Table of Contents
What is a Shell Company?
A shell company refers to a corporation that does not have any active business operations (e.g. employees, office, etc.) or significant assets. It’s main function is to hold and manage another entity’s financial transactions.
This usually amounts to having bank accounts opened and operated under the shell company, rather than under the owner or company’s actual name. It can also own intellectual property.
Legally speaking, creating and using a shell corporation does not necessarily violate any laws. For example, a startup might establish a shell company in order to pool investors’ money from different countries. But the anonymity a network of shell corporations can provide has led to them being used for tax evasion and money laundering, two criminal offences.
DID YOU KNOW?
The United Nations Office on Drugs and Crime estimates that money laundering accounts for 2%-5%, or $800 billion of the annual global GDP laundered globally in one year is 2 – 5% of global GDP, or $800 billion-$2 trillion in current US dollars.
Understanding Shell Companies
Massive public corporations to individuals can set up a shell company. Supposedly, in the U.S., it was easier to set up one in some states than getting a library card.
Many corporations use shell corporations as tax avoidance, not tax evasion, vehicles.
WHAT’S THE DIFFERENCE?
Tax avoidance refers to any completely legal (though debatably unethical) actions to reduce tax liabilities, thus maximizing after-tax profits.
Tax evasion refers to any illegal methods of concealing income/revenue or any legally-mandated financial information from the IRS. These actions likely result in more profits tha
Admittedly, depending on your perspective, some methods of tax avoidance (including legally approved uses of a shell company) can be viewed as legalized forms of tax evasion. Just more ways to unethically boost profits at the expense of tax money, government money used to provide public services. Ethically speaking, there is, without a doubt, a considerable grey area.
The Economist published a helpful graphic that places uses and abuses of shell companies on an ethical spectrum.
On the “perfectly legitimate” side, you’ll find “insulating your savings from an unstable economy.”
On the “deeply dodgy” side, you should see “Pay arms dealers and drug cartels.” Beyond the monetary concerns, shell companies can even be used to support acts of terrorism.
That’s about as bad as it can get.
The American public could be shouldering much more of the tax burden due to corporations evading taxes.
See what your fellow citizens are saying on the Zero Theft Movement platform…
Navigating the Grey Area
A major reason for a business to set up a shell company is to take advantage of tax havens—places with loose tax codes. Businesses might also want to ‘outsource’ or ‘offshore’ work. To legally do so, they need to set up business entities where there foregn employees operate out of. Shell companies also allow financial institutions to invest in foreign markets, realizing potential tax savings.
Perhaps you don’t find some of those practices ethical, but they are legal.
It, however, starts to get ethically and legally questionable when corporations or even individuals store domestically generated profits offshore to avoid paying U.S. taxes.
In 2017, the U.S. Public Interest Research Group (U.S. PIRG) released its famed “Offshore Shell Games.” The organization investigates whether “[c]orporate lobbyists and their congressional allies have riddled the U.S. tax code with loopholes and exceptions that enable tax attorneys and corporate accountants to book U.S.-earned profits in subsidiaries located in offshore tax haven countries with minimal or no taxes.”
We have compiled and quoted verbatim some of the key findings from its research below.
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- Fortune 500 companies [were] holding more than $2.6 trillion in accumulated profits offshore for tax purposes. Just four of these companies, Apple, Pfizer, Microsoft and General Electric, account[ed] for a quarter of the total. Just 30 Fortune 500 companies account[ed] for 68 percent or $1.76 trillion of these offshore profits.
- Most of America’s largest corporations maintain[ed] subsidiaries in offshore tax havens. At least 366 companies, or 73 percent of the Fortune 500, operate[d] one or more subsidiaries in tax haven countries.
- If we assume that the average tax rate of 6.1 percent applie[d] to all 293 Fortune 500 companies with offshore earnings, they would [have] owed a 28.9 percent rate upon repatriation of these earnings, meaning they would [have] collectively owe[d] $752 billion in additional federal taxes if the money were repatriated at once.
WIth the massive leaks of the Panama Papers and Paradise Papers, evidence pointing to undercover deals, corruption, and financial manipulation came to light. The extensive network of shell companies ended up being a lynchpin in facilitating much of what appears in the leaked documents.
Crackdown on Shell Companies
Up until recently, the U.S. served as a paradise for kleptocrats.
The main problem has stemmed from the country’s lack of a ‘beneficial ownership registry.’ A beneficial ownership registry refers to a central repository or database that identifies all beneficiaries of a business. That means, without this transparency measure, the corrupt could remain anonymous.
Professors Michael Findley, Daniel Nielson, and James Sharman conducted an undercover study called Global Shell Games. They posed as twenty-one different international consultants looking to set up shell companies in the U.S. Among the 3,700 corporate service providers in 182 countries the professors approached, the U.S.-based providers had the fewest requirements to set up an untraceable company. Many even offered to set up the shell corporations, despite the authors indicating intentions to use these false businesses as fronts for terrorism and/or corruption.
But the U.S. has recently made significant efforts to regulate shell companies much more. In 2020, Congress passed the Corporate Transparency Act of 2019, and the Senate passed the National Defense Authorization Act. As corroborated in a Reuters report, “…most companies [will have] to report their true beneficial owners to the government, [which] allows [for] greater information sharing between law enforcement and regulators, and authorizes the use of new suspicious activity monitoring tools.”
While we must monitor whether these new laws get properly enforced, it appears we can expect a considerable clean up of shell companies.
Do you think some use Shell Corporations to boost their profits unethically?
Those using shell companies legitimately should be free to continue doing so. The gray area can be debated. But the abuses of shell comapnies that support corruption and terrorism cannot go on unchecked.
The Zero Theft Movement is designed to give you a say on the matter. Do you believe certain uses of shell corporations are legal but unethical? Are they resulting in major gains for corporations while creating major economic losses for the public?
On the Zero Theft platform, citizens author theft proposals, and the community decides whether that investigation has convincingly proven (1) theft is or isn’t occurring in a specific area of the economy, and (2) how much is being stolen or possibly saved. Through direct democracy, we can collectively decide where the problem areas are and start working on addressing them systematically.
Standard Disclaimer
The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.
Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.