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Role of shell
The role of shell entities in fraud entities
and other financial crimes
Carl Pacini
Kate Tiedemann College of Business, University of South Florida-St. Petersburg,
St Petersburg, Florida, USA 247
William Hopwood and George Young Received 16 January 2018
Revised 24 May 2018
College of Business, Florida Atlantic University, Boca Raton, Florida, USA, and Accepted 27 June 2018

Joan Crain
BNY Mellon Wealth Management, Ft. Lauderdale, Florida, USA

Abstract
Purpose – The purpose of this paper is to review the use and application of shell entities, as they facilitate
crime and terrorism, impede investigations and harm societies.
Design/methodology/approach – The study details the types and characteristics of shell entities,
reviews actual cases to exhibit how shells are abused, outlines reasons shells disguise beneficial ownership
and analyzes steps taken by countries and organizations to thwart the abuse of shell entities.
Findings – Many types of shell entities are used by white-collar criminals and are often layered in an intricate
network which conceals the identity of beneficial owners. Nominees and bearer shares are used in tandem with
shell entities to optimize concealment. Accountants, lawyers and trust and company service providers facilitate
and promote the use and abuse of shell entities by lawbreakers. The G-8, Financial Action Task Force and G-20
have begun steps to improve ownership transparency, but the effort is moving at a modest pace.
Research limitations/implications – The analysis makes clear the reasons for and means by which
the wealthy and powerful, along with criminals, conceal trillions of dollars of income and wealth that remain
untaxed and may be used for nefarious purposes. The paper is limited by the paucity of data on concealed
assets and their beneficial owners.
Practical implications – The findings clearly show the need for more concerted action by national
governments, organizations, the United Nations and law enforcement and to improve ownership transparency
and information exchange regarding shell entities.
Social implications – The findings demonstrate that shell entities used to conceal wealth prevent untold
trillions in taxes from being collected by governments worldwide. This lack of revenue facilitates income
inequality and skews national economic and fiscal policies. Also, more white-collar criminals and terrorist
financiers could be brought to justice if ownership transparency is improved.
Originality/value – This study adds to the limited literature on shell entities, their characteristics and uses
and abuses.
Keywords Tax evasion, Beneficial ownership, Money Laundering, Ownership transparency,
Shell entities
Paper type Research paper

“The secret to success is to own nothing, but control everything.” – Nelson Rockefeller

Managerial Auditing Journal

1. Introduction/historical context Vol. 34 No. 3, 2019
pp. 247-267
The Financial Action Task Force’s (FATF) 40 Recommendations, published in 2004, addressed © Emerald Publishing Limited
0268-6902
the connection between business secrecy and financial crime [Wolos and Reuters, 2017; DOI 10.1108/MAJ-01-2018-1768
MAJ Financial Action Task Force (FATF), 2004]. Terrorists, members of criminal organizations, tax
34,3 evaders, fraudsters, money launderers, drug dealers and others hide illegal assets and activities
by availing themselves of the secrecy provided by the legal domestic and offshore business
structures commonly referred to as “shell entities.” In 2011, a World Bank study found that
perpetrators in 70 per cent of 213 largescale corruption cases relied on the secrecy of shell
entities to hide their identity (Global Witness, 2013). The legal structures of such entities
248 typically include domestic and offshore limited liability companies (LLCs), limited liability
partnerships (LLPs), international business companies (IBCs), private foundations, company
foundations (CFs) and asset protection trusts. Regardless of the entity type, the identities of the
beneficial owners are hidden behind the secrecy of financial “shells” (Baradaran et al., 2014).
The FATF defines a beneficial owner as the:
natural person(s) who ultimately owns or controls a customer and/or the person on whose behalf a
transaction is being conducted. This definition is very broad and also incorporates those persons
who exercise ultimate effective control over a legal person or arrangement [Financial Action Task
Force (FATF), 2014].
A beneficial owner is always a natural person – a legal person cannot be a beneficial owner.
Ultimate control gives the natural person the ability to benefit from the asset in question
(Willebois et al., 2011).
The extensive, illegitimate use and abuse of domestic and offshore entities to conceal and
transfer assets (including the proceeds of crime), fund terrorism, evade taxes and facilitate
other crimes (such as human slavery, prostitution, racketeering, illegal gambling, securities
fraud and financial fraud) make such entities an important focus of the work of forensic
accountants, auditors, regulators and law enforcement officials. Hence, the purpose of this
article is to review the use and application of shell entities, as they facilitate white-collar
crime and terrorism, impede investigations and ultimately harm society. This paper is
intended to educate forensic accountants, auditors, regulators, legislators and others about
the structure and workings of various legal entities used as “shells” and provide a policy
update on what steps have been taken to curb their abuse.
Section 1.1 discusses the importance of secrecy or concealment and then analyzes
the use and abuse of shell entities to achieve such secrecy (often for nefarious or illegal
purposes). Section 2 analyzes the different types of legal or business structures that
have been used as shell entities. The first two sections are intended to provide the
reader with the historical context of shell entities. Section 3 discusses suggested
reasons for the vulnerability of various business structures that, when privately owned,
are easily manipulated to operate as shell entities. Section 4 highlights policy reactions
and responses, including legislation aimed at dealing with issues relating to beneficial
ownership problems, curbing the abuse of various shell entities and enhancing the
ability of forensic accountants and law enforcement officers to combat tax evasion,
terror funding, money laundering, hiding stolen assets and defrauding creditors. The
final section concludes the paper.

1.1 Concealment and secrecy

A correlation exists between corruption and anonymous shell entities. Tracing illicit funds
or assets to a shell entity is not that useful if the individuals who control it (i.e. the beneficial
owners) cannot be identified (Anonymous, 2016a). Obscured beneficial ownership via shell
entities impedes law enforcement officials and forensic accountants from tracking the
movement of money, and investigating and recovering stolen assets (Kalant, 2009). This is
true for a wide range of investigations, ranging from foreign terrorists, narcotics traffickers, Role of shell
sanctioned regimes, cyber hackers and money launderers (Szubin, 2016). entities
A “shell company” refers to an LLC or other business entity with no significant assets or
ongoing business activities that are capable of moving assets and large sums of money
globally. Shell companies typically have no physical presence other than a mailing address,
have no employees and produce little or no independent economic value [Financial Crimes
Enforcement Network (FinCEN), 2006]. It is not uncommon to find hundreds, if not
thousands, of shell entities registered to the same address because most shell companies 249
have no operations (Anonymous, 2013; Hubbs, 2014)[1]. In Delaware, 285,000 companies are
registered at just one building. This figure is ten times higher than the total number of
companies registered in the Isle of Man, an offshore bank secrecy haven (Anonymous,
2016a). Shell entities are sometimes formed with a generic stated purpose, such as “to
conduct legitimate transactions, such as domestic and cross-border currency and asset
transfers, or to facilitate corporate mergers and reorganizations” (Hubbs, 2014).
Shell companies are not always formed for illegal purposes, and they are even a valuable
source of tax revenues in some countries. For example, shell entities in The Netherlands are
involved “in about $1 trillion in transactions each year with the taxes paid on these
transactions serving as an important government revenue source” (Couch, 2004). Shell
entities can be publicly traded or privately owned.
Privately owned shell entities tend to be more susceptible to illicit uses because limited
ownership limits public exposure and eases the cloaking of beneficial ownership. For this
reason, privately owned shell entities have become the financial and deception vehicle of
choice for tax evaders, money launderers, corrupt politicians, fraudsters, dishonest business
people, celebrities, terrorists, drug dealers, organized crime members and cybercriminals
(Hubbs, 2014).
A massive leak of documents from the Panamanian law firm Mossack Fonseca, known
as the “Panama Papers,” has illuminated the extent of the “vast” murky world of shell
entities, providing an extraordinary look at how the wealthy and powerful conceal their
money (Hall and Taylor, 2016). Data analytics firms such as Linkurious extracted metadata
from the 2.6 terabytes of leaked data and helped connect the dots through data visualization
tools (Santiso and Roseth, 2017)[2]. Individuals:
[. . .] exposed in the leak include the prime ministers of Iceland and Pakistan [. . .] and companies
linked to the family of Chinese President Xi Jinping. Add to those [. . .] honchos in [. . .] FIFA that
[control] international soccer and 29 billionaires featured in Forbes Magazine’s list of the world’s
500 richest people. [. . .] The documents within the leak [. . .] expose how secretive offshore
companies at times subvert U.S. policy and mock U.S. regulators. [. . .] Plenty of criminals are
[listed] in the documents, from drug traffickers to [. . .] fraudsters (Hall and Taylor, 2016; Ryle,
2013).
As a result of the Panama Papers leak, the Canada Revenue Agency (CRA) executed three
search warrants on February 14, 2018, during an offshore tax evasion criminal
investigation. The CRA’s investigation identified a series of transactions involving foreign
corporations and several transfers through offshore bank accounts allegedly used to evade
taxes (Canada Revenue Agency, 2018).
Another, more recent, leak is known as the “Paradise Papers.” The Paradise Papers
contain 13.4 million leaked documents, mostly from the Bermuda-based law firm Appleby
and Singapore-based Asiaciti Trust (Murphy, 2017). The documents detail the ways
politicians, celebrities, and the ultra-rich protect their cash from taxation, hide their
ownership of major assets and secretly conduct their business. Most of the exposed practices
are legal, but some may be unethical (Murphy, 2017). For example, Stephen Bronfman, a top
MAJ aide and key fundraiser for Canadian Prime Minister Justin Trudeau, was found to have
34,3 avoided millions in taxes through offshore accounts. Although this conduct was not illegal,
it was very embarrassing for Trudeau, who had pledged to crack down on tax havens
(Murphy, 2017). Another embarrassing disclosure revealed that US Secretary of Commerce
Wilbur Ross had business ties with Russian President Vladimir Putin’s son-in-law, a
Russian oligarch under US sanctions. Ross failed to disclose the ties during his confirmation
250 hearings (Murphy, 2017).
By necessity, criminals and terrorists are attracted to jurisdictions with lax financial
secrecy laws and practices. Such jurisdictions facilitate secrecy and thereby provide
relatively weak barriers to the abuse of domestic and offshore shell entities, trusts,
foundations, “shelf” corporations, IBCs, LLCs and other business structures. In 2009, the
Tax Justice Network (TJN) launched an online database that shows how the legal, judicial
and regulatory details of different jurisdictions contribute to the environment of financial
secrecy (Christensen, 2012). The Financial Secrecy Index (FSI) is a global ranking that draws
attention to the various aspects of financial secrecy. According to the TJN, an estimated
$21tn to $32tn of private financial wealth is located in secrecy jurisdictions around the world
[Tax Justice Network (TJN), 2018]. Secrecy jurisdictions use concealment and anti-disclosure
laws to attract illicit and illegitimate financial flows [Tax Justice Network (TJN), 2018]. Illicit
cross-border financial flows have been estimated at $1-$1.6tn per year [Tax Justice Network
(TJN), 2018]. Offshore companies in the British Virgin Islands (BVI) alone had assets in
excess of $1.5tn in early 2017 (Houlder, 2017).
The FSI reveals that the traditional stereotypes of financial secrecy and tax havens are
inaccurate. The world’s most significant providers of financial secrecy, the places that
harbor the most concealed assets, are not small, palm-fringed islands but rather the USA,
Switzerland, Hong Kong, Singapore, the UK and its overseas territories (e.g. the Cayman
Islands), Germany and Luxembourg [Browning et al., 2018; Tax Justice Network (TJN),
2018]. In 2017, the USA ranked second in terms of providing financial secrecy [Browning et
al., 2018; Tax Justice Network (TJN), 2018].
Not only does the US system of shell entities and liberal secrecy restrictions promote tax
evasion, money laundering and other crimes it also entices the most dangerous criminals in
the world to establish shell corporations in the USA (Szubin, 2016). Viktor Bout, a Russian
oligarch, referred to as the “Merchant of Death” by a US Senate committee and considered to
be the world’s largest arms trafficker, used 12 US shell corporations formed in Delaware,
TX, and Florida to finance his illegal activities (Browning, 2009). Bout was able to carry on
his business until he was arrested in Bangkok in 2008 (Stempel, 2013). Jose Trevino Morales,
the brother of two Los Zetas drug cartel leaders, one of whom dismembered his victims
alive, transferred tens of millions of dollars of illicit drug money under the guise of a horse
ranch business in Oklahoma. The cartel leaders’ names were nowhere to be found because of
the shell entities they used, which were completely secretive (Hicken and Ellis, 2015).

2. Shell entities and other legal structures and devices used to achieve secrecy
Legitimate business people and lawbreakers alike may form various types of domestic and
foreign entities, such as domestic LLCs, foreign LLCs, asset protection trusts, LLPs, IBCs,
private interest foundations (PIF) and CFs. Dishonest parties can use these entities to hold
legal title to stolen or hidden assets, cloak beneficial ownership, engage in illegal
transactions such as drug dealing, fund terrorism, evade taxation and commit various other
crimes. After the entities have been formed, the asset hiders open and fund bank accounts in
the names of these entities.
 Criminals can use shell entities to commit a panoply of crimes, such as tax evasion, Role of shell
money laundering, securities fraud, financial fraud, corruption and bribery. One example of entities
the abuse of a shell company can be found in U.S. v. Lake, 571 Appx. 303 (5th Cir. 2014).
Larry Lake operated VIP Finance, a car title loan business with six locations in the Dallas
area. Lake also owned Cash Auto Sales, which handled “auto club” memberships for VIP
Finance, as well as a drugstore called Grapevine Drug Mart. The day before he filed for
personal bankruptcy, Lake transferred $2,763,000 from an E*Trade account in his name to
an E*Trade account held jointly with his wife. Also on that day, he purchased a cashier’s 251
check in the amount of $348,000 payable to Air I.Q., a shell company formed in his wife’s
name. Because Lake did not disclose these transactions during the bankruptcy case, he was
charged with bankruptcy fraud.
Another instance of shell companies facilitating white-collar crime occurred in 2014.
Hewlett-Packard A.O. (HP Russia) agreed to pay more than $100m in penalties for felony
violations of the Foreign Corrupt Practices Act (FCPA) [Foreign Corrupt Practices Act
(FCPA), 2017; Athanas, 2010; Deming, 2006][3]. According to the plea agreement, HP Russia
executives created a multimillion dollar secret slush fund that was used to bribe Russian
Government officials [U.S. Department of Justice (DOJ), 2014]. To effect the payment of these
bribes, money was laundered using an intricate web of shell companies and bank accounts.
The conspirators kept two sets of books to conceal and track the corrupt payments. The
slush fund proceeds were spent on such items as travel, luxury automobiles, jewelry,
clothing and furniture.
These abuses are compounded by the fact that many states, provinces and countries
permit shell entities to own and manage other shell entities [Financial Crimes Enforcement
Network (FinCEN), 2006]. The result can be multiple layers of cloaked ownership that make
it virtually impossible for forensic accountants or law enforcement officials to determine the
identity of the beneficial owners.

2.1 Limited liability companies as shell entities

Domestic and offshore LLCs can be used to defeat, or at least delay, the claims of creditors
and other claimants. Because LLCs may be owned and managed anonymously, they can be
subject to abuse. They are creatures of statute, and transparency-of-ownership requirements
vary from state to state and country to country [Government Accountability Office (GAO),
2006].
LLCs are a hybrid of corporations and partnerships. LLCs provide members (rather than
shareholders) the same limited liability afforded to corporate shareholders while providing
the “pass through” taxation benefits (in most jurisdictions) to members. When used as shell
entities, LLCs exist only to own other entities, to hold bank accounts, or as simply a transfer
point for moving funds from one account or business to another.
An LLC shell entity’s ownership can be structured in a variety of ways, including having
shares issued to a natural or legal person or in registered or bearer form (Biedermann, 2015).
Bearer shares confer rights of ownership to the physical holder or possessor of the share(s).
They are commonly and legitimately used in a number of countries, but they are not
permitted in the USA. However, given that bearer shares are not registered with regard to
ownership, they enable illegal activities to be hidden and can be controlled by beneficial
owners who cannot be identified.
LLC shells are easy to form (in as little as two hours for about $100-$200 in some states)
and can be linked or layered across different jurisdictions, creating a confusing path for
forensic accountants, auditors and investigators (Martinez, 2017). If they are established in a
jurisdiction that has no regard for ownership transparency (e.g. Wyoming, NV, DE),
MAJ identifying the beneficial owners may be virtually impossible (Adkisson and Riser, 2004).
34,3 The USA is one of the world’s foremost jurisdictions for those seeking to avoid ownership
transparency. In fact, US LLC shells are used more often in laundering the proceeds of grand
corruption than the shells of any other country (Sharman, 2013).
A fine example of the abuse of LLC shells occurred in U.S. v. Beecroft, 825 F. 3d 991 (9th
Cir. 2016). From 2003 to 2008, Melissa Beecroft participated in a multimillion dollar
252 residential mortgage fraud scheme in the Las Vegas area. Beecroft and her co-conspirators
recruited and paid straw purchasers (buyers who purchase homes on behalf of undisclosed
persons, with no intent to retain the property themselves) to acquire homes at substantially
inflated prices. After each sale, straw buyers would transfer ownership in the properties to
the LLC shell entities. Buyers defaulted on the mortgages and lenders were unable to locate
the responsible parties. Altogether the scheme involved more than 400 straw buyer
transactions and 227 properties bought for more than $100m.

2.2 Shelf corporations

Existing, but unused, shell companies may be converted to current, possibly illegal, use.
Such companies are known as “shelf” or aged corporations. The established age of these
companies adds to their credibility. Shelf companies are attractive because any legal filing
requirements have already been satisfied, so they are instantly available, no shares have yet
been offered, and ownership can be immediate. In general, domestic and offshore shelf
corporations possess all the necessary corporate prerequisites in the appropriate jurisdiction
(e.g. Wyoming, St. Kitts and Nevis, Anguilla, Belize) for legal operation and quick transfer of
ownership (Weiss, 2011). Shelf corporations may be purchased on the internet for a few
thousand dollars from trust company and service providers (TCSPs) such as www.
offshorecompany.com and www.companiesinc.com. In some cases, shelf entities can even be
bought with ready-made, established bank accounts.
Once a shelf company is bought, the buyer may acquire the shelf corporation’s
established credit and tax history, which further enhances its credibility (Willebois et al.,
2011). The lack of accurate, recorded information about shelf entities can create almost
insurmountable obstacles for auditors, forensic accountants, regulators and law
enforcement officials in any attempt to identify the beneficial owner(s).

2.3 Nominees or nominee directors in shell entities

Another legal device or approach to optimize concealment involves the shell entity’s
beneficial owner or owners electing to hire a nominee as a company director. A nominee is
one who holds bare legal title for another, who is designated to act in place of another in a
limited way, or who receives and distributes funds for the benefit of others [LiButti v. U.S.,
107 F. 3d 110 (2nd Cir. 1997); Martinez, 2017]. A nominee can be a relative, friend, trusted
associate or a person who has no link to the true beneficial owner(s). Nominee incorporation
service providers (e.g. www.offshoresimple.com/nominee.htm) provide local and third-party
nominees to serve as the director and/or manager of the shell company. The nominee
typically signs a general power of attorney giving the beneficial owner(s) full power to
manage the shell entity. The nominee also provides a signed and undated letter of
resignation to further protect the anonymity and interest of the beneficial owner(s).
Globally, a small number of nominee directors are used multiple times in many shell
entities. Specifically, a mere 28 nominee directors have established, or are in control of, more
than 21,000 companies (Ball, 2012). Many of these individuals have been identified as
involved with criminal organizations and individuals (Ball, 2012). They market their
services by selling their names and addresses in obscure global locations. The shell entities
themselves are often registered anonymously in Switzerland, the USA, Hong Kong, Role of shell
Singapore, Luxembourg, Germany, Taiwan, Guernsey, Panama, St. Kitts-Nevis, Lebanon, entities
The Netherlands, Bahrain, the United Arab Emirates, Jersey, the Bahamas, Malta, Cyprus,
the British Virgin Islands, Ireland, China, Japan and Canada [Ball, 2012; Tax Justice
Network (TJN), 2018]. In early 2014, the International Consortium of Investigative
Journalists (ICIJ) (representing more than 190 journalists from 65 countries) published a
database of the incorporation records of shell companies, directors (some nominees) and
addresses that were leaked to them. The database showed the extent of shell company 253
networks and revealed how many companies and nominee directors are linked (See http://
tinyurl.com/jwxbg2z and https://tinyurl.com/mu5483k).

2.4 Trusts
Trusts are another vehicle subject to abuse by fraudsters, white-collar criminals and asset
hiders. The salient characteristic of a trust is that it provides for a separation of legal and
beneficial ownership (Danforth, 2002). Legal control is granted to a trustee by a settlor (a/k/a
creator or grantor). The trustee manages the trust asset(s) according to the terms of a trust
agreement for the benefit of the beneficiaries (Danforth, 2002). A settlor (or creator or
grantor) who establishes the trust can minimize the likelihood of transfer or attachment of a
beneficiary’s trust interest by creating a spendthrift trust or by including a spendthrift
provision in a trust (Miller v. Kresser, 34 So. 3d 172 (Fla. Dist. Ct. Appl. 2010) (quoting
Croom v. Ocala Plumbing & Elec. Co., 57 So. 243 [1911]). Spendthrift trusts are subject to
various laws, regulations and exceptions that vary from one jurisdiction to the other. Most
US states follow the principle that it is impermissible to have a spendthrift trust when the
settlor is also a trust beneficiary (In re Brown, 2002). In some offshore jurisdictions, however,
spendthrift trusts are permitted even when the settlor is a beneficiary (Ausness, 2007).
Self-settled spendthrift trusts, which have been given the misnomer of “asset protection
trusts”, are a “booming business for banks, trust companies, and estate planners, both [in
the USA] and abroad. They [are] a multi-billion-dollar-a-year business” (Morse, 2008). Many
US and offshore promoters attract US, Canadian and other citizens with promises of tax
avoidance (not evasion) and asset protection through the use of trusts (Morse, 2008). This is
quite similar to the use of LLC shell companies.
The popularity of asset protection trusts is based, in part, on the fact that trusts can
provide beneficiaries with more privacy and autonomy than traditional business entities.
Trusts have historically had no registration requirements or central registries where the
names of trustee, settlor and beneficiary must be listed (Fidelity Investor, 2017). Even where
beneficiaries’ identities must be disclosed, the beneficiary can be a limited partnership (LP),
LLC or another trust, thus adding layers of opacity to the trust’s ownership structure
(Simser, 2008).
“[E]stimates indicate that between $1 and $5 trillion in assets are located in [offshore
asset protection trusts, or OAPTs]” (Maxwell, 2014). Various jurisdictions that permit
OAPTs include Anguilla, the Bahamas, Barbados, Belize, the British Virgin Islands, the
Cayman Islands, the Cook Islands, Cyprus, Gibraltar, the Isle of Man, Saint Kitts and Nevis
and the Turks and Caicos Islands (Maxwell, 2014).
OAPTs possess a number of features that permit the settlor to exercise protective control
over trust assets. Protective features of an OAPT may include a trust protector clause, an
anti-duress clause, a flee or flight clause and a non-binding letter of intent or wishes
(Ausness, 2007). A trust protector clause provides for a “trust protector” being appointed by
the grantor to act as an advisor and who is responsible for making sure the trustee
implements the settlor’s wishes. An anti-duress clause prohibits the trustee from complying
MAJ with any order imposed upon the settlor or trustee (Lorenzetti, 1997). A flee or flight clause
34,3 authorizes or requires the trustee to transfer the trust to another jurisdiction upon the
occurrence of certain events, such as an inquiry from a foreign government or Interpol
(Taylor, 1998). A letter of intent or wishes is written by the settlor and states his or her
wishes as to the disposition of trust assets (Ausness, 2007).
Money launderers and other criminals are able to avail themselves of the layering and
254 misdirection features of OAPTs. One example of these features can be found in U.S. v.
Brennan, 395 F. 3d 59 (2nd Cir. 2005). In this case, the Second Circuit upheld Robert
Brennan’s conviction for bankruptcy fraud, based in part on money laundering using
OAPTs. Brennan owned and operated First Jersey Securities, Inc. (FSJ), a brokerage trading
in penny stocks. Brennan and FSJ were found guilty of securities fraud and were ordered to
pay $75m to 500,000 customers. Subsequently, FSJ and Brennan filed for bankruptcy. Near
the end of his trial for securities fraud, Brennan created an OAPT known as the Cardinal
Trust and funded it by use of $4m in bearer bonds. Brennan did not disclose Cardinal’s
assets in the bankruptcy action, allowing Cardinal Trust’s assets to grow to $22m by mid-
1997. Brennan used $12m in trust assets to buy and refurbish the Palm Beach Princess – a
gambling boat. The Cardinal Trust’s venue or situs was moved twice (via a flight or flee
clause) to avoid detection. Brennan was convicted of money laundering and other offenses
and sentenced to over nine years in prison.
OAPTs can be used by those bent on committing financial crimes in four ways:
(1) by hiding legitimate assets for the purpose of evading taxes (Silets and Drew,
2001);
(2) by integrating illicitly obtained funds into an economy as “clean assets” (i.e. money
laundering) (Silets and Drew, 2001);
(3) by moving legitimately obtained funds into an economy to be used for nefarious
purposes (i.e. reverse money laundering) (Arce, 2009); and
(4) by hiding legitimate assets from creditors with bona fide claims or spouses in
divorce proceedings (Silets and Drew, 2001).

The linchpins to illegitimate uses or abuses of OAPTs are layering and misdirection.
The most clever asset-hiding and asset-protection schemes insulate the identity of the
wrongdoer through many layers of trusts and other shell entities. They also incorporate
misdirection by creating the appearance that the wrongdoer has no control of the OAPT,
and that their sole administrator is in an offshore jurisdiction. One example of how a tax
evader layered OAPTs is found in U.S. v. Scott, 37 F. 3d 1564 (10th Cir. 1994). An
organization named International Business Associates devised a scheme involving
transfers to and among four successive trusts. Trust I was a domestic trust established as
a shell with an apparently fictitious contribution of $100 by some entity other than the
client. Trust I was required to distribute all taxable income to Trust II (a Belizean trust).
Trust II was a conduit trust that passed its income to Trust III, a foreign trust that could
distribute and accumulate income. Trust IV was a passive foreign trust until the
purchaser settlor of the trust scheme needed funds. Like most OAPT tax evasion
schemes, power rested with the purchaser-client while the true beneficial owners
remained unnamed in all documentation.
Just as with other types of shell entities, the goal is to transfer assets through enough
layers of OAPTs (and other entities) so that a banker, lawyer, forensic accountant,
auditor, bankruptcy trustee or law enforcement officer will not suspect or discover the
sources of assets (Zagaris, 1999). By accomplishing this goal, individuals and entities can Role of shell
control their assets without being named as a beneficiary or trustee. entities
2.5 Limited partnerships and family limited partnerships
LPs and family limited partnerships (FLPs) are superb places to secrete assets [Tax Justice
Network (TJN), 2018]. In a typical scheme involving an LP, the fraudster (general partner)
provides assets to trusted associates, friends or family members to invest in an LP. These 255
“investors” become limited partners who have no personal legal liability for the debts of
the business and cannot take an active role in operating the business. In another type of scheme
involving an LP, the fraudster or criminal conveys assets to an LP of which he is the sole limited
partner and then transfers the partnership interest to a trust of which he is the sole trustee and
beneficiary (usually done on an offshore basis).
In an attempt to hide assets or obscure the beneficial owner a married couple might
arrange to contribute all of their assets to the FLP [Association of Certified Fraud Examiners
(ACFE), 2009]. In this structure, each spouse retains a 1 per cent general partnership interest
and a 49 per cent LP interest. General partners in an FLP have unlimited personal liability
for the FLP’s debts and obligations. Using this arrangement, subjects only 2 per cent of the
couple’s assets to unlimited liability. If an FLP is structured correctly, creditors cannot
directly reach the FLP assets, but are instead restricted to obtaining a charging order, which
gives the creditor the right to receive any distributions made to the partner [Association of
Certified Fraud Examiners (ACFE), 2009]. But creditors cannot force the FLP to make
distributions to the partner. In the USA, however, there have been a few cases in which a
court has ruled that a partner’s interest in an FLP can be foreclosed upon by a creditor
[Firmani v. Firmani, 752 A. 2d 854 (N.J. Super. Ct. App. Div. 2000].

2.6 International business companies

An IBC is an offshore corporation closely related to a traditional corporation because it uses
articles of incorporation or association and requires company directors. An IBC is a
subcategory of LLC targeted at non-residents of the jurisdiction in which it is sited. It may
not engage in economic activities within its situs jurisdiction. Historically, in most offshore
jurisdictions, an IBC is governed by strict confidentiality regulations, as the names of its
shareholders and directors need not be published in any public register. Also, although
shareholders of many IBCs are required to elect directors, once elected the board may run
the IBC with little recourse to shareholders. In some jurisdictions, the abolition of share
capital allows the IBC to ignore capital retention in making distributions to shareholders
(Offshore, 2005). The lack of restriction when making distributions to shareholders makes
the IBC a convenient vehicle for money laundering and moving money to many different
locations, thus obscuring the money trail for auditors, forensic accountants and
investigators.
IBCs are also used as tools by corporations and individuals throughout the world to
direct profits away from high tax countries into offshore jurisdictions that have low or zero
tax rates and tax treaties with other nations (double tax treaties). For example, more than
140 listed businesses in London, New York and Hong Kong have a unit in the BVI, which is
useful as a tax neutral hub (Houlder, 2017).
Businesses which are suitable to be conducted through an IBC include international
trading, international construction and engineering, royalty firms, real estate companies,
shipping and ship management and holding companies.
MAJ 2.7 Private interest foundations and foundation companies
34,3 The private interest foundation (PIF) is a vehicle provided by civil law countries (and now
being adopted by some common law jurisdictions) for asset protection and estate planning
purposes, but which serves as an alternative to trusts (Berbey de Rojas, 2008). The PIF was
first introduced by Liechtenstein in 1926 but has attracted followers such as Panama,
Aruba, Bonaire and Curacao; the Bahamas; Costa Rica; the Seychelles Islands; St. Kitts and
256 Nevis; Anguilla; Antigua; and the Cook Islands (Wiggin, 2008). Like an asset protection
trust, a PIF may be used to conceal the identity of individuals, entities and assets. Although
there is no single definition of a foundation, a number of common features can be identified
in jurisdictions that offer PIFs.
Panama is a good example because it has permitted PIFs since 1995, has more than
400,000 registered offshore corporations and PIFs, does not require foundations to keep
financial records or submit tax returns and offers much secrecy (Thompson, 2010). A PIF
has four main parts:
(1) Founder – the person or entity that forms the foundation in the public registry.
Usually a nominee founder is provided by a professional service firm along with a
presigned, undated letter of resignation. At that point, the nominee founder holds
no further control. A founder is analogous to a trustee.
(2) Foundation Council – this serves the same function for a PIF as a board of
directors does for a corporation. The council members’ names and passport
numbers are noted in the public registry when the foundation is established. Often
a nominee council is provided by a professional service firm along with presigned,
undated letters of resignation from the nominee council.
(3) Protector – this is the ultimate controller of the foundation. Immediately upon
establishment, the council appoints a protector through a notarized private
protectorate document. Because the document is a private, non-publicly registered
document, the protector remains anonymous. At that point, the protector has full
control over the foundation (which holds legal title to any assets) and its assets.
(4) Beneficiaries – a PIF does not have owners but beneficiaries. The latter are
appointed by the protector either through a private letter of wishes or through a
formal set of bylaws. The contents of both remain confidential. Privately appointed
beneficiaries remain anonymous (Boschini, 2006; Berbey de Rojas, 2008; Elements,
2017; Aspen Group Limited, 2012).

In sum, no legal requirement exists to disclose the name of a founder, beneficiary or

protector. Annual tax returns or financial statements do not need to be filed. A foundation
may engage in any business or civil transaction in any part of the world and in any
currency. Moreover, the foundation charter may be signed by an attorney without disclosing
the name of the founder.
In some foundation jurisdictions (e.g. Anguilla), any assets available for distribution to a
beneficiary are neither capable of being alienated or passed by bankruptcy, insolvency or
liquidation nor liable to be seized, sold, attached or otherwise taken in execution, by process
of law (Wiggin, 2008). The secrecy and lack of transparency and flexibility of PIFs have led
to their spread throughout the offshore world (China Offshore, 2009). Such foundations
represent another vehicle that can be used by money launderers, tax evaders, terrorist
funders, organized crime members and white-collar criminals.
In the last quarter of 2017, the Cayman Islands implemented a new legal structure
(which could be used as a shell entity) known as a CF (Davern and Way, 2017). A CF
shares some features with a trust, but it may be established so that beneficiaries are Role of shell
given no rights to make a claim against the company foundation (CF) (Davern and Way, entities
2017). The CF law itself describes possible objects of a CF as acting as a holding
company or an investment company. Another feature of a CF (which trusts do not
possess) is that any kind of power can be given to any person, whether as a personal
power, as a benefit for the CF or for any other lawful purpose (Davern and Way, 2017).
These objects and powers make the CF vulnerable to abuse by white-collar criminals
such as tax evaders, money launderers and terrorist financiers. Only the passage of
257
time will indicate whether the CF will be added to the list of legal structures that
commonly serve as shell entities.

3. Three main reasons shell entities provide secrecy and disguise beneficial
ownership
Three main reasons explain the continued ability of white-collar criminals, terrorists and
organized crime members to use shell entities to conceal the identity of their actual beneficial
owners and to operate in the shadows. One reason is the lack of transparency in most
jurisdictions (including US states) with regard to actual or beneficial owners, directors,
corporate officers, members, partners, trustees, beneficiaries and others. The second reason
is that drug traffickers, money launderers, tax evaders, terrorist funders,and other white-
collar criminals are able to engage professionals such as accountants, lawyers, financial
advisors and TCSPs or “gatekeepers” to create shell entities, layer them together into
complicated webs, hide assets and launder funds. The third reason is that the layering or
pyramiding of different shell entities (often different legal types) in various jurisdictions
around the globe makes an impenetrable trail for law enforcement officers and forensic
accountants to follow.

3.1 Lack of transparency in identifying beneficial owners

Ownership transparency refers to the disclosure of majority and minority shareholders,
members, beneficiaries, protectors, trustees, founders and directors, depending upon the
type of legal entity or any other natural person who is in a position to control and/or benefit
from an asset. Transparency also includes knowledge of the controlling structure of other
legal entities. Knowledge of beneficial owners and the control structures of entities must
then be accompanied by effective investigation and enforcement mechanisms regarding the
disclosed information (Lakhani, 2016).
The issue of transparency is captured by FATF Recommendation 24, which states that
countries should ensure that there is adequate, accurate and timely information available on
the beneficial ownership of all legal persons [Financial Action Task Force (FATF), 2014].
The identity of the natural persons who ultimately have a controlling ownership interest in a
legal person and/or the identity of the natural persons exercising control of the legal person
through other means is the goal of transparency requirements [Financial Action Task Force
(FATF), 2014].
In practical terms, ownership transparency can be achieved by the use of a central
registry that collects, stores and verifies the detailed information necessary to determine
actual beneficial ownership of any and all types of entities, including trusts and
foundations. Relevant information captured in a central registry would include name;
legal entity type; formation documents; related bylaws; address of a registered office or
principal place of business or address of the entity itself; name and address of a registered
agent; names and addresses of persons in position of legal control within the entity (e.g.
MAJ directors, officers and council members); and the name(s) of the beneficial owner(s)
34,3 (Willebois et al., 2011).
One huge obstacle to the achievement of practical or actual transparency is that
transparency of ownership requirements vastly differs from jurisdiction to jurisdiction.
Transparency practices vary even on an international basis (Anonymous, 2016b). In the
USA alone, where entity formation legal requirements are controlled by the states, vast
258 differences make for more favorable entity formation and maintenance in some states
than others. For example, in 2006, a GAO study found that no state collected beneficial
ownership information on corporations, only a few collected it on LLCs and other
corporate-like entities, and only four states collected minimal information on LLCs. Less
than half of the states collected information about management, directors and officers of
corporations. Although most states collected information on corporate officers and LLC
managers in periodic reports, the information in these reports was not verified, including
information pertaining to beneficial ownership [Government Accountability Office
(GAO), 2006]. This is still the situation today (Martinez, 2017). Finally, the states do not
screen information against criminal watch lists. The FBI has open investigations that
have not been resolved because beneficial owners are virtually untraceable (Martinez,
2017).

3.2 Gatekeepers and trust company service providers

The services of gatekeepers are often essential for fraud and other illegal schemes to
succeed. Gatekeepers sometimes facilitate the commission of a predicate offense, such as
disguising a person’s involvement in a commercial transaction, commingling property and
proceeds or disguising property ownership/control by the ultimate beneficial owners (Baker
and Shorrock, 2009). Gatekeepers’ services help sever the connection between the illegal
schemer and the safe enjoyment of the assets. They can also provide criminals with a veneer
of respectability (Baker and Shorrock, 2009).
Gatekeepers include TCSPs, lawyers, accountants or other business professionals that
create and provide administrative services for various types of entities, such as
corporations, IBCs, LLCs, foundations and trusts. In some jurisdictions, gatekeepers are the
only means of establishing certain kinds of vehicles, such as an IBC. In code or civil law
countries, certain entities, such as foundations and IBCs, require a notarial deed for creation,
meaning that notaries must be employed (i.e. a TCSP must be hired).
Indispensable administrative procedures performed by TCSPs include checking for
the availability of an entity name, filing appropriate documents with the authorities,
opening bank accounts, providing nominees (when necessary), acting as registered
agents, paying fees, handling annual reporting obligations, mail forwarding and
providing virtual office facilities. Many gatekeepers furnish clients with entities from a
wide range of different jurisdictions. Large TCSPs may form an entity for a client in one
jurisdiction (e.g. Belize) but retain client data on file in a different jurisdiction. This makes
it more difficult for regulators and forensic accountants to access the information
(Willebois et al., 2011).
Money laundering experts at FATF have concluded that gatekeepers should be
regulated because they can form a vital link in the chain of performing due diligence (i.
e. finding out who they are dealing with and filing suspicious activity reports [SARs]), if
it becomes necessary (Global Witness, 2012). TCSPs typically possess varying degrees
of awareness of or involvement in the illicit purposes underlying their clients’ activities
[Financial Action Task Force (FATF), 2006]. TCSPs or formation agents have little
incentive to push clients for accurate information. TCSPs already up and running tend
to be archival; they do not verify incoming data because of the cost (Anonymous, Role of shell
2016b). entities
TCSPs in many offshore jurisdictions have become subject to formal licensing and
regulation, including being audited, meeting anti-money laundering requirements and
applying suitability tests to directors. TCSPs in onshore jurisdictions, particularly US
states, are more loosely regulated (Willebois et al., 2011). This factor contributes to the
large number of foreign persons creating LLCs and other entities in the USA. In sum,
TCSPs from alleged “tax havens” were found in one survey to have higher standards in 259
corporate transparency, at least in the entity formation stage, than those in other
countries (Willebois et al., 2011). By far, the worst performer in the survey was the USA
(Willebois et al., 2011). Some TCSPs in Nevada and Wyoming actually offered to use their
employees’ social security numbers to spare clients the need to obtain an Employer
Identification Number (Willebois et al., 2011)[4]. Moreover, several shell entities
originating in Cheyenne, WY (where Wyoming Corporate Services is a shell/shelf
incorporator) have been used in international frauds and criminal activity (Carr and
Grow, 2011). These facts are disturbing given the huge number of legal entities formed in
the USA every year-around ten times more than in all 41 tax havens combined (Willebois
et al., 2011).
In those cases, where an attorney is the TCSP or works for the TCSP, the attorney-client
privilege may erect another barrier to gleaning information by forensic accountants and
investigators. The extent to which this barrier exists varies depending on laws of the
respective jurisdiction.

3.3 Layering and chaining of shell entities

Perpetrators of tax evasion, securities fraud and other illicit activities often use a layer or
chain of entities established in different jurisdictions to maximize anonymity. This makes it
almost impossible for forensic accountants and investigators to determine beneficial
ownership. In a layered or tiered vehicle structure, various legal entities are inserted
between the individual beneficial owner(s) and the assets or funds of the shell entity that
holds legal title to those assets or funds. The layering or chaining of various legal entities
across numerous jurisdictions (e.g. Jersey, Gibraltar, the USA and the BVI) facilitates access
to the international financial or banking system. Investigators and forensic accountants
may, for example, obtain ownership information on an entity in Country A and discover that
the legal owners of that entity are corporations or trusts registered in Countries B and C.
Offshore countries and entities by no means possess a monopoly on this type of
arrangement. Legal entities in the USA and UK are also used frequently in layering
arrangements. The ability to layer or chain within and across jurisdictions faces few, if any,
restrictions (Willebois et al., 2011).
An example of the use of layered or chained domestic entities for tax purposes occurred
in Nevada Partners, LLC v. U.S., 720 F. 3d 594 (5th Cir. 2013). In this case, James Kelley
Williams, a successful Mississippi businessperson, expected to realize an $18m capital gain
in tax year 2001 from the cancellation of a loan he had guaranteed. Williams entered into a
long-term investment program offered by Bricolage Capital, LLC. Bricolage enlisted Credit
Suisse First Boston as the bank integral to Williams’ program and used LLCs or
partnerships to execute foreign exchange transactions and other transactions that generated
tax losses.
The three domestic LLCs were Nevada Partners, Carson Partners and Reno Partners.
Williams made his required investments in the LLCs using the JKW 1991 Revocable
Trust, which held most of his wealth. Numerous purchases of LLCs and other interests
MAJ occurred to transfer the necessary tax losses to Williams, which he claimed on his 2001
34,3 tax return.
The Fifth Circuit affirmed the federal district court’s decision that:

the transactions lacked economic substance and must be disregarded for tax
purposes; and

the negligence penalty applied, and the three domestic entities were not entitled to
260 the reasonable cause defense.

This case represents one illustration of the abuse of domestic chained entities and the
importance of TCSPs in structuring shell entities and their illicit transactions.
Criminals and others trying to cloak their identity using shell entities create complex
layered entity networks which result in a labyrinth for forensic accountants and
investigators. TCSPs involved in providing these professional services are often of little help
in investigations, as they do not deal with the beneficial owners personally (Martinez, 2017;
Komisar, 2011). The TCSPs and other gatekeepers are often left untouched by authorities
even when a fraudster is caught and prosecuted in a shell entity scheme (Hicken and Ellis,
2015). Gatekeepers and TCSPs will continue to capitalize on the needs of white-collar
criminals, drug traffickers and others, making for a vicious cycle.

4. Policy reactions and responses to the beneficial ownership issue

4.1 US domestic
Forensic accountants and law enforcement officials have a very difficult time untangling the
intricate shell entity networks created by money launderers, tax evaders and other
criminals. Aware of this issue, the US Government has attempted policy initiatives to
improve shell entity ownership transparency.
The US Government is slowly moving forward on the beneficial ownership issue. In June
2016, FinCEN finalized its long outstanding beneficial ownership rule, which extends
customer due diligence requirements to the natural person behind a legal entity (Wolos and
Reuters, 2017). In June 2017, a bipartisan group of legislators introduced the Corporate
Transparency Act, which would require FinCEN to collect information on the beneficial
owner(s) of entities created in the USA if it has not been collected at the state level (Wolos
and Reuters, 2017).
The Foreign Account Tax Compliance Act, which became law in 2014, has assisted in
the fight against tax evasion (FATCA) [26 USC sections 1471 et seq. (2017)]. FATCA
looks at all types of entities to identify a US taxpayer’s “financial assets”, held
in “financial accounts” outside the USA (Levine et al., 2016). The terms “financial asset”
and “financial account” do not refer simply to bankable assets or accounts with regulated
financial institutions. They are broadly defined to include such things as equity interests
in partnerships, corporations and beneficial interests in trusts [Foreign Account Tax
Compliance Act (FATCA), 2017]. FATCA requires all non-US financial institutions to
search their records for customers with indicia of “USA person status, such as a USA
place of birth, and to report the assets and identities of such persons to the USA Treasury
Department” [Foreign Account Tax Compliance Act (FATCA), 2017]. FATCA intends to
ferret out US persons who may be hiding as anonymous beneficiaries of corporate
vehicles (Biedermann, 2015).
When launched, FATCA threatened to impose a 30 per cent withholding tax on certain
US source payments for non-participating persons. The 30 per cent tax was considered
necessary to get the attention of other governments (Levine et al., 2016). When over 100
countries entered into intergovernmental (bilateral) agreements with the USA and
pledged to incorporate FATCA into their domestic laws, banks and other regulated Role of shell
financial institutions became de facto responsible for implementing FATCA (Levine et al., entities
2016).

4.2 Other nations

In 2013, the risks of hidden entity beneficial ownership and various white-collar crimes
reached the attention of high-level political leaders at the G-8 summit in Lough Erne,
Northern Ireland. The G-8 countries announced the “G-8 Principles” a set of eight
261
principles, or a “beneficial ownership action plan,” to combat the abuse of entities via
legal arrangements [Lakhani, 2016; Biederman, 2015; Government, UK (UK Govt), 2013].
One significant outcome from this summit was that it led to the G-20 and Organization for
Economic Cooperation and Development’s (OECD) call for the adoption of a multilateral
exchange of information on beneficiaries (Lakhani, 2016; Biedermann, 2015).
Inspired by FATCA, in early 2016, the Group of 20 (G-20) countries committed to
advance towards the implementation of an automatic exchange of information targeting tax
evasion (Reis, 2016). The G-20 embraced the OECD’s proposal of a global model of automatic
financial data exchange known as the Common Reporting Standard (CRS) (Reis, 2016). The
CRS resembles FATCA with a global reach, seeking information about individuals and
entities residing in CRS-signatory jurisdictions but held outside their own countries of
residence (Reis, 2016).
As of March 2018, 102 countries have committed to the adoption of CRS. As of December
21, 2017, over 2,600 bilateral exchange relationships have been activated with respect to 78
jurisdictions (OECD, 2018a). Despite the implementation and cooperation of CRS countries,
information from academic studies, media leaks and governmental authorities show that
professional advisors and other intermediaries continue to design, market or assist in the
implementation of offshore structures and arrangements that can be used by non-compliant
persons to circumvent government regulation and commit various white-collar crimes
(OECD, 2018b).
Similar to FATCA, CRS obligations depend on an entity’s classification and country of
residence. Entities include corporations, partnerships, trusts and foundations that are
classified as reporting or non-reporting financial institutions, passive or active non-financial
entities (NFEs) (Reis, 2016). Financial institutions include banks, brokers, custodians and
investment funds. Reporting financial institutions are subject to a comprehensive set of
duties and obligations (Reis, 2016). TCSPs are generally financial institutions for CRS
purposes (Reis, 2016).
The way that CRS rules function demonstrates a clear policy focus on control apart from
ownership (Levine et al., 2016). CRS regulations blur the lines between controlling persons
and beneficial owners (OECD, 2018a). On the other hand, FATCA seeks to identify US
taxpayers’ beneficial ownership in non-passive assets, the notion being that the tax
liabilities are attached to income derived from ownership [Foreign Account Tax Compliance
Act (FATCA), 2017; Levine et al., 2016].
In November 2016, the G-20 nations published a set of principles for governments to
facilitate identification of the beneficial owners of shell entities (Smyth and Parker, 2016). In
the EU, the 4th Anti-money Laundering Directive (AMLD) requires member states to
introduce registries of company beneficial owners. The UK beneficial ownership registry
opened in April 2016, but it excluded trusts (Radon and Aehuthan, 2017). The UK has set a
precedent by creating the world’s first fully open register of beneficial ownership, albeit one
that only discloses those beneficial owners that meet a 25 per cent threshold (Radon and
Aehuthan, 2017). Wherever registries have become available in other European countries,
MAJ the quality of data (often collected but not verified) has been criticized by industry experts
34,3 (Wolos and Reuters, 2017).
In December 2017, an agreement was reached between the European Parliament and the
EU Council on the latest amendments to the 5th AMLD. The amendments attempt to
prevent the use of the financial system for funding white-collar crime. The following
measures will be introduced in EU member states:
262
Registers of beneficial owners of firms will be made publicly accessible and national
registries will be better interconnected.

Registers of beneficial owners of trusts and similar legal arrangements will only be
publicly accessible where there is a legitimate need.

Information on national banks and safe deposit boxes, as well as data on real estate
ownership, will be registered (only to public authorities) (KPMG, 2017).

Member states must verify beneficial ownership submitted to their registries
(Ivanovsky et al., 2017).

EU bank customers who send funds internationally must provide personal data so it
can be transmitted to all banks in the payment chain (O’Connor, 2017).

The potential implementation of the 5th AMLD requirements remains to be seen since few
member states took up the 4th AMLD option of implementing publicly accessible central
registries of corporate beneficial owners (O’Connor, 2017).
Moreover, as of March 1, 2018, an amended Companies Ordinance requires Hong Kong-
incorporated firms to obtain and maintain specified information on their beneficial owners
in a Significant Controllers’ Registry in English or Chinese. The registry is open to
inspection by Hong Kong law enforcement (Clifford Chance, 2018).
Beneficial ownership disclosure by itself is not the complete answer to the problems of
financial crimes and lost revenues. Such disclosure is most effective when accompanied by
well-drafted criminal and tax laws, sustained enforcement, modern technology and
sustained political will (Radon and Aehuthan, 2017).

5. Conclusion
White-collar criminals, terrorist financiers, tax evaders and other individuals form and use
various types of domestic and offshore legal shell entities to conceal their identities as
beneficial owners of assets or funds. A beneficial owner is a natural person who controls and
enjoys an asset and/or its benefits. Shell entities often have no significant assets or ongoing
business activity. The vulnerability of shell entities for illicit purposes is amplified when
they are privately rather than publicly owned. The extensive abuse of domestic and offshore
shell entities to conceal and transfer assets make them an important aspect of the work of
forensic accountants and law enforcement officers.
Trillions of dollars are located in secrecy jurisdictions around the globe. The
traditional stereotypes of financial secrecy and tax havens are inaccurate. The locations
that provide the most secrecy are the USA, Switzerland, Hong Kong, Singapore, the UK
and its overseas territories, Germany, Luxembourg and certain other nations — not
small, tropical islands.
White-collar criminals use various shell entities to commit a panoply of crimes such
as tax evasion, money laundering, securities and financial fraud, corruption and bribery.
Such criminals may choose from various types of legal structures: LLCs, shelf
corporations, LLPs, FLPs, asset protection trusts, IBCs and PIFs. Each entity type has
its own unique structure and legal characteristics. Nominees, nominee directors and
bearer shares are legal devices used in combination with shell entities to optimize Role of shell
concealment. entities
Three principal reasons explain the ability of white-collar criminals and others to
continue to hide their identity as beneficial owners and operators. One reason is that many
jurisdictions possess a legal framework that promotes lack of ownership transparency.
Another reason is that those who abuse shell entities need the services of gatekeepers, such
as accountants, lawyers and other TCSPs. A third reason is the layering or chaining of 263
numerous shell entities in different jurisdictions that make it virtually impossible for
forensic accountants and law enforcement officials to discern the real identity of beneficial
owners and operators.
Various global organizations, such as the FATF, and international groups, such as the
G-8 and G-20, have started to cooperate in dealing with the issue of hidden entity
beneficial ownership. Improved information exchange (e.g. that provided for in FATCA)
is one of the means being used to combat concealed beneficial ownership. The creation of
ownership registries is another goal that is starting to receive attention and government
action. The use of ownership registries is complicated by numerous issues and concerns,
such as privacy infringement, the burdens on financial institutions, infringements on
national sovereignty, bank secrecy, violations of contractual relationships and others.
Global efforts to improve entity ownership transparency are moving ahead but at a
modest pace.

Notes
1. One building in the Grand Caymans, known as Ugland House, is officially the registered home of
18,000 companies. Another address of interest is P.O. Box 3444, Road Town, Tortola, British
Virgin Islands. A Google search of this address yields more than 600,000 hits (Anonymous, 2013;
Hubbs, 2014).
2. The Panama Papers scandal shows the power of data analytics to uncover corruption. Open data
can place lots of data into the hands of those who can transform it into valuable information to
identify, trace and predict financial crime (Santiso and Roseth, 2017).
3. Two central themes are captured by the FCPA. The first is that no entity or person may offer or
pay anything of value to an official of a foreign government or certain international organizations
that would cause the official to misuse power or influence to benefit a business interest of any
entity or person. The second is that if any payment is made to an official, whether the purpose is
proper or corrupt, the payment must be reported in the payer’s financial statements according to
US GAAP (Athanas, 2010; Deming, 2006).
4. The most thorough study, entitled “Global Shell Games” by Michael Findley, Daniel Nielson, and
Jason Sharman, was done in 2012. The authors sent 3,773 formation agents a request posing as
consultants trying to establish untraceable shells. In offshore havens, such as the Cayman
Islands, few TCSPs took the bait. Dozens of TCSPs in America took the bait and offered such
services.

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Corresponding author
Carl Pacini can be contacted at: cpacini@mail.usf.edu

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