Lifting the lid on shell companies

With renewed focus on tax havens and illicit financial flows in the wake of the Panama Papers, pressure to reform is mounting.


African countries lose more than $50bn per year in illicit financial outflows, according to a report released in February 2015 by an African Union taskforce headed by former South African President Thabo Mbeki. Tax evasion facilitated by setting up shell companies accounts for a large chunk of this lost revenue.

In a shell company, control of the business is exercised through a chain of owners or companies, obscuring the identity of those who ultimately profit – the beneficial owners.

So the fact that tackling shell companies was made a priority at the international anti-corruption summit in mid-May, hosted by UK Prime Minister David Cameron, can be viewed as a small triumph. This, even if Cameron described Nigeria – whose President Muhammudu Buhari was widely perceived as one of the summit’s star performers – as “fantastically corrupt”.

Of the 40 governments represented in London, Nigeria and Kenya were among a group of six to agree to publish publicly accessible registers of who really owns companies in their territories as part of their “country commitments” at the summit.

Meanwhile, Senegal, South Africa, Tunisia and Tanzania committed to making beneficial ownership information publicly available in the extractive and logging sectors.

Although the summit failed to deliver on the big prize of getting the UK’s various overseas territories and crown dependencies, along with the US state of Delaware, to agree to publish their own registers of shell companies, the wheels have been turning on identifying shell companies for many months.

News laws in the pipeline

EU governments have until June 2017 to implement beneficial ownership rules contained in the bloc’s latest anti-money laundering directive. Under the new law they must make information on company structures accessible to banks, law firms and “any person or organisation that can demonstrate a legitimate interest”.

The Paris-based Organisation for Economic Cooperation and Development (OECD), for its part, has drawn up plans on base erosion and profit shifting (BEPS) that would prevent firms from re-routing profits through shell companies.

Meanwhile, the Extractive Industry Transparency Initiative (EITI) has promised to set out plans for its 51 member countries – 20 of whom are in sub-Saharan Africa – to publish public registers detailing the owners of mining, gas and petroleum shell companies by January 2017.

The EITI’s requirement that its member countries keep a publicly available register of beneficial owners of “entities that bid for, operate or invest in extractive assets”, including the identities of their beneficial owner(s), the level of ownership and details about how ownership or control is exerted, is broad enough to hold a wide range of corporate entities accountable.

“The rules have been drafted and we are now working with the countries to put together a road map on how it will be implemented,” says EITI deputy head Eddie Rich.

“The beneficial ownership standards in the EITI are just on the edge of what countries can achieve,” adds Eric Joyce, a former MP and now a member of the UK EITI’s stakeholder group.

Since shell companies typically operate under a complex web of ownership structures spanning a range of jurisdictions, a patchwork approach will only be effective up to a point. African governments need to draft and then rigorously implement their own national laws on company ownership.

Getting African houses in order

Apart from the Mbeki-led working group on illicit financial outflows, the African Union has shown little interest in getting its own house in order.

Sub-Saharan African governments have tended to be characterised by a combination of weak tax authorities and implementation of regulation, on the one hand, and limited law enforcement and judicial capacities to combat corruption and money laundering, on the other.

“The vested interest in governments is playing a part [in hindering implementation]. Those benefiting from the lack of implementation are often very powerful people in government,” says Alvin Mosioma, executive director of the Tax Justice Network-Africa.

“You can have a nice system but if you don’t prosecute people then it is completely useless,” says David Hotte, who leads an EU training programme for regulators and banks in the Greater Horn of Africa.

However, there were signs that attitudes were shifting even before the London summit.

Last July’s UN financing for development summit in Addis Ababa was dominated by demands from African and other developing countries for a global UN-run tax body to coordinate rules on beneficial ownership and tax transparency. The initiative was rejected by the US and Europe, but was a clear statement of intent from African governments.

“Lone ranger solutions cannot be effective in the long term,” says Mosioma, who adds that Europe and the US “will be fighting a losing battle if they don’t act globally … nothing stops Kenya or Botswana from following the example of the Cayman Islands or the Channel Islands.”

“We need a global beneficial ownership system,” says Open Corporates chief executive Chris Taggart, whose organisation makes data on companies publicly accessible.

He hopes that within five years “it will no longer be feasible for any government to do business with a company that doesn’t publicly disclose its owners.”

To Taggart, transparency makes good business sense for governments and companies. “You’re taking a risk if you do business with a company that you don’t know the owners of,” he says.

Getting the money back

Yet while transparency is all well and good, it won’t return the ill-gotten assets taken from African countries and stashed in tax havens and foreign banks.

Nor will new laws on anonymous companies aimed at tracing where illicit money has gone be enough for African leaders.

“Let these governments return all these stolen funds in London,” said Nigerian senator Chukwuka Utazi at an anti-corruption conference organised by the Commonwealth Secretariat the day before the leaders’ summit. “The UK may be born again, but the loot from Nigeria is still in the UK. It hasn’t been returned.”

This wish is unlikely to be fulfilled imminently, but the combined momentum of the debate and new legislation in the pipeline is gradually bringing it closer to reality.

Benjamin Fox

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