Word in the New$: Shell company

by Ryan Ong

OKAY so it isn’t technically one word, but shell company is the term that’s all over the news this week. Documents leaked from Panamanian law firm Mossack Fonseca have everyone wagging their finger at the rich. The 2.6 terabytes of leaked data show how the super-rich, including many prominent celebrities and politicians, hide their money via shell companies. Big surprise, I know. Who knew that immense wealth and unchecked authority could possibly lead to corruption?

Anyway, a shell company is one of two main tools that can be used to hide money. The other tool often works in a private bank or law firm, and facilitates the process.

What is a shell company?

Also called a holding company, a shell company is a registered business that, well, isn’t too interested in business. It exists on paper, because it’s been registered – in Singapore, for example, you can register a company with a paid up capital of just one dollar. But the main purpose of the shell company is often just to hold on to assets, and it can help to conceal the owner of those assets.

Mossack Fonseca, the law firm at the heart of this madness, specialises in setting up shell companies. This is a popular service among both the rich as well as companies. And it’s not always for malign purposes.

What are the legitimate reasons for setting up a shell company?

One common reason for setting up a shell company is that not all governments are benign. I’m not going to point fingers, but we all know there are countries where “ownership” is largely the opinion of a tinpot dictator who happens to have all the guns. If you live in such a country, and you’re wealthy, a shell company is a safe place to store your assets.

Likewise, political figures who oppose a dictatorial regime may need a place to store their money. As an example only, with no reference whatsoever to any country, however familiar it sounds: a politician who opposes the ruling party of a country may find his resources targeted.

The ruling party may attempt to ruin the said politician financially, by seizing his assets or suing him into bankruptcy.

But if the opposition politician’s assets are safely hidden in another country, and can’t be traced to him, they will be safe. Lucky we never need to think of issues like that in Singapore.

Even in developed states, there are sometimes fears that the government will confiscate assets in difficult times. In March 2013, for example, some wealthy Cypriots saw their wealth seized as part of a debt crisis.

In those situations, merely opening an offshore bank account may not be enough to protect your money. Bank accounts can still be traced to their owners. But with a shell company, you can appoint a third-party as a stand-in to “run” the business, and conceal the fact that the company’s assets are actually yours.

(Bank accounts can also attract taxes, whereas some countries have foreign investor tax breaks to encourage foreigners to invest locally.)

Then there is the issue of corporate secrecy.

Companies aiming to launch new product lines, or move into a new industry, often hide new projects behind shell companies. For example, say a company that makes massage chairs wants to go into making sports equipment. They may set up a shell company, and have the tennis rackets, golf clubs, etc. designed and tested under the shell company. This affords certain advantages, such as concealing their motives from competitors.

So what’s the problem with rich people or corporations setting up shell companies?

It’s hard to tell which shell company is used for legitimate purposes, and which are used to aid criminals. In many ways, it’s similar to the issue of Internet anonymity: anonymity can be used for positive purposes, or it can be a shield for illicit activity.

Some of the companies identified in the Panama Papers leak could be used to fund dictatorships and terrorists. For example, one of the companies involved in the leak was DCB Finance, a North Korean bank that helped the dictatorship bypass economic sanctions via shell companies.

And then of course, there is the issue of tax avoidance. Governments may not be able to tax you for assets held in another country (and it may be legal for you to avoid taxes this way.) In the case of tax evasion, which is illegal and involves outright lying about your assets, it is harder for the government to find out what you’ve stashed in an offshore company. This is a cost to the country, as tax dodgers could hide millions of dollars that should go into the country’s economy and infrastructure.

All the goodies we got in Budget 2016? The job growth initiatives, automation grants, support for the elderly, etc.? The government needs tax revenue for that. When the wealthy hide their assets and dodge taxes, we have less to fund these initiatives.

With companies and tax avoidance (again, tax avoidance is legal while tax evasion is not), the ethical issues are migraine-inducing. On the one hand, it’s easy to get pissed at companies that hide away millions in tax dollars. Bad for the social good and all. On the other hand, corporations have an obligation to their stakeholders and shareholders to minimise what they pay in tax.

For example, say your insurance policy fund includes shares in company X. This is going to be part of your retirement plan. How pissed would you be if company X decided to be lax in accounting, and pay out $12 million a year in taxes that it could easily avoid?

What if your employer, instead of focusing on expansion and stability (both good for your job and your bonus), decided to blow money for those purposes on avoidable taxes?

This is a debate we’ve never quite resolved, one that cuts straight to the heart of the capitalist / socialist conflict.

Shell companies are here to stay

Shell companies are not going to go away, Panama Papers or not. They are a simple fact of the financial world, and how it operates. Ultimately, deciding that shell companies are evil would be like deciding electricity or the Internet is evil. It all comes down to the ethics of the people using them, and there may be as many drawbacks to making them more transparent as there are to leaving them in the dark.

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Featured image PO Box by Flickr user Martin Cathrae. CC BY-SA 2.0. 

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The post Word in the New$: Shell company appeared first on The Middle Ground.

- Ryan Ong