A PUBLISHED BOOK in 2014 rocked the world of offshore finance. “Global Shell Games” exposed the ease with which scoundrels could launder money or dodge taxes using bank accounts held by shell companies. The book, NGO activism and numerous leaks – the latest, earlier this month, being the Pandora Papers – have since pushed governments to increase corporate transparency. Britain and other countries have introduced public registers of business owners. America has passed a law ending the anonymity of shell companies.
But for what purpose? The book’s authors are putting the finishing touches on a study that suggests little has changed. Banks and business service providers (CSPs) – companies that start businesses for others – supposed to be on the front lines of the fight against financial crime do a terrible job of distinguishing between legitimate leads and those waving red flags.
The three academics behind the study – Jason Sharman of the University of Cambridge and Daniel Nielson and Michael Findley of the University of Texas at Austin – embarked on what they call a “mystery shopping expedition.” They registered shell companies with varied risk profiles and then sent over 30,000 emails to banks and CSPs in all countries of the world to open bank accounts. The riskier businesses of these companies were domiciled in places with high risk of corruption, such as Papua New Guinea or Pakistan. The safest came from Australia or New Zealand. In between were seashells from offshore havens of secrecy like the British Virgin Islands. In some missives, the authors and their team pretended to be legitimate businessmen; in others, as more cunning-looking supplicants or true disbelievers, such as people on sanctions lists.
The global fight against money laundering (AMLA) which has evolved since the 1980s as part of the Financial Action Task Force (FATF), a multilateral agency, relies heavily on the private sector to eliminate dirty money. Banks must follow the rules of “know your customer” and identify the actual owner or “beneficiary” of a potential customer.
This “risk-based” regime is broken, the study suggests. The authors found that the different risk profiles made “almost no difference” in the willingness of banks to open an account; CSPs were even less risk sensitive. (However, a Singaporean bank deserves credit for sniffing out a rat and saying “Hey, you guys from Global Shell Games!”)
The study shows that the hard work of AMLA is “pushed into a private sector that can’t or won’t do it,” says Sharman. “Banks are unable or unwilling to make the precise risk judgments required by the system because they use standardized and generic procedures. “
While the finding is largely consistent with the authors’ previous research, Sharman says he’s surprised at the level of insensitivity to risk, because “some of our approaches were ridiculously shady.” Other experts will also be baffled: Researchers interviewed by the authors before making any purchases predicted that the study would show the system was working much better than it was before the transparency reforms of the past five years.
The FATF knows the system is far from perfect. Last year, its leader, David Lewis (who has since resigned), admitted that the AMLA laws were rarely used effectively. He also implored bankers “to stop just ticking the boxes.” Even before this study, the agency was revising its approach. More than DIY is in order. ■
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This article appeared in the Finance & economics section of the print edition under the title “The shell games go on”
