The US is one of the easiest places in the world for criminals to hide behind a shell company, but despite pressure from anti-corruption activists that require companies to identify their true owners, secrecy is still the order of the day. Some states, like Delaware and Nevada, have created a virtual cottage industry hiding behind corporate screens.
Global Witness, the anti-corruption NGO, has put together an extensive list of ways these shell companies are being abused. We’ve already told you about some—like this Manhattan skyscraper owned by Iran for decades without anyone noticing or corrupt leaders from developing countries robbing their citizens—but here are six more shell company scams from the report:
Drug cartels are always coming up with clever ways to move their money around, and before there was the fast-fashion route, there were the ponies. Since 2008, the Los Zetas cartel, one of the most violent drug organizations in the world, used anonymous companies (many in Oklahoma) to launder money through the purchase of race horses with names like “Number One Cartel” and “Morning Cartel”; the horses also raced successfully, winning prize money. Fourteen people were indicted on money laundering charges in 2012.
An Armenian-American crime syndicate created a network of fake health clinics utilizing shell companies in Alabama, California and Colorado, and received $35 million in payments from Medicare, the US public health insurance system for the elderly before law enforcement caught on. Similar schemes involving phantom clinics purporting to offer HIV and cancer treatments collected $38.5 million from Medicare between 2005 and 2010.
When it contracts out work, the US government offers preferences to businesses that are small or minority-owned. Shell companies allow people to exploit these preferences: for example, a shell company claiming to be owned by a disadvantaged person won $153 million in security contracts from NASA and other government agencies, collecting $31 million from 2004 to 2011 and farming the work out to larger companies. This robbed the government of its profit margin and denied other contractors a work opportunity.
Semion Mogilevich, an Russian national who wanted for a list of crimes in the United States, is alleged to have used a network of US shell companies in Pennsylvania to convince investors he was operating a profitable industrial magnet business, instead of defrauding them of $150 million from 1993 to 1998; Mogilevich’s attorneys have denied the charges. Using mulitiple related companies to generate false purchase orders and invoices is a common technique in corporate fraud that is only made possible by excessive corporate secrecy; just look at fraud allegations in China against Sino-Forest or Tianhe Chemical.
The government of Ukraine purchases medical supplies from Interfarm, but it has a law forbidding mark-ups of more than 10% on drug imports. To get around this prohibition, Interfarm used a shell company in Oregon to hide the fact that it purchased vaccines directly from the manufacturer and nearly doubled the price of the vaccines at a time when Ukraine was struggling to increase its polio vaccination levels. A US court ordered the company to pay $60 million to the Ukrainian government.
Even American politicians get in on the act: jailed Congressman William Jefferson was convicted for using shell companies to collect nearly $500,000 in bribes at companies nominally controlled by family members that he actually owned. And in 2012, a shell company was created, donated $1 million to a political action committee supporting Republican presidential candidate Mitt Romney, then dissolved itself before the PAC had to report its donors. None of that is illegal, so only public outcry led the donor, a former colleague of Romney’s named Edward Conard, to identify himself. Today, between corporate secrecy rules and changes in campaign finance rules that prevent disclosure from certain kinds of political committees, it’s become very easy for companies to contribute money to politicians with disclosure.
Many of these schemes could be crimped if the US simply had a public database of beneficial owners. Legislation to create such a registry has stagnated in Congress for the last year thanks to two obstacles: First, some state governments are in a race-to-the-bottom to attract companies looking for loose rules, and don’t want to handle the expenses of tracking business ownership. Second, legitimate businesses love to use shell companies, too—to disguise the ownership of planes and real estate, to keep competitors from knowing their plans, and to avoid US taxes in foreign jurisdictions. It’s a common story in the global economy: Whenever legitimate businesses finds a loophole, the black market is sure to follow.