Good Offices to Bad Governance: Towards International Rules against the Abuse of Off‐shore Companies
| Date | 01 April 1998 |
| DOI | https://doi.org/10.1108/eb027178 |
| Pages | 120-127 |
| Published date | 01 April 1998 |
| Author | Paolo Bernasconi |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control —
Vol.
2 No. 2
Good Offices to Bad Governance: Towards
International Rules against the Abuse of Off-shore
Companies
Paolo Bernasconi
POSSIBILITIES OF ABUSE OF
OFF-SHORE COMPANIES
Corruption, government inefficiency, the lack of
transparency in the financial markets, the uncon-
trolled mix of public sector and private economy
activity, the deficient regulation of the conflict of
interest and the escalation of organised crime, con-
stitute as many obstacles to the economic develop-
ment and welfare of
a
country. The financial crises
also caused by the simultaneous and converging
input of all these factors is proof enough. Lately
the tendency is to search for examples in Asia,
Africa and Eastern Europe even though, in a not so
distant past, examples just as numerous and serious
can be found in all the other continents.
The secrecy of economic activity is a common
denominator in all these negative factors; in fact,
hidden economic activity not only escapes taxation,
but also hinders the implementation of the regimes
of authorisation and supervision which are indis-
pensable for the proper operation of the industrial,
financial and commercial markets. Secrecy also
represents the common denominator for criminal
activity, especially when it is a matter of concealing
the associated illegal proceeds. The experience of
the judicial, supervisory and fiscal authorities indi-
cates that one of the preferred instruments of
secrecy on the international market is made avail-
able by the so-called off-shore countries, namely
those countries which use every means to attract
capital from other countries. In fact, numerous
off-shore countries offer investors and foreign
operators a level of confidentiality which often
coincides with absolute secrecy both with respect
to the market and to foreign government authori-
ties.
It should therefore not be surprising that in all
the major cases of international economic crime, as
in those of international money laundering,
off-
shore companies have been used. Basically, it is a
question of companies which have no industrial or
commercial business, no offices or personnel, but
only an address (thus the names 'Briefkastenge-
sellschaften', 'sociétés de domicile', 'tax shelters'
etc) and which are set up exclusively to conceal the
identity of the individual or company that does,
indeed, carry out one or more specific commercial
or financial transactions. The definition of FATF
Recommendation No. 11 is the following: 'institu-
tions,
corporations, foundations, trusts, etc that do
not conduct any commercial or manufacturing
business or any other form of commercial opera-
tion in the country where their registered office is
located'.
This type of company is not only favoured by
hundreds of thousands of fiscal swindlers, but also
by those who commit financial crimes, corruption
of public officials, illicit dealings (such as traffic in
drugs,
psychotropic substances and precursor sub-
stances, unauthorised weapons, prohibited cultural
goods, dangerous and toxic waste and nuclear
material, traffic of women and children for prosti-
tution, etc) and members of organised crime.
Indeed, this type of company constitutes the ideal
instrument for those criminal activities which are
conducted on a large scale and over a length of
time.
These are criminal activities which can lead
to the liquidation or bankruptcy of industrial,
commercial or financial groups. The bankruptcy of
such groups could, in turn, result in a chain of
liquidations and bankruptcies such as to threaten
an entire economic sector of a given country and,
consequently, the latter's economic and monetary
stability and, in the final analysis, political stability.
It must, therefore, be concluded that there exists
a direct line of cause and effect between this sort
of company and the specific factors of economic
crisis;
off-shore countries render good offices to
bad governance.
In this field the international community has, so
far, not been able to react adequately. The most
important measure has been adopted in the context
of the OECD, more specifically by the Financial
Action Task Force on Money Laundering, which
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