After the Panama Papers: A Private Law Critique of Shell Companies

• Author: Delphine Nougayr`ede
• Position: Lecturer-in-law, Columbia Law School, Senior research fellow, Columbia Center for Global Legal Transformation, practicing corporate and commercial lawyer. The research for this article was supported by the Max Planck Institute for Comparative and Private International Law in Hamburg, to which the author expressed her thanks. She also thanks the...
• Pages: 327-367

After the Panama Papers: A Private Law Critique

of Shell Companies

D

ELPHINE

N

OUGAYR `

EDE

*

I. Introduction

“Shell companies,” summarily defined as companies devoid of physical or

human substance,

1

continue to regularly appear at the center of international

scandals. The Panama Papers stand out as the most memorable of the

“Papers” and “Leaks” series that made media headlines.

2

To most

international practitioners of corporate finance and transactions, however,

these revelations did not come as a surprise, as shell companies have been at

the center of corporate and tax planning for decades. A few alarm bells were

rung by the Organisation for Economic Co-Operation and Development

(OECD) and the Financial Action Task Force (FATF) in the early 2000s

3

in

connection with the use of these structures for tax evasion and money

laundering, but the critique took on a new dimension after the 2008 financial

crisis and seems now to have become the prevailing orthodoxy in policy-

making circles. In 2015, for example, the United Nations Conference on

Trade and Development (UNCTAD)’s annual World Investment Report

* Lecturer-in-law, Columbia Law School, Senior research fellow, Columbia Center for

Global Legal Transformation, practicing corporate and commercial lawyer. The research for

this article was supported by the Max Planck Institute for Comparative and Private

International Law in Hamburg, to which the author expressed her thanks. She also thanks the

organizers and participants of a 2018 workshop at SOAS University of London on the topic

“Sovereignty and Offshoring,” at which a prior version of this paper was presented, and in

particular Kristin Surak of SOAS and Tonya Putnam of Columbia University. All errors are her

own.

1. On this definition of “shell companies,” see infra Section II. Generally, in this article, the

terms “company” and “corporation” will be used interchangeably, as will “company law” and

“corporate law.”

2. The most recent leaks, at the time of writing, were the 2017 Malta Files and Football

Leaks (both produced by the European Investigative Collaborations, a consortium of

journalists) as well as the November 2017 Paradise Papers and 2018 West Africa Leaks

produced by the International Consortium of Investigative Journalists (who were also at the

origin of the 2013 Offshore Leaks, 2014 LuxLeaks, 2015 Swiss Leaks and 2016 Panama Papers).

See Shu-Yi Oei & Diane Ring, Leak Driven Law, 65 UCLA L. R

EV

. 532, 545–58 (2018) (for a

summary of data leaks up until the Panama Papers).

3. F

IN

. A

CTION

T

ASK

F

ORCE

, FATF 40 R

ECOMMENDATIONS

(2003); F

IN

. A

CTION

T

ASK

F

ORCE

, G

UIDANCE ON

T

RANSPARENCY AND

B

ENEFICIAL

O

WNERSHIP

4 (2014); F

IN

. A

CTION

T

ASK

F

ORCE

, T

HE

M

ISUSE OF

C

ORPORATE

V

EHICLES

, I

NCLUDING

T

RUSTS AND

C

OMPANY

S

ERVICE

P

ROVIDERS

(2006); O

RG

.

FOR

E

CON

. C

O

-

OPERATION

& D

EV

. [

HEREINAFTER

OECD],

B

EHIND THE

C

ORPORATE

V

EIL

: U

SING

C

ORPORATE

E

NTITIES FOR

I

LLICIT

P

URPOSES

3

(2001).

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328 THE INTERNATIONAL LAWYER [VOL. 52, NO. 2

dedicated its policy chapter to the “pervasive” and “outsized” use of offshore

investment hubs through the use of “letterbox companies” by multinational

corporations and the resulting decline in tax revenues received by developing

countries.

4

The following year, its policy chapter analyzed the “blurring” of

investor nationality from multiple tiers of corporate ownership, transit

investment through third countries, round-tripping and “mailbox

companies,”

5

concluding that overly-complex corporate structuring made it

increasingly difficult for governments to devise and implement effective

policies on foreign investment. Even within a legal system like Britain—

traditionally very deferent to private ordering in general—a leading scholar

wrote:

[T]here is a sense, which does not really go away, that as corporate

structuring has become more and more focused on the maximization of

assets and profits, which is in turn brought about by managing to make

liabilities, whether personal, trade or fiscal, somehow vanish, the

common law has been rather too ready to shrug its shoulders.

6

Much of this corporate structuring, of course, relies on the use of shell

companies registered in a small number of well-known hub jurisdictions.

The response at present has been to accelerate intergovernmental measures

that were already under way to combat tax evasion and money-laundering.

7

These measures involve creating new stores of information through two

types of channels: first, exchange of financial account information across

borders,

8

and second, domestic registries of beneficial owners of companies.

9

It will be a few years before the empirical effects of these new measures can

be evaluated, but it already seems they suffer from a number of inherent

weaknesses. They are, first of all, geographically incomplete, due to the

4. U.N. Conference on Trade and Development, World Investment Report 2015: Reforming

International Investment Governance, at 189–90, 200, U.N. Doc UNCTAD/WIR/2015 (2015).

5. See U.N. Conference on Trade and Development, World Investment Report 2016: Investor

Nationality: Policy Changes, at 144, 160, 185–87, U.N. Doc UNCTAD/WIR/2016 (2016)

(“[C]omplex ownership of investment projects or foreign participated companies—i.e. multiple

cross-border ownership links to the ultimate owner through intermediate entities. . . at a

minimum . . . make the application of rules and regulations on foreign ownership more

challenging.”). A particularly salient problem is “how to avoid investors using artificial entities

(mailbox companies) . . . to unduly gain access to treaty benefits.” UNCTAD refers to this as

the “multilateralizing effect” of ownership complexity.

6. A

DRIAN

B

RIGGS

, P

RIVATE

I

NTERNATIONAL

L

AW IN

E

NGLISH

C

OURTS

, ¶ 10.32 (2014).

7. Press Release, Economic and Social Council, International Cooperation to End Tax

Crimes Crucial for Achieving Sustainable Growth Agenda, Speakers Say as Development

Financing Forum Concludes, U.N. Press Release ECOSOC/6840 (May 25, 2017).

8. See Automatic Exchange of Information, OECD, http://www.oecd.org/tax/automatic-

exchange/ (last visited Feb. 3, 2019); see also Brief on the State of Play on the International Tax

Transparency Standards, OECD at 1 (Sept. 2017), https://www.oecd.org/tax/exchange-of-tax-

information/brief-and-FAQ-on-progress-on-tax-transparency.pdf.

9. See, e.g., Council Directive 2015/849, art. 114, 2015 O.J. (L 141) 5, 30–31 (EU).

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2019] AFTER THE PANAMA PAPERS 329

resistance of certain jurisdictions and particularly the United States.

10

Secondly, even in the jurisdictions that are participating in these measures,

effectiveness will be dependent on national regulators and enforcement

agencies and on the extent of resources devoted to them by national

governments. Many of these domestic agencies will, furthermore, face a

conflict of interest between their desire to participate in multilateral

initiatives (if only for reputational reasons) and the political need to support

domestic professional constituencies economically dependent on corporate

and financial services to non-residents. A third difficulty is that the

effectiveness of the new measures will depend on the quality of information

that is maintained by local service agents, which as will be explained below

can be problematic. In the face of the new disclosure rules, novel methods

of structuring and concealment will probably also be devised by the

corporate services professions.

11

It is to be feared, therefore, that the new

regulatory measures will not be enough to put an end to the harmful effects

of shell company proliferation in the global economy.

12

In this context, if one accepts that there is indeed a problem with shell

company proliferation in the first place,

13

should it not then be necessary to

10. On the United States and its position on exchange of information and corporate

transparency, see below.

11. See, e.g., M

ARK

F

ENWICK

& E

RIK

P.M. V

ERMEULEN

,F

OCUS

14: D

ISCLOSURE OF

B

ENEFICIAL

O

WNERSHIP AFTER THE

P

ANAMA

P

APERS

50 (2016) (“Much of the commentary in

the immediate aftermath of the release of the Panama Papers was characterized by . . . calls for

stricter and more stringent rules that attempt to force more information into the public domain.

Unsurprisingly, the regulatory strategies particularly focus on the disclosure of ‘ultimate

beneficial ownership’ as a prerequisite in preventing tax evasion, tax avoidance, money

laundering, and corruption (for example, see Economist 2016).”). The authors then comment

that

[i]f people are determined to conceal, or at least obscure, their beneficial ownership

of a company, then they are going to be able to find the techniques to do so. There

are enough lawful strategies available to make this possible even without having to

have recourse to misrepresentation. From this perspective, simply ratcheting up the

disclosure requirements to force the information into the public domain seems

unlikely to be effective and merely encourages new and more imaginative means of

circumvention.

Id.

12. It is revealing that very few consolidated figures are available on the number of global

incorporations, particularly in offshore hubs. In 2013, The Economist estimated total

incorporated companies at 1,045,000 in Hong Kong, 945,000 in Delaware, 473,000 in the

British Virgin Islands, 92,000 in the Cayman Islands, 33,000 in Jersey and 17,000 in Bermuda;

these figures were on the basis of combined sources and seem inferior to other estimates. See

Matthew Valencia, Storm Survivors, T

HE

E

CONOMIST

, Feb. 16, 2013, at 2. The OECD’s

estimate of BVI incorporation numbers in 2013 was 850,000. See OECD, G

LOBAL

F

ORUM ON

T

RANSPARENCY AND

E

XCHANGE OF

I

NFORMATION FOR

T

AX

P

URPOSES

P

EER

R

EVIEWS

:

V

IRGIN

I

SLANDS

(B

RITISH

) (2013).

13. The idea that there is a problem tends to be resisted in the legal and finance professions, in

sharp contrast with the general public’s indignation that followed the Panama Papers and

subsequent scandals. As US President Barack Obama pointed out at the time, “the problem is

that a lot of this stuff is legal, not illegal.” See Rupert Neate & David Smith, Obama Calls for

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