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Money laundering made easy

A new study found nearly half of corporate service providers around the world don’t collect legally-required ID from customers seeking to form a shell company.

Shell companies exist on paper only, without assets or employees, and have legitimate and legal uses. But when the owner is anonymous and untraceable to law enforcement, they become vehicles for bribes, money laundering and financing terrorism.

“In some ways it’s discouraging that identification of corporate owners is widely disregarded, but we can’t fix these global problems unless we know what they are and where they are,” said Daniel Nielson, a political scientist at Brigham Young University.

Nielson and colleagues from BYU, Australia’s Griffith University and the University of Texas at Austin carried out an experiment to see how well the laws are followed. Using 21 different email aliases, they contacted representatives of 3,700 corporate service providers.

The messages emphasized the desire for confidentiality and asked what identifying documents are needed. Half of the responses fell short of legal requirements. In roughly one of every four cases, the provider said they didn’t need to see any documents at all.

“This suggests that shady customers would, on average, have to contact fewer than four firms to find one that would make anonymous incorporation relatively easy,” the authors write in the Minnesota Law Review.

One lone bright spot is that legal compliance was significantly higher in tax havens such as the Cayman Islands.

The biggest problem lies in wealthy nations, including Canada, England and especially the United States. In the U.S., corporate law is handled by the states. Delaware, Indiana, Wyoming, Montana and Nevada rank among the easiest places in the world to incorporate anonymously.

“The irony is that the U.S. has pushed hard on tax havens and others to follow financial standards,” Nielson said.

If there is any silver lining in this, it’s that auditing for compliance is not that difficult – regulators just need to check to see if the documents are on file.

“It’s not an onerous task,” Nielson said. “Some countries like India do a reasonably good job with corporate transparency.”

The experiments were limited to email correspondence alone and no actual transactions took place. The researchers varied the wording in the emails to see what kinds of cues influenced compliance with the law.

For example, some messages hinted at a bribe or made it sound as though the customer was involved with corruption. Corporate service firms, on average, were more likely to bend the rules in those conditions.

Only two cues seemed to deter corruption. If the customer appeared to be a front for terrorist financing, firms were less likely to accommodate anonymity. The same was true if email solicitations mentioned the IRS by name.

Nielson is a principal investigator on the project along with Jason Sharman of Griffiths University and Michael Findley of the University of Texas at Austin. BYU law professor Shima Baradaran served as the lead author for the report in the Minnesota Law Review.