Shell companies have been called the “getaway cars” of corruption. In some jurisdictions, including the U.S., individuals can easily set up anonymous companies and use them to hide stolen funds. Last week, members of congress introduced bipartisan bills in the House of Representatives and Senate that would, finally, make this practice more difficult.
The legislation would also address contradictions in current U.S. policy toward corruption, as shown by several oil sector cases mentioned below.
The bills would require U.S. companies to identify their beneficial owners—the individuals who actually control and benefit from their activities—and report this information to state governments. The European Union passed similar requirements in 2015.
Ideally, the bills would have called for the public disclosure of beneficial ownership information, as is the case in the U.K., so as to enable more widespread oversight. But the collection of beneficial ownership data into centralized registries will at least allow law enforcement, financial institutions and others to detect when suspicious individuals set up shop in the U.S.
Individuals and companies can use shell companies for legitimate transactions and disclosing ownership data should not disrupt these purposes. However, shell companies also appear to be the method of choice for actors who siphon funds from lucrative oil, gas and mining sector deals.
In an April report, Twelve Red Flags: Corruption Risks in the Award of Extractive Sector Licenses and Contracts, we at NRGI analyzed 100 real-world cases of corruption. In 55 of them, a secret company was used to cover up the participation of a top official or an associate in a deal. In a further set of cases, the parties used secret companies to channel illicit funds into offshore bank accounts, real estate and other assets.
As recent headlines make clear, the use of shell companies to obscure ownership is hardly unique to the extractive industries: for instance, a Financial Times investigation revealed that a former minister and alleged money launderer from Kazakhstan bought properties in a Trump building using such an anonymous entity. In the last year USA Today reported that 70 percent of property sales from President Donald Trump’s real estate holdings have been made to secretive shell companies. Most of these entities are based in jurisdictions which, like many U.S. states, make it easy to set up secret companies.
To date, the U.S. has responded to these trends in a contradictory manner. On one hand, the government has sought to fight corruption, such as by prosecuting cases under the Foreign Corrupt Practices Act and seizing the proceeds of foreign corruption that enter the U.S. On the other, it practically invites corrupt actors to move their money into the U.S. by making it easy to establish anonymous companies here. The following examples, all related to oil wealth, show how these opposing approaches can crop up in the very same case:
- Chad’s former ambassador to the U.S. helped Canadian oil company Griffiths Energy win access to lucrative oil blocks in his country. The ambassador set up a shell company in his wife’s name and registered it in Maryland and Nevada. Griffiths paid bribes into the shell company’s accounts. The company later pled guilty to the crime. The U.S. Justice Department then took up the case, seeking the forfeiture of assets belonging to the ambassador because they were the proceeds of corruption.
- American authorities also went after the son of the president of Equatorial Guinea, Teodoro Obiang, accusing him of embezzling USD 300 million in public funds and laundering money in the U.S. The case settled, with Obiang forfeiting assets worth USD 30 million, including a Malibu mansion, a Ferrari and Michael Jackson memorabilia. Obiang had created several shell companies registered in California to acquire the mansion and other assets.
- Nigerian authorities have accused Kola Aluko of stealing oil worth over USD 1.5 billion from his country’s government. Court documents from the case indicate that Aluko and his associates moved illicit funds into the U.S. and purchased several luxury properties. For instance, Aluko used a New York-registered shell company to purchase a USD 51 million penthouse in one of Manhattan’s hottest new properties in 2014. The Panama Papers reveal that the New York shell company was owned by another shell company based in the British Virgin Islands, a common tactic for obscuring the actual beneficial owner. Aluko denies any wrongdoing. Media reports suggest that U.S. authorities, along with those in the U.K., Switzerland and Nigeria, are investigating Aluko, though the FBI has not confirmed or denied whether this is the case.
- During the recent oil boom, oil revenues from several Persian Gulf countries poured into a Malaysian government investment fund called 1MDB. U.S. authorities allege that several individuals then diverted billions of dollars from the fund into private assets. The masterminds of the scam hired lawyers and real estate agents who set up shell companies in California, Delaware and New York. These shell companies bought an array of real estate including a USD 654 million hotel overlooking Central Park and a USD 39 million mansion in the Hollywood Hills. The U.S. Department of Justice has moved to seize USD 1.7 billion in assets bought with 1MDB funds; many of these assets were acquired using shell companies registered in the U.S.
Enforcement actions like those mentioned here are essential to combatting corruption and the government should continue them. However, prevention also has a role to play. Ending the abuse of anonymous companies is a critical part of that. Congress should remedy this inconsistency in approach and help keep corrupt funds from entering the U.S. in the first place.
Alexandra Gillies is an advisor with the Natural Resource Governance Institute (NRGI).