Tagtax evasion

(Un)Accountable Shell Games

A shell corporation often has no active business operations or hold any productive assets. Structured as an efficient financial vehicle, a shell corporation can serve as a convenient mechanism to raise funds, to complete a hostile acquisition or to take a company public. Nevertheless, these corporate structures can also be used for nefarious purposes some of which include disguising ownership from law enforcement or the public, or to evade taxes.

For instance, the “Panama Papers” leaks revealed that banks, political leaders and wealthy individuals had allegedly hidden billions of dollars in shell companies through a Panama law firm. The scheme allowed clients to evade taxes. Reportedly 214,000 shell companies were created to facilitate illegal activities.

Shell Games

Not all shell companies are creating to siphon off funds or to evade taxes. There can be merits to creating a shell company.

  • Fortunes
  1. A startup can use a shell corporation to safeguard its assets before officially launching its business.
  2. A company preparing for a merger or an acquisition can hold its assets in a shell company for legal reasons and keep those assets separately from the acquiring entity.
  3. Foreign companies can create shell companies in tax havens like Panama (Swiss private banking, Hong Kong, Belize are some of the other dubious and prominent tax havens) and lower their taxes at home. How so one may ask? Most tax haven countries do not mandate tax information for the funds being funneled into the tax haven countries via shell companies. Further, some tax havens do not report the existence of these shell companies to the government of the owners operating the shell companies thereby creating a “black hole.”
  • Misfortunes
  1. Shell companies are often set up to mask the identity of the individual owning assets in the company or to evade taxes.
  2. Occasionally, companies take advantage of the secretive nature of shell companies and engage illegal activities like money laundering.

Limited Games in the Land of the Free 

In the U.S., we are fortunate to have monitoring agents like the Securities and Exchange Commission, the Justice Department, and the Public Company Accounting Oversight Board (PCAOB) guarding the corridors of capital markets to ensure that public companies are not actively engaged in “shell games” to defraud minority shareholders.

In sharp contrast, and most inappropriately, in emerging markets and particularly in the BRICS countries, minority shareholders may not be as fortunate where the use of shell companies to hide business ownership or to evade taxes is rampant.

What is the auditors’ role in policing dubious shell companies which are actively created by publicly listed companies to siphon off funds and to dupe minority shareholders? 

Let the Games Begin in BRICS Countries

The Securities and Exchange Board of India (the counterpart of US SEC) is scrutinizing the functioning of auditors in various public companies in India, especially if the auditor has had a long-standing relationship with the client. Under the Companies Act of 2013, auditors, have greater responsibilities to ensure that financial statements of an Indian company are not materially misstated and that auditors red flag “dubious” transactions.

The Finance Ministry in collaboration with SEBI is taking actions against 331 listed suspected shell companies. More than 100,000 directors (holy cow!) may be disqualified for their association with shell companies. Investigations are in progress to identify professionals, chartered accountants, company secretaries and cost accountants associated with the defaulting companies.

The auditors are not exempt from these inspections. Authorities are looking at the possibility of having stricter scrutiny of global auditing firms (e.g., the Big 4 audit firms) and to make them more accountable when their auditors certify companies with a clean opinion even when clients are actively engaged in corporate misconduct.

Commentary on BRICS

Similar to the initiatives in India, China, where the problems of shell games are even more pervasive, under President Xi Jinping, has been actively confronting these problems. While these are modest steps, India and China can do more to bring the unaccountable or black money back into the mainstream economy for the betterment of their citizens.  

While India and China are at least attempting to tackle this social ailment, sadly not much can be said about the other 3 countries within the BRICS which include Brazil, Russia and South Africa where their top leaders appear to be the cause and not the solution to this social ailment.


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Death, Taxes, and Goddess Helvetia

swiss-bankingnewSwitzerland is the world’s largest offshore financial center with more than $2.2 trillion of offshore assets. Earlier this year, the U.S. Justice Department declared that it expects to collect more than $1.36 billion from 80 Swiss banks as part of a broad legal settlement. Numerous Swiss banks admitted to planning illegal tax strategies to enable U.S. taxpayers conceal income from U.S. tax authorities through an intricate web of offshore accounts.

In 2009, UBS paid $780 million to the U.S. government and turned over more than 4,000 names to avoid criminal charges. In 2014, Credit Suisse pleaded guilty to one charge of encouraging tax evasion and paid $2.6 billion as part of a settlement to the Justice Department.

Collectively, in the last 6 years, the U.S. has collected more than $13 billion from individuals and financial firms in connection with secret offshore accounts whose singular objective is to evade paying taxes.

Why Swiss Banks?

Swiss banks typically offer two prominent rewards for depositors ― privacy and the low risk. Because Swiss laws forbid their bankers from disclosing the existence and identity of individual accounts without the consent of the account holder, depositors are able to hide their financial assets under a cloak of secrecy. Additionally, because the Swiss franc has virtually zero inflation with the backing gold reserves (at least 40%), depositors’ exposure to foreign currency risk is negligible. The political neutrality retained by the Swiss government in world affairs ensures very little political risk as well. Given these distinct benefits, Swiss banks have become a notorious haven for parking (un)accountable money.

Private vs. Retail Banking

Switzerland offers a wide array of private and retail banking services. Private banking refers to services provided by banks to private individuals with unusually large assets. Historically, exclusive private banking service has been reserved for those with liquid assets over $1 million. The services in a private bank include private counseling in wealth management, investments, tax concerns, and estate planning. Many private banks require a special invitation or referral by current customers.

Retail banking, on the other hand, is your traditional mass-market banking system offering checking, savings, personal loans, mortgages and other types of accounts for individuals. While many retail banks also offer investment services, they are not at the level of those offered by private banks.

EU and Swiss Banking Agreement

The European Union (EU) and Switzerland have agreed to exchange information on the bank accounts with the intention of preventing EU citizens from hiding undeclared income in Swiss banks from 2018. The pact means that EU countries will automatically receive the names, addresses, tax identification numbers and dates of birth of their residents with accounts in Swiss banks thereby making it almost impossible for EU citizens to hide wealth from EU-based tax jurisdictions.

The European Commission is negotiating similar agreements with Andorra, Liechtenstein and Monaco, which are three European microstates with very low levels of taxation and a popular destination for depositors intending to hide their financial assets from tax authorities.  

Tax-Free Rest of the World

Unfortunately, there are no such agreements between Switzerland and the rest of the world. Therefore, for the time being, citizens of non-EU and non-US jurisdictions are relatively free to evade taxes by tapping into the sophisticated Swiss banking system.

The irony is that countries with the maximum need for resources to fund investments in infra-structure, education and healthcare are unable to rely on tax-based revenues to fund their growth because of the private banking system. Largely because of corruption, governments of developing countries and emerging markets have very little economic incentives to enact measures, or to create bilateral agreements, to limit tax evasion.  

Benjamin Franklin once famously said “In this world nothing can be said to be certain, except death and taxes.” For much of the world population, while death is a forgone conclusion, paying taxes is not; thanks to Goddess Helvetia.

The link below identifies ways financial transactions were structured to evade the origin of funds and avoid taxes.


February 20, 2016; 7.58P

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