Anonymous shell companies: A global audit study and field experiment in 176 countries

Abstract

To test whether firms behave consistently with international law prohibiting anonymous incorporation, we conducted a global audit study and field experiment, using data from 1639 incorporation firms in 176 countries. We requested anonymous incorporation and randomly assigned references to international law, threat of penalties, norms of appropriate behavior, or a placebo. We find a substantial number of firms willing to flout international standards and show that those in OECD countries proved significantly less compliant with rules than in developing countries or tax havens. Firms in tax havens displayed significantly greater compliance and were sensitive to experimental interventions invoking international law.

Résumé

Pour vérifier si les entreprises se comportent conformément au droit international interdisant l’enregistrement anonyme d’une société, nous avons mené une étude d’audit globale et une expérience sur le terrain en utilisant des données sur 1 639 entreprises enregistrées dans 176 pays. Nous avons demandé un enregistrement anonyme et avons assigné au hasard des références au droit international, à la menace de sanctions, à des normes de comportement approprié ou à un placebo. Nous constatons qu’un nombre important d’entreprises sont prêtes à contourner les standards internationaux et nous montrons que celles des pays de l’OCDE s’avèrent moins conformes aux règles que celles des pays en développement ou des paradis fiscaux. Les entreprises dans des paradis fiscaux ont affiché une plus grande conformité et étaient plus sensibles aux interventions expérimentales invoquant le droit international.

Resumen

Para probar si las empresas se comportan consistentemente con el derecho internacional que prohíbe la incorporación anónima, hicimos un estudio global de auditoria y un experimento de campo, usando datos de 1639 empresas incorporadas en 176 países. Solicitamos incorporación anónima y asignamos aleatoriamente referencias al derecho internacional, amenazas de sanciones, normas de comportamiento apropiado, o un placebo. Encontramos un número sustancial de empresas dispuestas a hacer caso omiso a los estándares internacionales y demostramos que las de los países de la OECD resultaron que cumplían en menor medida que las de países en vía de desarrollo o en paraísos fiscales. Las empresas en paraísos fiscales mostraron mayor cumplimiento y fueron susceptibles a las intervenciones experimentales para aplicar el derecho internacionales.

Resumo

Para testar se as empresas se comportam de maneira consistente com leis internacionais que proíbem a incorporação anônima, realizamos um estudo de auditoria global e um experimento de campo, usando dados de 1.639 empresas de incorporação em 176 países. Solicitamos uma incorporação anônima e designamos aleatoriamente referências ao direito internacional, à ameaça de penalidades, às normas adequadas de comportamento, ou um placebo. Encontramos um número substancial de empresas dispostas a desrespeitar os padrões internacionais e mostramos que aquelas empresas em países da OCDE se mostraram significativamente menos condescendentes com as regras do que empresas nos países em desenvolvimento ou paraísos fiscais. As empresas em paraísos fiscais apresentaram uma observância das leis significativamente maior e foram sensíveis a intervenções experimentais que invocavam o direito internacional.

概要

为了检验公司是否与禁止匿名注册公司的国际法行为一致,我们使用176个国家的1639家公司注册的数据,进行了一个全球性的审计研究和田野实验。我们调查了匿名注册公司,并随机参照了国际法,处罚威胁,适当行为规范,或安慰剂。我们发现有相当数量的公司愿意无视国际标准,并显示经合组织国家的公司显著地证明要比发展中国家或避税港的公司较少服从规则。避税港的公司显著地展示出更大的合规性,并对援用了国际法的实验干预敏感。

Appendices

Appendix A: Definition of Key Terms

Anonymous shell corporation	A shell corporation for which the beneficial (real) owner has been been disguised, generally in order to operate without the scrutiny of law enforcement and public. The term shell corporation and shell company is used interchangeably in the manuscript
Compliant	CSPs were deemed compliant if they required photo identification that was notarized/certified to complete the incorporation
Corporate service provider (CSP)	A firm or sole proprietor that can incorporate a company on behalf of its founding members and can also act as the resident agent for the company
Developing countries	A country in which the majority lives on far less money – with far fewer basic public services – than the population in highly industrialized countries
Field experiment	A scientific methodology that experimentally examines an intervention in naturally occurring environments (real world), rather than in the laboratory
Financial action task force (FATF)	An international organization created by the world’s leading economic powers to counter money laundering, was created to promote and enforce corporate transparency standards worldwide
Logic of consequences	Adherence to laws and standards occurs only to avoid penalties or to achieve some benefit (March & Olsen, 1998)
Logic of appropriateness	Adherence to international law is a function of and response to accepted norms (March & Olsen, 1998)
Mutual evaluation reports (MERs)	Assessments conducted by FATF to determine whether a country is compliant (C), largely compliant (LC), partially compliant (PC), and non-compliant (NC) with each of the 40 Recommendations
Managerial School of International Law	Most countries follow most international rules most of the time (Chayes & Chayes, 1996)
No response	Firms from which we did not receive a reply were coded as no response
Non-compliant	CSPs were deemed non-compliant if they did not request any photo identity to complete the incorporation
Norstralian countries	Wealthy, low-corruption OECD countries (Norway, Finland, Sweden, Denmark, the Netherlands, Austria, New Zealand, or Australia). The Norstralian countries are among the least corrupt countries ranked on the Transparency International Corruption Perceptions Index (CPI) and are where the consultants in our study claimed to be from
OECD countries	A collection of 34 countries with the world’s most advanced and developed economies that have committed to enact and enforce its standards for transparency in corporate governance. These countries adhere to the rule of law and have relatively well-funded, capable judicial, regulatory and law enforcement
Partially compliant	CSPs were deemed partially compliant if they requested photo identification to complete the incorporation, but did not ask the it be notorized/certified
Refusal of Service	Incorporation firms that did respond, but refused to offer their services were deemed Refusal of Service
Tax Havens	Countries identified by the OECD as those that host companies not engaged in substantive business activities, that apply low or zero tax rates, do not exchange tax information with other governments, and have little transparency

Appendix B: Summary of Faft Mutual Evaluation Reports Audits

	Recommendation 10		Recommendation 22		Recommendation 24
	Frequency	Percentage	Frequency	Percentage	Frequency	Percentage
Non-compliant	72	46.2%	114	70.4%	49	30.6%
Partially compliant	71	45.5%	44	27.2%	85	53.1%
Largely compliant	13	8.3%	4	2.5%	20	12.5%
Compliant	0	0.0%	0	0.0%	6	3.8%
Total	156	100.0%	162	100.0%	160	100.0%

Appendix B provides a summary of the FATF MERs for countries throughout the world, focusing on the three key FATF recommendations. They provide four outcome categories, and the table shows the distribution of compliance levels across the countries and recommendations. Only a small percentage of countries were Largely Compliant and only Recommendation 33 had any countries identified as fully Compliant. The vast majority of country audits indicated either Non-Compliance or Partial Compliance with the transparency standards.

Appendix C shows the results of regression analysis considering whether national level compliance with each of the recommendations predicts firm level compliance. Each of the “Recommendation” variables is an ordered scale ranging from non-compliance to full compliance (1 = non-compliant, 2 = partially compliant, 3 = largely compliant, and 4 = compliant) for national level assessments and predict percent firm-level compliance. The model is estimated using ordinary least squares regression analysis. National compliance does not predict firm-level compliance for FATF Recommendations 5 and 12 and predicts virtually none of the variance. For Recommendation 33, national compliance is a significant predictor (at the p < 0.05 level), but less than 4% of the variance is explained, offering weak substantive support for the proposition that statutory law drives firm-level behavior across the full sample.

Appendix C: Regression Analysis

	Model 1	Model 2	Model 3
Constant	0.579 (0.070)	0.495 (0.066)	0.385 (0.66)
Recommendation 10	−0.039 (0.039)
Recommendation 22		0.014 (0.046)
Recommendation 24			0.063 (0.030)
R2	0.0010	0.0009	0.0399
Adj. R2	−0.0001	−0.0087	0.031
F	0.990	0.090	2.060*
N	102	106	104

1. + p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001

Appendix D: Example Emails Used in Study

Control (Placebo) Email

Dear [name/company]

I am contacting you as I would like to form an international corporation for my consulting firm. I am a resident of [Norstralia] and have been doing some international consulting for various companies. We are now growing to a size that make incorporation seem like a wise option. A lot of our newer business is in your region.

My two associates and I are accustomed to paying [Norstralia] income taxes, but the rising tax rates make incorporation in another country a more economical alternative. Also, our contracts grow larger and more complicated, so reducing personal liability through incorporation seems more attractive.

As I am sure you understand, business confidentiality is very important to me and my associates. We desire to incorporation as confidentially as we can. Please inform us what documentation and paperwork is required and how much these services will cost?

I would like to start the process of incorporation as soon as possible. Also, how much can we expect your fees to be?

Due to numerous professional commitments, I would prefer to communicate through email. I hope to hear from your soon.

Thank you very much, [alias]

Treatment Email: International Standard

Dear [name/company]

I am contacting you regarding a business I am trying to set up. I am a consultant and my colleagues and I are seeking to establish an international corporation. I am [Norstralia] resident, but I do business both locally and with some international clients, including some in your region. Out business has been growing substantially, and our goal is to limit tax obligations and business liability.

We would like as much business confidentiality as possible in these early stages of formation. My internet searches show that the international Financial Action Task Force requires disclosure of identifying information. But I would rather not provide any detailed personal information, if possible.

So, we would like to know what identifying documents will be required to establish this company. We would also like to know what start-up costs will be.

Due to my travel schedule, email will be the best way to reach me. I look forward to hearing from you soon.

Regards, [alias]

Treatment Email: Consequences

Dear [name/company]

I am seeking information on how to incorporate an international company. I hope you might be able to offer what I need.

I am a consultant, and my colleagues and I live in [Norstralia]. Much of our business originates here, where we operate, but our company also grows quickly among international clients. Many of them are in your area. So, we feel that incorporation is a necessary option of us. We hope to limit taxes obligations and business liability.

We would like to know if you feel that you will be able to service us with a corporation. What identifying documents will you request for this transaction? We would prefer to limit disclosure as much as possible.

My internet searches show that the international Financial Action Task Force sets standards for disclosure of identifying information when forming a company. I also understand that legal penalties may follow violation of these standards. But I would like to avoid providing any detailed personal information if possible. If you could answer these questions and also let us know about your prices, we very much appreciate it.

Thank you for the time to address our query. Business obligations make communication difficult, so we would prefer to correspond with email.

Until we speak again, [alias]

Treatment Email: Appropriateness

Dear [name/company]

I am a resident of [Norstralia] and would like to inquire about your process to form international corporations. With several associates, I operate a consulting firm in [Norstralia]. We deal with a growing number of international clients, many that come from your area, and would like to pursue incorporation option for liability and taxes purposes.

We are particularly concerned with keeping business interactions private; thus, we are eager to limit information disclosure as much as possible. My internet searches show that the international Financial Action Task Force sets standards for disclosure of identifying information when forming a company and most countries have signed on to these standards. As reputable businessmen, I am sure we both want to do the right thing by the international rules. But I would like to avoid providing any detailed personal information if possible.

Can you please inform me what your start-up costs are and what kind of identification or documents we will need to provide? We are all fairly burdened with commitments, so email communication is preferable.

Thank you in advance, [alias]