At the latest with the revelations of the Panama Papers, mass media and wider public joined a chorus of outrage over the hidden financial assets of politicians, celebrities and criminal organisations. According to ICIJ, the Panama leaks expose “a system that enables crime, corruption and wrongdoing, hidden by secretive offshore companies”. In particular, the Panamanian law firm Mossack Fonseca has become one of the main protagonists in bribery and money laundering scandals. These leaked documents disclose internal files that contain information on 214,488 offshore entities connected to people in more than 200 countries and territories.
What are the services of law firms like Mossack Fonseca? What are shell companies, offshore entities and so-called tax havens? Can they be used for legitimate or illegitimate businesses? What does the current legislation say? Here is a brief guide and explanation of what has been going on for decades in the hidden financial world.
To put it simple, shell companies are corporations without any active business or operations, or companies that passively own the shares of other companies. Shell companies are also referred to as international business companies, personal investment companies, or “mailbox”/”letterbox” companies. Generally, establishing a shell company is no different from setting up any other type of company.

There are legitimate purposes for shell companies, such as helping entrepreneurs gain cheaper and easier public listings on a stock exchange despite minimal sales turnover. Another example of legal use of shell corporations occurs in the case of hidden financial interactions between two companies: if “Company A” does not want to be associated with “Company B”, for instance because of its poor reputation, they can create a shell corporation through which the transaction can be concealed.
Nevertheless, this mechanism is being used to hide corruption and illegal financial transactions such as money laundering and tax evasion. Shell companies have the essential characteristic of being able to obscure the true ownership of an asset. By disguising both the ownership of the shell corporation and its activities, it is relatively simple to conceal the true origin and intent of large amounts of funds that might have been obtained through illegal actions such as drug dealing or other criminal processes.
Shell companies are often formed in so-called tax havens. There are dozens of tax havens besides Panama such as Switzerland, or Luxembourg and many countries in the Caribbean like the British Virgin Islands that provide little or no tax liability and financial information to foreign tax authorities.
The debate surrounding the legality of shell companies is characterised by pro-arguments that in particular focus on the distinct use and counterarguments that question the entire system of shell companies asking why a company should be allowed to hide financial transactions and assets.
Does law enforcement clarify the controversy? Here is the key issue of the discussion: law avoidance is possible and legally permitted – law firms like Mossack Fonseca are specialised to “protect” their clients from the law. Often, governments that harshly criticise tax avoidance and offshore finance are themselves beneficiaries of those strategies. In most cases public anger, accusations of being opportunistic or unethical and undermined political credibility bring about accountability of wrongdoings, not the judgement in a courtroom. Current laws do not require the creators of shell companies – such as Mossack Fonseca – to report who actually controls them. Further, the compliance with international anti-money laundering obligations remains low and inefficient since financial institutions may be negligent or incapable to perform due diligence to the appropriate depth. Anti-Corruption International fights for more transparency and less “legal corruption” in order to stop the immoral businesses of shell companies……

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