these tax havens are at the root of serious crimes: fraud, money laundering and international terrorism.

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flickr / theamazingyen

In 2009, leaders of the world’s 20 most powerful nations gave the impression that offshore tax evasion would no longer be tolerated. The London G20 threatened tax havens with economic sanctions unless they agreed to exchange bank information. High-level international pressure forced commitments from all tax havens to cooperate. The G20 declared: “the era of bank secrecy is over.”

Three years later, bank secrecy is not over and many tax havens are thriving. In fact, the fight against offshore tax evasion has backfired. Information exchange agreements – the main policy tool that G20 countries use to curb tax evasion – have proven to be largely ineffective.

Each year, the UK’s Her Majesty’s Revenue and Customs automatically receives millions of reports from British banks about the amount their customers earnt in interest and dividends. This information makes tax evasion via UK bank accounts very hard.

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flickr / Oxfam International

The European Parliament voted through a resolution calling for measures against tax evasion. The resolution was passed with an overwhelming 538 votes in favour, and only 73 against and 32 abstentions. The resolution of 19 April goes far in echoing Eurodad’s demand in calling for Automatic Information Exchange (AIE), Country-By-Country Reporting (CBCR), a mandatory Common Consolidated Corporate Tax Base (CCCBT) amongst other useful suggestions.

Single EU tax base for companies

The resolution calls for a mandatory Common Consolidated Corporate Tax Base (CCCTB) This would create a single European standard for what income is taxable and what is exempt. Taxable income would then be split between the countries where the company operates on the basis of the real economic activity that takes place within those countries (calculated by looking at staff levels and other factors). Compulsory CCCTB would be a major step in the fight against transfer pricing abuse ensuring more income is taxed where it is actually made. The European Commission has a proposal to introduce CCCTB on a voluntary basis for countries and companies an approach which would make tax competition worse, unlike the mandatory approach Parliament asks which would improve the situation.

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flickr / NASA Goddard Photo and Video

Large amounts of money are needed to address the impacts of climate change. If we succeed in limiting global warming to 2°C, this will still require as much as US$275 billon. A new report released by Eurodad calls into question the latest desperate initiative of donors to fill the gaps in public climate finance: investing in the private sector with the aim of leveraging additional funds.

Rich countries promised to mobilise resources to help developing countries deal with climate challenges. However, they are failing to meet their commitments. According to the World Resource Institute’s preliminary analysis of the Copenhagen’s Fast Start pledges, not more than half of the US$30 billion pledged to be provided between 2010-2012 has been accounted for, and it is not yet clear how much of this money has been or will be delivered.

The report published by Eurodad focuses on financial intermediaries, one of the main tools to leverage private funds. According to many Development Finance Institutions (DFIs), financial intermediaries, such as banks, insurance companies or private equity funds have the ability to use public money to overcome the barriers to private investments in developing countries and leverage substantial amounts of private money. For instance, the public money that is invested in a local bank should make the institution stronger and more profitable, hence attracting more private capital.

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flickr / Kansir

Reuters published a fascinating report today, ‘Out of Control at HSBC’. It draws on leaked documents from a number of criminal investigations into the bank that assert the bank violated U.S. anti-money laundering laws.

The report confirms what Global Witness has been saying for several years: despite a global system of anti-money laundering laws, banks in practice fail to carry out their obligations to combat financial crime.

According to prosecutors, the bank intentionally broke the law. HSBC created an operation that was a “systematically flawed sham paper-product designed solely to make it appear that the Bank has complied” with the US anti-money laundering regulations. It will be interesting to see how HSBC responds to this.

According to the documents that Reuters have seen, the bank failed to review thousands of internal anti-money laundering alerts and so did not file suspicious activity reports.

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flickr / mcwetboy

Tech companies have been racing to acquire as many patents as possible. Last month, Microsoft announced that it had reached a monster deal with AOL, buying 925 patents from Facebook for $1 billion, and then quickly reaching a deal to share the patents with Facebook for a cool $550 million. Many, many more examples of all the top tech companies – Yahoo, Apple, Google, Motorola, RIM – buying and selling huge numbers of patents have proliferated. Many of these patents are frivolous. For example, Apple patented ‘smartphone multitasking’ and ‘swipe to unlock‘ years ago. Nevertheless, the companies have rushed to create as many patents as possible.

Why is this fight going on? The headline reason is to avoid lawsuits. These certainly happen, and are on the mind of tech executives dishing out huge sums of money to acquire libraries of patents. They are probably the biggest factor behind the tremendous value placed upon patents. But I think there is another potential, not mutually exclusive, explanation out there: tax avoidance.

The New York Times expose on Sunday showed that Apple uses patents as a key cog in its tax avoidance apparatus. In part by moving patents overseas, claiming royalties from those patents as income in offshore tax havens, and not repatriating the profits back to the United States, Apple is able to get its global effective tax rate down to 9.8%. They saved $2.4 billion in U.S. taxes in 2011 according to one estimate. Wal-Mart, a company making plenty of money, but trading and owning more physical assets than intellectual property, couldn’t get their rate lower than 24%. Not all of that can be attributed to profit shifting via patent, but the New York Times report makes it clear that patents are central,

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flickr / karathepirate

The fallout from the scandal surrounding the discovery that Wal-Mart headquarters suppressed an internal investigation when it discovered its Mexican subsidiary had been systematically paying bribes has been swift and significant. According to an investigative piece in the New York Times, Wal-Mart used bribes not only to obtain permits for its stores, but to reduce the time required for those permits, from months to days or weeks. The public outcry to denounce the corporation has been loud.

But not everyone has joined the opprobrium. Many have said, either implicitly or explicitly, that Wal-Mart was doing business the way business needs to be done and that ultimately Mexico came up better off for Wal-Mart’s presence, both for the consumers and its thousands of employees. For example, an article by Holman Jenkins in the Wall Street Journal argues this point. He notes:

Indeed, Wal-Mart will likely be more severely mauled now for failing to act on its own inquiry than for any bribery its Mexican affiliate may have engaged in.

It’s an outcome that will fill many with ambivalence. Mexico’s failure to provide itself with better governance hardly seems a reason to deprive Mexicans of the benefits of Wal-Mart. Just the opposite: Multinational investment is usually seen as a fillip to development, and development as the antidote to corruption, environmental recklessness, human-rights abuse and all the debilities poor countries are thought to be prone to.

This is partly true. At least the part about economic development being an antidote to corruption certainly is.

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