People who are involved with international company formation and banking services have noticed an increase in stricter identification and due-diligence requirements when dealing with service providers operating in the many offshore international financial service centers. These rigid identification rules stem from a set of 40 recommendations or guidelines, which the G-7, the group of the seven most-developed and wealthiest countries at the time 25 years ago (Canada, France, Germany, Italy, Japan, United Kingdom, and the United States) adopted during a summit in the year 1989. During this summit a special unit, the Financial Action Task Force (FATF), was created to monitor the implementation of these recommendations and apply sanctions against countries that fail to implement the FATF recommendations as directed and comply with them.
In 2000, after 11 years, the FATF issued its first blacklist with 15 so-called “non-cooperative countries” in the international fight against money laundering. Typically non-cooperation is manifested as unwillingness or legal inability to provide foreign law enforcement officials with information related to the beneficial ownership of shell companies. A shell company is a company with minor assets that has been created to hold a bank account and conduct international business transactions. The most recent FATF blacklist was issued in November 2013, with XX non-compliant countries.
The blacklisting of certain countries, especially small developing countries that are considered “tax havens,” may be unfair. A recently published article on shell company service providers entitled “Global Shell Companies,” conducted by researchers at the University of Texas, Brigham Young University, and Griffith University, revealed the following interesting findings:
• Nearly half (48 percent) of the service providers worldwide interviewed during the researchers’ investigation reported that they did not ask for proper identification and 22 percent did not ask for any photo identification documents at all when a client expressed the intent to form a shell company.
• Contrary to a common sense opinion, service providers creating shell companies in tax haven countries were significantly more likely to comply with the regulations than providers in OECD countries such as the United States and the United Kingdom.
• Providers in poorer, developing countries were also more compliant with global standards than those in rich, developed nations.
No one would be surprised to learn that none of the countries comprising the G-7 that created that FATF has ever been blacklisted by the FATF as a non-compliant jurisdiction. Common sense tells us that certainly these countries must be above reproach! However, we were indeed surprised when we took note of the news that in April 2014, the US government announced plans to enact legislation that would help law enforcement investigate the use of shell companies. This recently introduced legislation will require all shell companies formed in the USA to obtain a federal tax identification number. The implication here of is that, once a shell company is forced to take a federal tax identification number, the IRS would be able to collect the information on the beneficial ownership of that company. This will apply to all shell companies formed in the US.
So even though, the FATF has been monitoring the use of shell companies for 25 years, it is only now, in 2014, that the USA, one of the major initiators of the movement against the use of shell companies, is announcing plans to enact legislation that is in line with the FATF list of recommendations?!
We here at Sadekya welcome the implementation of these regulations in the USA, as we believe it will create a more level playing field for the many small island economies with a high dependence on revenues from the delivery of international financial services.
