To the Ukrainian demonstrators who stormed his plush residence in February, former President Viktor Yanukovych’s private zoo, vintage car collection, hovercraft, golf course and hand-written receipt for $12 million in cash were stark and obvious indicators of his corruption.
Much less obvious, however, was the network of anonymous and untraceable shell companies used to acquire and hide the ownership of the presidential palace. Companies set up in Austria and the United Kingdom to hold the property were administered by lawyers and front men in London and Liechtenstein.
Another corrupt Ukrainian leader, Pavlo Lazarenko, is accused of stealing $200 million during his two years as prime minister, and he was convicted of money laundering in California in 2006. Corruption watchdog Transparency International named him the eighth most corrupt world leader in history. Lazarenko held some of his loot through U.S. shell companies set up for him by a firm not in the British Virgin Islands or Switzerland, but rather Cheyenne, Wyo. Yes, you read that right. Wyoming.
Although various governments around the world have made combating shady shell companies an international priority, the results of our forthcoming book “Global Shell Games” indicate that something has gone terribly wrong with this campaign. The sort of untraceable shell companies commonly used to give and receive bribes, launder money, evade taxes and break through sanctions are easily available online for a few hundred dollars.
To get a handle on just how serious the problem is, we posed as a range of would-be corrupt officials, money launderers and terrorist financiers and made thousands of solicitations for prohibited untraceable shell companies from firms in more than 180 countries.
The logic was that we didn’t care about the international and national laws on the books mandating that all companies be able to be traced back to the real person in control, but rather whether these laws actually work in practice. If those firms setting up companies online don’t ask for ID from their customers, the companies they sell are untraceable, and the rules don’t work.
Of the replies we received, almost half failed to ask for proper, certified proof of identity. A bit more than a fifth failed to ask for any photo ID at all. Furthermore, those selling shell companies proved completely insensitive to corruption risk. They were just as willing to sell untraceable companies to our obvious high-risk profiles as to the innocuous, low-risk customers.
The biggest surprise of the study was that classic tax havens such as the Cayman Islands do a much better job of enforcing corporate transparency rules than the rich, powerful countries that have been the loudest in their calls for stricter standards. The United States in particular is one of the worst offenders. In fact, some of the least compliant incorporation service providers in the world were found in Delaware, Nevada and Wyoming. According to our evidence, on average, developing countries do better on more measures in enforcing these rules than developed countries do.
To fix the problem of untraceable shell companies, what needs to happen is that those selling such companies need to be licensed. They also need to be required to collect certified photo IDs on their customers, especially foreigners, where this is not already the case. But most importantly, regulators need to check that shell company providers are in fact collecting the identity documentation that they should.
There is no excuse for countries such as the United States and Britain that have at best patchy compliance. Given that tiny tax havens and developing countries can apply international standards on corporate transparency reasonably well, enforcement is not especially expensive.
Unless and until this kind of action does take place, we can expect plenty more scandals such as the one revealed in Ukraine. At the very least we should stop making it easy to hide illicit money internationally.
Michael Findley is an assistant professor of government at The University of Texas at Austin and is an expert in foreign aid, international relations and terrorism. Daniel Nielson is an associate professor of political science at Brigham Young University. Jason Sharman is a professor in the Centre for Governance and Public Policy at Griffith University. Their most recent book looking at illicit shell companies, “Global Shell Games,” provides the results of the first field experiment conducted on a global scale.