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Just how difficult and costly is it to set up an offshore company?

Max Heywood

Cross posted from Transparency International’s Space for Transparency blog.

flickr / kallu

Last week the massive “Offshore Leaks investigation by the International Consortium of Investigative Journalistsreported the uncovering of the beneficial owners of thousands of offshore companies.

Among the owners of offshore shell companies disclosed so far are several senior politicians and their close families in various countries.

‘We especially recommend the Seychelles’

With an internet connection, a credit card, and as little as 690 euros, it can take under 10 minutes to set up a shell company.  Let’s take a quick tour of two online providers of offshore services, randomly selected out of the hundreds of companies selling secrecy.

Our first stop is at the website www.offshorecompanyexperts.com, owned by a law firm called Coldwell, based in London. The homepage already makes clear what they are offering:

“Benefit from going offshore. Privacy, limited liability, asset protection, tax exemption”.

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Video: Understanding Offshore Secrecy

EJ Fagan

ICIJ’s investigation last week into the world of secrecy in tax havens is a voluminous, detailed, entirely worthwhile read. There are literally dozens of unique stories that you can sift through, including this weekend’s fantastic summary in the Washington Post of the investigation. The damage from offshore secrecy comes far and wide, from billionaires like Bernie Madoff using offshore tax havens to facilitate Ponzi schemes to couples trying to unable to locate assets following a divorce.

To help readers digest the deep and complex issues at hand, the Post created this nifty animated video:

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ICIJ’s Massive Investigation of Offshore Tax Havens, Shell Companies, and the People Behind Them Released

Sydney Lucia

flickr / nathanmac87

­­­Yesterday, the International Consortium of Investigative Journalists (ICIJ) released an article explaining how they explore the hidden world of shell companies.  After a three year long investigation, ICIJ’s director, Gerard Ryle, obtained information about offshore companies that included over 2.5 million files.  These files contained information surrounding shell companies, nominee directors, and shareholders for over 122,000 shell companies.  ICIJ found that most offshore companies were staffed by nominee directors, or people who sell their name to be listed as part of the company.  ICIJ also found that the people setting up offshore companies were mostly from China, Hong Kong, and Taiwan, but that the former Soviet republics were also well represented.

To investigate these files, ICIJ had a team of 86 journalists, which faced challenges in analyzing the large amount of information.  The projected used sophisticated software such as NUIX and dtSearch to analyze the databases.  But, help also came in the form of a British programmer who designed an online search system, Interdata.  One of the findings from using these complex systems was that the same person’s information had been used for several companies.  Additionally, the databases revealed that many offshore companies had purposely left the field for beneficial owners empty.

This may be the biggest investigation of this kind to ever come out on offshore shell companies and tax havens.

A partial list of stories from the ICIJ website, with more coming:

“The people identified in ICIJ’s analysis of the data are shareholders, directors, secretaries and nominees of companies and trustees, “settlors” or “protectors” of offshore trusts, as well as power-of-attorney holders who direct the actions of third parties. Many of the structures are designed to conceal the true ownership and control of assets placed offshore.   Their identified addresses are spread across over more than 170 countries and territories.

ICIJ’s data analysis showed that the people setting up offshore entities lived most often in China, Hong Kong and Taiwan. Another important group of clients comes from Russia and former Soviet republics.  This helps explain why the second-largest source of capital investment flowing into China is the tiny offshore tax haven of the British Virgin Islands.  Similarly, a large source of investment flowing into Russia is from Cyprus, a country that also features heavily in the data – and whose financial stability was recently undermined by a crisis precipitated by Cypriot-based banks being bloated by Russian money.”

Attribution Some rights reserved by nathanmac87

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Bitcoins: The Dangerous Alternative to Offshore

Ann Hollingshead

flickr / Adam Crowe

Move over, Cayman. Step aside, Switzerland. The world’s next offshore powerhouse won’t be in the Caribbean or the Alps. It won’t be an island surrounded by water, a peninsula in Asia, or a tiny nation barely larger than a city. It won’t be in New York, Delaware, or London. Because it won’t be anywhere. It will all be a figment of our imaginations—and of course the internet.

I’m talking about internet currencies, and specifically, the largest of them all: Bitcoins. And I firmly believe they will pose the next great challenge for stemming money laundering, corruption, and illicit financial flows.

Bitcion is money, but Bitcoins are issued by complex computer algorithms rather than a government. They exist completely online, using peer-to-peer networks rather than a centralized system. And they serve, like all other forms of money, as a medium of exchange. Like the U.S. dollar or the euro, you can buy and sell them on markets. You can also use them buy things like an upgrade on Reddit, blog services in WordPress.com’s store, and pizza deliveries from Domino’s through Pizzaforcoins.com. You can use them to transfer money to a friend overseas or you can use them to buy drugs, sell illegal arms, and launder money. I’ll get to those in a second.

Until now, I would have said the challenges that Bitcoins face overwhelmed its potential to replace other currencies as criminals medium of exchange in the future. That’s because it faced three very real impediments: its size, its stability, and its security. Like I said, until now.

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Iraq’s Corruption Legacy

Farid Farid

Cross posted from Transparency International’s Space for Transparency blog.

$800 million. That’s the staggering amount of money said to be unlawfully transferred out of Iraq every week.

Last month marked the ten year anniversary of the start of the occupation of Iraq by coalition forces. The aftermath of war and occupation has been ravaging well after the withdrawal of foreign troops.

The US Special Inspector General for Iraq Reconstruction has investigated corruption for nearly a decade involving US funds and recently released a final extensive report called Learning from Iraq.

The report quotes a former Iraqi Minister:

Corruption today is worse than ever. It’s a disaster.”

In one specific case, highlighted in the report, senior US military officials were involved in a sordid money laundering scheme leading eventually to eight convictions.

Here’s what happened in that case.

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Why UN arms negotiations must include talk of ending corporate secrecy

Stefanie Ostfeld

This op-ed originally appeared in Al Jazeera English.


flickr / sdobie

Addressing anonymous shell companies andhidden company ownership will be essential to successfully stemming the flow of illegal weapons around the world and protecting the innocent civilians who suffer from their proliferation.

On April 5, it will be one year since Viktor Bout, also known as the Merchant of Death, was sentenced to 25 years in prison, finally putting an end to his notorious career as a weapons trafficker. Bout was convictedon terrorism charges in the Southern District of New York, including conspiring to kill Americans and provide material support to terrorists.

The case served as an indictment of Bout’s career as a gunrunner, fuelling conflict around the globe. The US Department of Treasury described Bout’s network as “one of the largest illicit arms-trafficking networks in the world” and submitted testimony to Congress stating that Bout “used US shell companies to mask his ownership and facilitate his illegal arms trafficking activities”.

Bout’s use of shell companies, including at least 12 incorporated in Texas, Florida and Delaware, was integral to his arms trafficking because it allowed him to hide his identity behind anonymous companies created in the US and abroad. Yet despite Bout’s conviction, this loophole in US law continues to be used by other sanctioned individuals, terrorists, corrupt dictators, drug traffickers, organised crime syndicates and tax evaders to legally hide their identities, access the US financial system and launder dirty money.

Each year, approximately 2 million corporations are formed in the US under state laws that often allow anonymous incorporation of companies. While some states require listing of shareholders, these can be other companies or “nominees” who serve as front people for the actual shareholder.

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No more shifty business: Campaigners call for new tax rules

Alex Pratts and Øygunn Brynildsen

Cross posted from Eurodad.

flickr / OECD

In a response to the OECD’s February report Addressing Base Erosion and Profit Shifting, 58 campaigning organisations say it’s time to make multinationals pay their fair share of tax. Eurodad, Christian Aid and others call on the OECD and G20 to work with the United Nations Tax Committee and governments in developing countries to define new rules for the taxation of multinational companies.

The international system for taxing multinationals is broken and out of date, with many loopholes which allow unscrupulous companies to avoid paying their fair share – as the recent Google, Ikea, Amazon, Glencore and Starbucks scandals have clearly shown.

Outdated rules

The OECD identifies aggressive tax planning by multinationals as a fundamental cause of base erosion, which includes tax avoidance and evasion. But countries such as the UK, Germany, France and the US have only asked for solutions when their own economies have felt the consequences. For many years, however, unfair tax rules have been seriously undermining efforts to tackle poverty in developing countries.

The current tax rules, which were written 80 years ago, assume that the different entities that form multinationals exchange goods and services as if they were mutually independent. But this is a fiction. These different subsidiaries follow an overall business strategy. The truth is that the tax system has not kept pace with the way multinationals operate.

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Farming for Rats: Perverse Incentives and Illicit Financial Flows

Ann Hollingshead

flickr / timparkinson

In the words of two of my personal heroes: “Economists love incentives. They love to dream them up and enact them, study them, and tinker with them.”

For good reason; incentives make the world go round. They are the reason we get up in the morning, the reason we go to work, and definitely the reason we brush our teeth. They are dictate the speed we drive, the groceries we buy, and the pace of our work. Sometimes they are negative (the prospect of getting a cavity or a speeding ticket) and sometimes they are positive (a raise, or a hug from a child). But they are always at work in hundreds of ways, sometimes conscious and sometimes not.

Politicians like incentives almost as much as economists do. Federal and state governments incentivize all sorts of things, from milk production to renewable energy, and everything in between. The problem is though, that incentives are often difficult to design and, even more importantly, result in a whole new set of incentives that the designer never intended.

These are called perverse incentives and history is replete with them. Take nineteenth century China, for example, when paleontologists looking for dinosaur fossils paid peasants for handing over pieces of dinosaur bone. Later they discovered the peasants were digging up the bones, smashing them into many pieces to maximize their payments, and greatly diminishing their scientific value in the process. Others have pointed out that structuring bonuses for company executives around earnings encourages them to artificially inflate profits and make decisions targeting short-term gains at the expense of long-term profitability.

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Illicit Wealth and Enormous Tax Dodging Fuel Inequality

EJ Fagan

Brad Plumer had a great article in The Washington Post today on the consequences of economic inequality in the United States. As inequality increases, all sorts of crazy things might happen: politicians may ease credit regulations, allowing middle class citizens (who are less wealthy due to inequality) to borrow from the future in order to keep up short term consumption, leading to bad long term consequences like increased bankruptcy, divorce, housing bubbles, etc.

What drives inequality? Plumer takes a shot:

One possibility is that in areas with high top-end inequality, politicians are more likely to favor policies that allow middle-class Americans to borrow more so that they can keep up. Another possibility, though, is that high inequality at the top is driven by a growing financial sector — and so politicians are more willing to loosen credit to placate the banks.

These are perfectly plausible causes of inequality, along with other usual explanations (globalized industry, technology, the ‘superstar economy’, etc). But I don’t think they really do a great job of internationalizing. A quick look at Wikipedia’s Gini index page shows the United States in the middle of the pack in Gini coefficient globally, and quite a lot of variation in between:


What’s going on here? There seems to be some clustering (Southern Africa, Northern Europe, South America), but little consistency. Growing financial sectors doesn’t explain why, for instance, the United States is significantly more unequal than the United Kingdom, or why Malaysia and India are so different.

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Task Force Recommendations to the BRICS Summit 2013

EJ Fagan

flickr / Blog do Planalto

For the first time, the Task Force Regional Representatives delivered specific recommendations to the BRICS governments, which met in South Africa this week. The BRICS countries hold a unique position among developing countries and emerging markets: they suffer from the same persistent problems relating to international taxation, transfer pricing, exchange of information, and tax evasion and avoidance that affect the rest of the developing world, but unlike many developing countries, hold significant power and influence at the international institutions and fora. All five BRICS are members of the G20, and Russia holds the Presidency this year.

In the Communiqué issued following the BRICS Head of Revenue Meeting on January 18th, they committed to the following principles:

  • (i) contribute to development of International Standards on  International Taxation and Transfer Pricing taking into account the aspirations of developing countries in general and BRICS Countries in particular,
  • (ii) strengthening the enforcement processes by taking appropriate actions for non-compliance and putting more resources on international cooperation,
  • (iii) sharing of best practices and capacity building
  • (iv) sharing of antitax evasion and non-compliance practices, including abuse of treaty benefits and shifting of profits by way of complex multi-layered structures,
  • (v) development of a BRICS mechanism to facilitate countering abusive tax avoidance transactions, arrangements, shelters and schemes
  • (vi) promotion of effective exchange of information.

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Taxcast Episode #15: March 2013

Taxcast by Tax Justice Network

In March 2013′s Taxcast: the crisis in Cyprus and the risk tax havens pose to the global economy, a surprise earthquake for UK-affiliated tax havens and a frustrated corporate tax inspector speaks out on the corrupting of the tax system.

Want to download to listen to anytime offline? 

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.


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HSBC by the Numbers

Regina Morales

200: Full-time employees in HSBC USA’s Compliance Department from 2006 to 2009, out of total 16,500 employees, of which Anti-Money-Laundering-focused employees were only a “subset.”

1: Months after being hired in 2009 that HSBC USA’s AML director informed its Compliance official of HSBC USA’s “extremely high risk business model from AML perspective.”

17,700: Backlog of suspicious transaction alerts that had not yet been reviewed in 2010.

83: Number of “Matters Requiring Attention” notifications issued by the Office of the Comptroller of the Currency (OCC) to HSBC USA from 2005-2010.

50,000: USD-denominated accounts opened by HSBC Mexico’s Cayman Islands “branch” with inadequate customer due diligence.

2,000: Number of HSBC USA accounts opened with untraceable bearer share corporations as the owner over the course of a decade. 28,000: Number of transactions between 2001 and 2007 sent through HSBC USA involving countries, groups, or individuals that U.S. has financial sanctions against. The countries include Libya, Sudan, Cuba, Burma, North Korea, and Iran.

25,000: Number of the above transactions, totaling $19.4 billion, involving groups or individuals in Iran.

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