In April 2016, the world witnessed one of the biggest information leaks in history, consisting of 11 and a half million document leaks known as the Panama Papers. The Panama papers revealed some of the world’s biggest politicians, businessmen, and even terrorist groups for tax evasion and other illegal activities leading to violent reactions from people around the globe.For anyone who has witnessed the whole incident airing on every possible news channel during the Panama papers leak, one of the biggest buzz word that was used was “Shell Companies”.
So what exactly are shell companies? Are they always used for illegal purposes? How do they operate? Where do they exist?
Let’s dive deeper to understand.
What are Shell Companies?
Typically a Shell Company is defined as an organization that solely exists on paper and doesn’t produce anything nor has any employee or office. A shell company has financial assets that may have a bank account or have passive investments. Their fundamental purpose is to serve as a front for businesses that are owned by another individual. This further can be used for legal or illegal purposes.
How do shell companies operate?
A shell company is typically situated in countries with low or nonexistent tax rates or simply referred to as tax havens. To register the company the identities of the registered agent and the beneficial owner are needed. Often there are people who are hired to act as nominee directors to register under their names. At times there are even layered shell companies meaning a shell company acts as a subsidiary of another shell company. This adds more secrecy to the whole process. A shell company can also be registered to the address of a company that provides services in setting up these shell companies.
The chances of money laundering and tax evasions increase in this case as the shell companies do not trace back to the actual owners therefore the owners can wire their money through their shell company accounts and thus have the flexibility to launder the money at their wish. This money is then claimed as business income in countries with low or nonexistent tax rates. It is again very easy to avoid taxes in this case because the government can’t tax money which they cannot find. In the end, the money ends up in the owner’s pocket and this whole process lands him up in great profits.
At times even legally obtained funds are channeled through these shell companies to avoid taxations, by investing a share of profit into these shell companies and claiming it as an investment. Since only profitable incomes are taxable and the whole invested money flows out tax-free.
Are Shell companies legal?
Shell companies are legal and some of the legitimate purposes for which they are used for to serve as a basis of start-ups which don’t have any kind of assets but still have to exist as a legal entity or to keep business plans secret and to protect the brand identity of companies. However, there is a high chance of using Shell companies illegally, and some of the illegitimate uses including hiding assets from creditors, avoiding taxes, and money laundering. It is this severe wrong usage of shell companies that increases the concern around its existence.
Coming back to where we started, The Panama Papers. The Panama papers was one such incident where shell companies were used for illegitimate reasons. 11.5M data was leaked to the German newspaper Süddeutsche Zeitung, which revealed information about 214,000 shell companies which were administered by Panama based law firm Mossack Fonseca. The Shell companies were used by politicians, celebrities and terrorists groups for illegal activities and tax evasion.
So even though shell companies are not illegal by nature, there have been multiple instances where the world has seen them playing a key role in fostering illegal activities. With the rise of these kinds of issues, there has been a significant increase in regulating these corporations and also filling the loopholes of it which are wrongly being exploited by autocrats. But the existence is still debatable as the globe continues to fight against the loopholes created by these companies and accounting for the tax money that is somewhere hidden amidst the layers of Shell companies.