Tag Archives: Regulation

Shell / Paper companies and excesses – The Economist!

Did you Know?
* Up to 2m are set up in America each year!
* Britain creates some 300,000; around 250,000 are set up in offshore locations.
* The British Virgin Islands (BVI) alone registered 59,000 new firms in 2010. It had 457,000 active companies as of last September—more than 16 companies for every one of its 28,000 people.

Shell Companies/ Paper companies/ firms, often with nominee directors are free of any obligation to publish their accounts. That helps stop outsiders from working out what they do or own, where they operate, who controls them and whom they really belong to.

Positive Uses of Shell firms:

Shell companies are perfectly legal and have many above-board uses. Firms may use them during mergers, to park assets during complicated transactions, or to fend off lawsuits in countries with predatory governments or corrupt courts. They can usefully protect trade secrets or safeguard directors from kidnappers or busybodies. They offer flexibility for entrepreneurs needing to move quickly. “Every company starts out as a shell”!

Misused?
They can also be misused—for tax evasion, money laundering, sanctions-busting or terrorism. A World Bank report last year, “The Puppet Masters”, investigated 817 big cases of corruption between 1980 and 2010. Almost all used shells.

One reason for their ubiquity is an American-led push against money laundering. New rules make it all but impossible for someone to open a bank account anonymously. As a result, shell companies have become the easiest way for a malefactor to hide his identity. The recent indictment of Wegelin, a Swiss private bank being sued for helping Americans to evade tax, is peppered with references to “sham” companies and foundations, set up in places like Panama and Liechtenstein to conceal the identities of the bank’s clients. Several companies, including global giants such as BAE Systems, have been caught using shells to pay bribes to officials posing as consulting firms.

Who to Blame?
Much of the blame for this goes to small-island jurisdictions, often derided as “sunny places for shady people”. Yet the biggest offenders are countries that pride themselves on their financial integrity. Britain (unlike most offshore locations) does not regulate company-formation agents. It even lets firms be founded with bearer shares, which, like cash, belong to whoever happens to have them with him at the time. Most countries have abolished these securities, under pressure from international financial regulators, but one British website offers same-day incorporation of a UK bearer-owned shell for a mere £142 ($227), within four to six hours.

merica is even laxer, because company formation is a job for the states, not the federal government. Formation agents are neither covered under anti-money-laundering rules nor required to report suspicious activity by firms they have established or administer. Reuters, a news agency, has shown that agents with dire records can be barred from doing business—but even then can soon start up again.

Tracing the real owners of private firms is harder in America than almost anywhere else. Some formation agents there do not ask for identity documents, let alone verify them, as Mr Sharman discovered when he posed as a would-be money launderer, as described in his book, “The Money Laundry”. One-eighth of all the shells found by the World Bank were incorporated in America (see table). Attempts at reform have got nowhere.

Offshore formation agents seethe at this: they have tightened their standards under pressure from big countries that do not practise what they preach and (worse still) are now stealing their business. Raúl Castro of Morgan & Morgan in Panama speaks of a “great sense of injustice”. Big countries are increasingly demanding that offshore companies prove they have “substance”, such as real offices and employees, in order to qualify for benefits under bilateral tax treaties.

Banking the profits

Miscreants will find little use for a company unless it has a bank account. That in theory should be a tightly guarded gateway to the world of respectable business. Mass incorporators typically offer bank accounts too, creating a symbiotic relationship between the smithies of corporate identity and the money men. “The two can’t live without each other,” says a financial-transparency expert at a multilateral institution.

In many or most cases that may be perfectly legal. But the potential for abuse is huge. Banks with big offshore businesses have been known to offer their employees incentives to sell corporate vehicles. A former UBS employee who left in 2008 says that the member of his department who had sold the most shells the previous month received a gift and a bonus. All were expected to sell at least a dozen a year. Bankers kept incorporation forms for various offshore structures in their drawers. Once a week some of them would go to Liechtenstein to get the paperwork for the latest batch of foundations stamped. UBS declined to comment. Such practices may no longer be widespread. But the Wegelin case shows how easily they attract American prosecutors’ attention.

Having got offshore jurisdictions, at least, to find out more about their customers and keep better records, and with banks quivering in fear of American ire, the next push is towards regulating the booming company-formation industry. Hong Kong and the Netherlands are mulling the idea of introducing regulation within the next three years. Even Britain and America may impose a duty to report suspicious activity. By the murky standards of the past, even that would be a welcome change.

Link to the article: http://www.economist.com/node/21552197?fsrc=scn/tw/te/ar/theysellseashells

Y V Reddy’s Comments on World Economy..

Today, while I was browsing through the Telugu channels for all the news on the Telangana happenings, I suddenly came over to a Telugu news channel broadcasting business news and I could see Dr.Y.V.Reddy, Governor RBI (Reserve Bank of India) talking something about the world economy and the recent financial crisis in Telugu!! (I said, good to see the economist talking in Telugu..my language)

BTW, some very pertinent and important comments were being made by Mr. Reddy on the recent (I hope its not current any longer!)  financial crisis which were very sensible and thought provoking! So, just wanted to share these with you guys..

1) Too much development of financial markets – In the boom times precipitating the financial crisis, financial markets became too complicated, with very complex financial instruments arriving in the markets at a very great pace.(I was in part a witness to the rapidity of the these instruments coming up while I worked for a short span at the NYSE in their listings department.) The issue was not with a lot of options to invest for the investors, but the pace at which they were being created, let to no time being given to properly evaluate the impacts of these instruments on the markets, by both the creator and the Regulators!

2) Transparency Dr. Reddy, put this is a very apt way when he said that the objective of transparency regulations and measures in the financial markets, was outwitted, by the sellers of complex financial instruments (the Global Investment Banks, which are now busy giving out Billions $ bonuses to their employees!), because what these sellers did was to make the complications of their complex financial products transparent, instead of making the products themselves transparent!! (Bloody Rascals.. isn’t it!!)

3) Free Movement of CapitalAnother very pertinent point made by the Governor, was about the movement of capital. The assumption with the internationalization of the markets, capital would freely move from the developed countries to the developing or under-developed economies. But, in reality what is happening is that the poorer countries are exporting capital to the wealthy countries and especially to the US, including developing economies like India and China! (buying the treasuries?.. At least now they think of Gold!) ..Haa..all the fruits seem to be in one basket and thats why, the global scare that when the US sneezes the World economy catches Cold!! 😉

4) Markets Global – Regulation Local – Another superb point to understand and realize! Markets have become International, so the US people invest in Indian Markets, Chinese Markets etc. and we could invest now in International Markets, but regulation however is predominantly National/Local!  With the cross-border barriers of trade coming down, internationalization of trade has happened at a rapid pace..Now what is the Problem!? The problem is that with Regulation being local/national, they are not able to effectively regulate a lot of these financial transactions not happening on their shores – a lot of offshore financial transactions and hedge fund operations! Regulators are way behind in trying to make regulations as financial markets keep ever expanding off the country’s shores.

Dr. Reddy gave a quotation from another great economist Mervyn King who said, “Banks are Global in life and Local in Death“. Now, all you guys should say, hahaha.. we’ve seen that happen!  I think that summaries the voes of the Financial Regulators.. at the end these large banks with global presence (including the Icelandic Ones;) ) end up at home on their dying beds, when the bad times come! So, better beware for the Regulators, who are being attacked from all sides…

Now, I think, the points we need to understand is to direct our Financial Managers/ Asset Managers, to invest in financial products which are really transparent (and then make them explain what it all means;) ) and are tried and tested. These other funky products are not for us, but for those big shots, who won’t have lost anything, even if they loose a million or two in a single gamble!!