International rules requiring shell companies to collect proof of customers’ identities are ignored and flaunted, a study shows. A research team affiliated with the Griffith University Centre for Governance and Public Policy in Australia impersonated customers and solicited more than 3,700 Corporate Service Providers that create and sell shell companies all over the world.
Shell companies are those which have the legal identity of actual companies – they can sue and be sued, hold bank accounts, own and sell property – but none of the personnel or active business. They can be created online quickly and at low-cost in dozens of countries, and they assume the national jurisdiction of the country in which they were created.
They’re popular among organized crime groups because, among other things, ownership is easy to conceal. They’re convenient tools and key resources for those engaged in money laundering, sanctions busting, tax evasion, and the financing of terrorism.
The Griffith University study wanted to determine how easy it was to obtain a shell company and whether or not providers were following the rules. The aim, ultimately, was to improve policy devoted to countering shell companies’ illicit uses.
The study’s findings were stark:
International rules which govern shell companies are ineffective, especially those which require them to collect proof of customer identity. Nearly half of all replies (conducted entirely over email) did not ask for the proper identification. Twenty-two percent required no identification at all.
To the researchers’ surprise, providers in poorer, developing countries were more compliant with global standards than those in wealthy nations.
In general, providers were “remarkably insensitive” to even obvious criminal risks, though they were less likely to respond to high-risk customers with links to terror.
Informing providers of the rules they ought to be following made them no more likely to do so; offering to pay providers a premium not to follow rules was effective. Demand for certified documents fell “precipitously” in those cases.
Though the study doesn’t expressly offer solutions to the ineffectiveness of these international rules, it does shine a spotlight on the problem. Because organized crime and terrorism depends heavily on financial secrecy, the study insists that governments need to increase their efforts to enforce corporate transparency.
Jason Sharman, the Director of the Griffith University Centre for Governance and Public Policy, says the study is crucial because it tells a side of the story that governments haven't seen yet. It "provides the most systematic and rigorous picture available of what actually happens in practice when it comes to the shell company industry, not just the laws on the books."