In 2009 Dr. Jason Sharman, a professor at Griffith University, conducted a study with some of his students in which they intentionally tried to legally set-up shell companies in various countries, without having a real business and without divulging their true identities. They tried in 22 countries and found that in 13 of them they were successful, including in industrialized countries like the United States, the United Kingdom and Canada. In these countries it was possible to legally establish a company with no real operations and without revealing the true identities of their shareholders. Furthermore, in some cases, they were able to open bank accounts and in others the whole process took only one day. Clearly, countries are not doing enough to regulate companies.
In light of the news regarding the Panama Papers, where leaked documents from a Panamanian law firm revealed that individuals from many countries in the world use offshore companies for different activities, it is suitable to reflect on the topic. The sensationalism value of the report is mainly due to the disclosure of the many famous and influential people that use this figure to manage their affairs – which before were protected under the anonymity offered by the corporate veil overseas. But, is this anonymity legal? Is the corporate veil always a means for unlawful behavior? Are offshore companies always bad?
“Countries are competing in a globalized market where a good business environment and the reduction of the tax burden become competitive advantages to attract revenue. The fact that an investor chooses to establish his or her company in another country in order to take advantage of these benefits — provided by the governments themselves — is not awful.”
The corporate veil doctrine refers to the limited liability and anonymity that shield the identity of the true owners of a company. It is a tool to protect capital investors of a business designed as a wall to separate their personal liability from the obligations of the company as an independent legal entity. Its main purpose is to allow a shareholder to invest in a company without putting his own assets at risk.
The challenge of the corporate veil doctrine is that this legal protection to investors also encompasses the protection of their identities. No doubt that the corporate veil is an important assurance in the business world. Without it, a majority of capital investors would not dare invest out of fear of being affected personally. Nevertheless, this protection could also give rise to situations of abuse from persons who seek to shield themselves behind the anonymity it provides to carry out unlawful activities.
For example, shell companies – like the ones that Dr. Sharman and his students successfully were able to set-up – are established and exist legally, but do not carry out any commercial activity in practice. Their formal appearance is proper and they have all the necessary paperwork to support their alleged operations. However, it is all a legal facade that allows them to cover up the true objective of hiding marginal or non-existing operations.
Questions on the Panama Papers should focus on the fact that some of these companies are shell companies; and not on the fact that they are offshore companies per se. Countries are competing in a globalized market where a good business environment and the reduction of the tax burden become competitive advantages to attract revenue. The fact that an investor chooses to establish his or her company in another country in order to take advantage of these benefits — provided by the governments themselves — is not unlawful. What must be questioned is the ultimate purpose for which these companies are established, and not their nature of simply being offshore. Let us not forget that the Panama Papers investigation was carried out by journalists, and not by lawyers, with a scandalous focus because of the celebrities it uncovered.
Evidently, Dr. Sharman’s study indicates that countries can do more to ensure that new companies that are born truly are going to carry out a legitimate social and commercial purpose, and that they will not only serve as empty shell companies. However, they have to act responsibly. We cannot demonize legal figures or institutions such as offshore companies or the corporate veil to accomplish this, simply because they may be subject to abuse. Regulations must be strengthened to limit the possibilities of these abuses, but without losing sight of the role that offshore companies and the corporate veil play as facilitators of international business and investment.
