The use of shell companies has increased over the years, and as well as their traditional use of decreasing tax liability… they are now commonly created to hold a parent entity’s assets, to facilitate mergers or to protect trade secrets. The use of shell companies is not just limited to decreasing the burden of high taxes or for other legitimate business reasons. A 2011 World Bank Report, “The Puppet Masters”, investigated over 800 cases of corruption between 1980 and 2010, almost all of which involved the use of a shell company. Indeed, shell companies are sometimes used for illicit purposes including money laundering, bribery, and tax avoidance – they are the ideal corporate vehicle through which companies and their leaders can conduct such illicit behavior because they offer a high-level of anonymity for their true or “beneficial owners”, making it difficult for authorities to trace such crimes to back to the source. – Compliance Insider
The business advantages advantages are clear: secrecy, tax avoidance… those are the two primary benefits. But those are some incredibly large benefits. If a corporation could hide profits or hide assets, it can not just benefit the shareholders but also the executives that manage the secrecy and tax avoidance.
What the right thing to do is very difficult question. If no competitor is using shell corporations, then the right thing is clearer. Despite the legal loophole having been available and known by legal professionals for decades, it was considered immoral and uncouth to use shell corporations fifty years ago. Now, even the CEO of Apple, the largest corporation by valuation, is unapologetic about being “smart” to avoid taxes. Tax accounts and lawyers are quick to point out that tax avoidance is legal but tax evasion is illegal. And all human’s in their right mind would know that not all legal activity are moral, as is not all illegal activity are immoral.
Use of shell corporations, then, comes down to choosing whether it is the right thing to lose some market advantage and profits to shareholders for contributing adequately to an economic system that benefits to held corporation that actually produces products and services. It comes down to allegiance.
Apple, I’m picking on Apple because it is the largest company in the world, but it definitely is not leading the two-faced allegiance of corporations. Apple, like many other companies, have decided that it can be a Irish corporation even though it is headquartered in California. It is basically stating that it is legally Irish but not actually. The true test of such things is this: in a war between the nations of its legal headquarters and its business headquarters, and if these nations asked Apple to contribute to the war effort the way companies did during World War II, which side will Apple choose? Or maybe it won’t choose a side at all and flee or just take advantage of the situation on both sides somehow. Ultimately, its action will either make it American or Irish or a corporation of some other nation… or… a sociopath. And that’s the disturbing thing about this moral dilemma. While the first three statements reveal Apple’s true identity as a national interest or a corporation with no backbone, but we also allow it to be a sociopath when we don’t allow people to be so. And this isn’t an argument for allowing people to be sociopathic. This is an argument to disallow corporations from being sociopathic. Don’t allow shareholders be sociopathic through a legal framework. Considering only wealthy people own shares of corporations – whose ever heard of a homeless who died of being homeless – why do we allow wealthy people to be sociopathic?
How do you like applying moral philosophy to Compliance?
Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is a member of ACAMS and ACFE.