Mandy Moody, CFE
ACFE Media Manager
Since the International Consortium of Investigative Journalists published the Panama Papers on Monday, the term "shell company" has taken on a life of its own. These entities have been around for years, but with the news of the data surrounding their use, it is almost assumed that where secrecy hides, fraud will also.
The Associated of Certified Fraud Examiners' Fraud Examiner Manual states that "shell companies have become common tools for money laundering primarily because they have the ability to hide ownership and mask financial details, and because money launderers can create them with minimal public disclosure of personal information regarding controlling interests and ownership.” But, shell companies do have legitimate uses. The manual goes on to explain that shell companies can be used for "holding the stock or intellectual property rights of another business, facilitating domestic and cross-border currency and asset transfers, and fostering domestic or cross-border currency corporate mergers.” Just like with many other instances of fraud, the real trouble begins when a tool, a program, a database or an account is abused and used for an illegal or deceptive purpose.
I thought we would share a recent op/ed from one of our guest bloggers and former keynote speakers about the data release in hopes of further explaining much of what you have been and will be hearing about for weeks to come.
From The Globe and Mail:
Martin Kenney, Managing Partner of Martin Kenney & Co., Solicitors of the British Virgin Islands, a specialist investigative and asset recovery practice focused on multi–jurisdictional fraud and grand corruption cases
The Panama Papers leak has been described as the biggest dump of confidential offshore company ownership data ever: 2.6 terabytes of electronic data; 11.5 million documents; 200,000-plus offshore companies. That’s 10 per cent of the world’s population of two million active offshore companies.
The offshore industry is complex in nature. Most commentators struggle to understand and accurately describe its purpose. As a result, many observers latch onto the word “secrecy” and spin that to mean something suspicious and corrupt. This is not the case. Only a small proportion of offshore entities are vehicles used for money laundering, fraudulent asset concealment or tax evasion.
Yes, there will always be skulduggery. Criminals will seek to manipulate the system to gain advantage. And I understand those who express moral outrage against large corporations or wealthy individuals who use offshore companies to avoid tax. But tax avoidance is entirely legal.
Of course, there is an ethical consideration when a multinational company appears to have paid less tax than the average person on the street. But it’s a public-policy issue, not a legal one, unless aggressive tax planning crosses the line from avoidance to evasion.
These so-called fat cats (as the media loves to call them) employ vast numbers of the working population. Without them, their countries’ unemployment figures would be depressing and their economies would suffer. Mudslinging at successful entrepreneurs will only drive them away into the waiting arms of another country.
The tax systems of developed countries have their derivation in the 1970s. The issue now is that we now have a global economy and our tax laws need to reflect this scenario more accurately. This is why large coffee-shop chains, for example, have been able to avoid taxation – legally.
Still, the aforementioned skulduggery is manifest across the globe. It includes the rapidly growing offshore services provided by Scotland. Added to this list are jurisdictions that fraud investigators see as black holes – the U.S. states of Nevada and Delaware. No investigative material is collected regarding the ownership or control of Nevada or Delaware companies, unlike offshore jurisdictions, where regulations require this material to be collected and housed. It can very quickly be seen that dodgy dealing is a worldwide problem, not limited to, say, the British Overseas Territories.
Continue reading Martin's full op/ed in The Globe and Mail.