From Triple Hack

The release today of a massive leak of tax and financial records known as the Panama Papers has shone the spotlight on how the wealthy global elite evade taxes and launder money.

One of the most important tools is a “shell company” – this is a company that exists only on paper and has no office and no employees. It’s usually registered to the address of a company that provides a service setting up shell companies in a tax haven.

For example, that’s why this five-storey building in the Cayman Islands supposedly houses more than 12,000 corporations.

You can buy one of these companies directly from an offshore service provider.

Shell companies are legal. They only become criminal when they are used for criminal purposes – things like tax avoidance or money laundering. Unfortunately, they’re used for criminal purposes quite a lot. This is because setting up a shell company doesn’t require much identification and, in any case, customers are promised their identity won’t be exposed.

That’s why the Panama Papers leak is such a big deal. The release of 11 million documents from the notoriously secretive Central American law firm Mossack Fonseca has exposed 12 current and former world leaders and 29 Forbes-listed billionaires.

The Australian Taxation Office is investigating 800 Australian residents named in the leak.

But rather than being just the domain of the mega-rich, shell companies are relatively cheap and disposable commodities. They cost about $2000 to set up and buying one is a simple process not unlike booking an international plane ticket or an overseas hotel.

Hack sat down with one of Australia’s foremost experts on shell companies – Griffith University Professor Jason Sharman, the author of books on international money laundering and global tax regulation – to see how easy it was to set up your very own shell company.

Step One: Google

Google ‘offshore company’ and select from the many shell company providers.

Step two: Choose a name and tax haven

Type your proposed company name into the dialogue box and choose from a list of a dozen tax havens including the Cayman Islands, Panama, Samoa, the Seychelles and Belize.

You can even set up a shell company in the United States.

“If you’re an American, yes you probably want to take money out of the United States to avoid taxation,” says Jason.

“But if you’re a foreigner you’ll have a completely different view.”

“The United States takes a very dim view of foreign countries helping Americans evade tax – but the US is much more relaxed about American financial institutions helping foreigners evade tax that would be paid to foreign governments.”

It’s possible to set up a shell company in the US without identification, Jason says. It was also possible to do this in other countries in the 1990s, but after the 9/11 terrorist attacks the US clamped down, and introduced more stringent ID requirements.

“The 1990s was even more wild west though the US is still pretty wild west today because it has been able to exempt itself from rules it’s forced on others,” Jason says.

Jason says he set up his own limited liability company in Nevada without being asked for any kind of identification. He was then able to set up an American bank account using a scanned copy of his un-notarised and expired Queensland licence.

The most common offshore shell company jurisdiction is the British Virgin Islands. “It’s cheap and versatile,” says Jason.

The cost so far is likely to be between $1500-$4000.

Step three: Fries?

The dialogue box asks if you want a nominee director. This is someone who will appear on company paperwork as the director, but who doesn’t have any actual power. It allows the company owner to hide their identity behind the nominee director’s.

This is also not illegal.

The nominee director probably costs an extra $200 plus an annual fee. You may be provided with a signed, undated copy of the nominee’s resignation letter.

“If you ever want to get rid of them you just sign and put in the date,” says Jason. “And of course you can backdate the letter – in case you want them to have already resigned.”

“The resignation letter is to assure you that you’re in control.”

Step four: ID please

You will usually be asked for a scanned and authenticated copy of your passport as well as a scanned copy of a utility bill.

“The passport proves who you are and the utility bill ticks the where-you-live-box,” says Jason.

“Sometimes you can use your friend or lawyer or relative as a further layer of secrecy – it means you’re one step further removed from the shell company.”

According to Jason, providers often assure the customer that “don’t worry even though we know who you are we promise to never tell and no one will ever find out.”

Step five: Supersize that?

Just like being offered car rental after buying a plane ticket, you may now be offered a bank or trust account or legal or accounting services.

There’s also an opportunity to buy a ‘shelf company’. This is a company that has been established a few years earlier. By trading under this company name it will superficially appear your brand new company has a longer track record.

“This is particularly useful if you’re going for a loan,” says Jason. “It can be helpful to have a company that didn’t come down in the last shower.”

“And if you’re a criminal it can further confuse the trail.”

Shelf companies are also legal.

Why do I need a shell company anyway?

Congratulations! Once the company has processed the paperwork (this can take about 48 hours), you will be the proud owner of a brand new shell company.

“Probably the majority of people who use offshore shell companies are doing so for legal reasons,” says Jason. “On the other hand there’s a fair minority who are engaged in crimes like tax evasion and in some cases laundering proceeds of crime.

“Hiding things is not against the law. But of course criminals are people who are particularly keen on hiding their financial affairs as are people who want engage in tax evasion.”

Shell companies are not only used for illegal ends. They are useful in situations where a person or company is investing in a country with a poor judicial system.

“Say I have a joint venture in China and the partner is Chinese and worried the Chinese courts don’t work very well. I might think I don’t want to go to a Chinese court, and this chinese person reluctant to go to an Australian court.”

“Neither wants to concede the home ground advantage.”

“So you might set up a company in the British Virgin Islands – that way you have an English-speaking jurisdiction that has British law, and these companies are pretty cheap and pretty flexible and tonnes of people use them.”

Jason says the internet has helped the offshore industry, but it really took off in the late 1980s with another important invention.

The fax.

“Previously offshore was the province of few extremely wealthy people with very smarty pants lawyers,” he says. “Now instead of having very few people with hundreds of millions or billions of dollars you have a Joe Blogs tax avoider with $1-5 million dollars.”

The ATO says the Panama Papers data leak should serve as a warning to taxpayers.

“It’s very hard to hide offshore and not have your assets and incomes not declared in this country,” Deputy tax commissioner Michael Cranston told the ABC.

“Basically the message is don’t do it but if you have please come and speak to the tax office because … penalties will be reduced significantly.”

IMAGES:

The notorious Ugland House in the Cayman Islands. Supplied: Bloomberg

Mossack Fonseca office in the British Virgin Islands. Four Corners

For more on this story go to: http://www.abc.net.au/triplej/programs/hack/setting-up-your-own-tax-haven-shell-company-takes-10-minutes/7297094

See also related iNews Cayman stories posted today (April 4 2016) under “Panama Papers”