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(CNS Business): Contrary to conventional policy wisdom, corporate service providers (CSPs) selling shell companies from tax havens are significantly more likely to comply with international Know Your Customer rules than providers in OECD countries like the United States and Britain, a study scrutinizing the level of compliance worldwide has found. Posing as consultants, the authors asked 3,700 incorporation agents in 182 countries to form companies for them. The Cayman Islands was among the top eight jurisdictions with no record of non-compliance regarding KYC rules in this experiment – the other seven were the United Arab Emirates, Seychelles, Jordon, Jersey, Israel, Denmark and the Bahamas.
The research team impersonated a variety of low- and high-risk customers, including would-be money launderers, corrupt officials, and terrorist financiers when requesting the anonymous companies. The resulting “Dodgy Shopping Count” shows on average how many providers a customer would have to approach before being offered an untraceable shell company, where the lower the Dodgy Shopping Count, the easier it is to get an anonymous shell corporation.
Surprisingly, the authors also found that providers in poorer, developing countries are also more compliant with global standards than those in rich, developed nations.
The report notes that organized crime and terrorism depend on financial secrecy, and untraceable shell companies are the most important means of providing this. Shell companies that cannot be traced back to their real owners are one of the most common means for laundering money, giving and receiving bribes, busting sanctions, evading taxes, and financing terrorism.
“One of the biggest surprises of the project was the relative performance of rich, developed states compared with poorer, developing countries and tax havens,” the authors found. “The overwhelming policy consensus, strongly articulated in G20 communiqués and by many NGOs, is that tax havens provide strict secrecy and lax regulation, especially when it comes to shell companies. This consensus is wrong. The Dodgy Shopping Count for tax havens is 25.2, which is in fact much higher than the score for rich, developed countries at 7.8 – meaning it is more than three times harder to obtain an untraceable shell company in tax havens than in developed countries.”
The experiment showed that it is easier to obtain an untraceable shell company from incorporation services (though not law firms) in the United States than in any other country save Kenya, and only a tiny proportion of US providers of any kind met the international standard by requiring notarized identity documents. “Wyoming, Delaware and Nevada were among the worst states in being the most likely to supply untraceable shell companies, a particularly worrying finding in that providers in these states are most likely to sell companies to foreign clients,” the authors note.
The report found that, overall, international rules that those forming shell companies must collect proof of customers’ identity are ineffective. Nearly half (48%) of all replies received did not ask for proper identification, and 22% did not ask for any identity documents at all to form a shell company.
In addition the experiment showed that shell company providers were often remarkably insensitive to even obvious criminal risks. Thus, although providers were less likely to reply to clear corruption risks, those that did respond were also less likely to demand certified identity documents of potential customers from high-corruption countries who claim to work in government procurement.
Corporate service providers were significantly less likely to reply to potential terrorists and were also significantly less likely to offer anonymous shell companies to customers who are possibly linked to terror. However, a worrying number of firms that did reply to the terrorist profile also failed to ask for identity documentation or refused service.
Informing providers of the rules they should be following made them no more likely to do so, the authors found, even when penalties for non-compliance were mentioned. "In contrast, when customers offered to pay providers a premium to flout international rules, the rate of demand for certified identity documentation fell precipitously."
See full report below.
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