In previous articles of this series, I have provided a few details of corporate law.
The Offshore Company Money Machine
I will bring up examples of how corporations are put to nefarious uses.
As mentioned earlier, shareholders in corporations are not liable for failures of the corporations they own. The shareholders may lose their original investment, but no more.
But there is a different legal obligation on the directors of the corporation. The directors have been elected or appointed to make the big decisions of the corporation. Their legal responsibilities do not include the business decisions, so the directors can lead their company to financial ruin — and legally escape that failure. Rather, the directors are obligated to keep their company operating within the law. If the corporation breaks the law, the directors can be taken to civil and criminal court.
Unfortunately, putting a legal case together is difficult. So most errant directors escape their legal consequences, similar to the bad business decisions they may make.
One good example is the board of directors for British Petroleum after the BP Macondo disaster in 2010. The board interfered with the culture of this well, forcing well trained petroleum engineers to make bad engineering decisions. In essence, BP Macondo was more of a psychological than a technical disaster. While the board was fired, none of them faced any real consequences. Some found other highly-paid executive positions in the petroleum industry. Other directors retired into a very comfortable retirement.
BP Macondo & Cognitive Dissonance
The Corporate Minute Book
When I incorporated my first business in 1985, my lawyer presented me with my corporate minute book. Apparently, I was named as the sole director. And I had three board meetings with myself, with a time and place attached to each of these meetings. And I decided on certain things. But these meetings never really happened. My lawyer just put the words together to say I held a meeting with myself and decided on things my lawyer told me to decide. In essence, the minute book was giving a show of proper corporate governance, with minutes of official meetings. But it was a charade.
I didn’t have enough capital to start my business. So I had to find outside shareholders. Then I had more “meetings” giving the sole director (me) the right to issue shares in exchange for money. In another “meeting,” I acknowledged the new shareholders. And in another “meeting,” I appointed four shareholders as co-directors. My lawyer kept the charade going in the minute book, for a small fee, of course.
In the next two years, I would sometimes call these directors up individually to get their perspectives on the business’s next moves. When they had their say, then I would decide things. We had only one formal meeting. This would not be considered as good corporate governance. As time passed, one director resigned. The other two seemed annoyed with me calling them. So I no longer called them. But they were still listed as directors until my business failed.
I am making this point because many small corporations tend to not follow the laws for good corporate governance. In my situation, it was too impractical to set up board meetings for this small business. In was too expensive to pay my lawyer to write up minutes.
By law, corporations are obligated to report at least one director. With this name, there should be some individual responsible for the behavior of the corporation. That name(s) is sent to the corporate registry. But I doubt the government verifies this person has agreed to serve as director. That person may not even exist.
In the next section, I discuss a hypothesis as how this feature of corporate registry serves to launder money for organized crime.
A long lineup at my bank
My bank was busy. Maybe 10 people waiting for a teller. As we were waiting and fidgeting in line, I got a little look at the bundle the fellow in front of me was carrying. He had about five or six stuffed brown envelopes. One had “Royal Bank” written on it; one had “Bank of Montreal”; one had “Toronto Dominion Bank.” It seemed he had business with all the Canadian charter banks on that day.
The fellow got called to the teller. I was called next. My teller was next to the fellow’s teller. I could see that the fellow opened one envelope, and he and the teller were counting bills. The fellow was making a big cash deposit.
I surmised that this fellow was a runner for organized crime. He was depositing proceeds of crime to various bank accounts. There is a limit of how big cash deposits can be before the banks have to report the deposit to Canadian authorities. I believe it was $10,000. All those envelopes this runner had were just under this limit.
There are some documents for a corporation to set up a bank account. The corporation’s lawyer can set up a runner with the right documents, like the articles of incorporation and/or a minute authorizing the corporation to open an account in this bank.
So organized crime gets a lawyer to set up a new corporation — and that corporation gets a bank account to launder money. That corporation probably has a few more bank accounts.
In Holding Companies, I told you of how the government refused to recognize the demise of my second corporation. Even though the government to sent me ugly letters to pay up, it never did investigate me.
In a like manner, bank accounts working for organized crime have a shelf life of several years. They can keep accepting cash deposits before the government senses something funny is happening. And in that time, that bank account will move that money to the holding company.
Neither the front company nor the holding company ever files a tax return. It will take several years for the tax authorities to notice and take action. By then, these companies have been shut down, and no longer deposit money. Yes, the information is still on the corporate registry. Most likely, the director and original shareholders cannot be found.
The money moves through several holding companies until it finds legitimate businesses to invest in. These businesses could be real estate, restaurants, stock market holdings, repair shops, venture capital investing, farms, etc. etc. & etc. Then this higher-level holding company has the appearance of a legitimate business. It files a tax return and pays a corporate tax on the profit. But the business empire probably has ways of reducing that profit, like through offshore accounts.
But the seed of these legitimate businesses was organized crime. It would be very difficult to trace the business back to its seed. There were many business layers that no longer exist. Money was moved from quick-and-dirty bank accounts to other bank accounts and finally into the legitimate businesses. Then these bank accounts closed; the original company disappears, and the holding company owning the original company also disappears.
If the director(s) of these companies is found, that director can say: “I had nothing to do with that company. They used my name without my permission.”
It is easy to set up a corporation anywhere in the western world. And with a corporation, bank accounts are easy to get. And bank accounts can be run for several years before suspicions are raised.
We could provide a more robust identification and reporting mechanism for corporations. But this will make it more difficult for legitimate businesses to start and operate. And it would be expensive to monitor this system. In other words, when we make business easier for legitimate businesses, we make it easy for nefarious businesses as well. There is a trade-off.
This runner-in-my-bank story is about 30 years old. Organized crime might have found better ways to launder since then. And I should admit that I have conjectured a reason for that runner’s action on that day. While I have no proof, I also have no other logical reason for what I saw that day.
Housing Shortage in Vancouver BC
Like many Canadian cities, metropolitan Vancouver has experienced a housing shortage. House prices went up. Rents went up. The city has become more unlivable for middle-class people.
One of the reasons for Vancouver’s shortage were wealthy Chinese businesspeople. They were buying up Vancouver residences in anticipation of China cracking down on its capitalists. The houses and condos would provide a place for them to escape to. They could also be turned into more liquid capital if needed.
And these residences were not rented out. They remained empty in a city that needed more housing. The wealthy Chinese businesspeople did not need the hassle of renters.
Take my next assertion with a grain of salt. Very few of these residences were owned by someone in China. Rather they were likely owned by a holding company registered in Canada. And that holding company was owned by another holding company: maybe another Canadian layer, maybe a Chinese holding company, or maybe an offshore holding company in Bermuda or US Virgin Islands or Switzerland.
A lot of the world’s real estate is owned by holding companies. And each holding company is an opportunity to avoid taxes. Each holding company is also an opportunity to evade taxes. These properties have such a convoluted ownership that make effective tax auditing a difficult task.
My Partial Solution
Whenever a property is sold, the buyer’s lawyer investigates whether the seller actually owns that property. That lawyer refers to the “land titles” agency in government that records the true owners of all properties. If the seller is legitimate, the transfer of property can proceed. When the transaction is complete, the new owner is listed on the title deed.
With this bureaucracy working well in most places, the transfer of ownership could become a point of taxation. I suggest a 10% tax on purchase amounts greater than $1,000,000. In this way, the little people are not hurt when they buy/sell residences. The tax implications become part of the transaction price negotiated between the buyer and seller. The government gets some tax revenue, provided by the wealthy.
American Illegal Immigration
Illegal immigrants have become an integral part of the American economy. If the illegals are somehow deported, a lot of low-paying jobs will go unfilled. Less lettuce getting to grocery store shelves; fewer laborers at the construction sites; fewer workers cleaning hotel rooms; fewer nannies watching over rich people’s kids. Classical economics says this work will have to be paid higher wages to find the workers. The USA is not ready to give that raise.
So there has been an informal contract between the USA and its illegals. If they keep their heads low and do the dirty work, they can stay in the country for decades. And there seems to be an informal access to health care and education for their children. While it is an uneasy existence to be living illegally, this unease is usually better than what they had in their home country.
When an American or American business hires a new worker, it is incumbent on the employer to prove that this worker is legal to work in the USA. Usually the Social Security Number (SSN) is the criteria to prove legality. If the prospective employee does not have this number, he/she should not be hired. If the employer is found to hire illegal workers, that employer might be subject to a big fine or penalty.
Some illegal employees may obtain fake identification on the black market. So this might be one avenue for illegal immigrants to appear to be legal. But it would not be cheap for the immigrants to get this documentation.
There is another way to put illegal immigrant worker and the final employer together.
An entrepreneurial person sets up a corporation called 34569 USA Ltd. The purpose of this corporation is to be an agent for the illegal workers. It provides the workers to the final business. It also promises to take care of the paperwork, which includes proving legality. When the final business hires the 34569 USA Ltd., the final business need not do the due diligence of proving legality of the workers.
The final business pays 34569 USA Ltd. Then 34569 USA Ltd. pays the workers, probably in cash.
When the government authorities catch on to the illegal employment, the final business can claim that 34569 USA Ltd. said it would take care of the paperwork. The final business has a signed contract with 34569 USA Ltd. to prove the deal. The final business is off the hook.
Then the government authorities look for 34569 USA Ltd. It has been shut down. The shareholder of 34569 USA Ltd. is a holding company that has been shut down. The director is fake. There is no one to prosecute.
Next year or next month, the final business gets a cold call from a new agency: 34570 USA Ltd. It promises to find new workers. The manager for 34570 USA Ltd is the same manager for 34569 USA Ltd. And most of the workers look similar. Strange, isn’t it?
Like corporations for organized crime, these agency corporations and their holding companies have no intention of following laws. The agency corporation does not pay payroll taxes on behalf of their employees. It is obviously making a profit, but it does not file a tax return.
The people behind the agency corporation and its holding company know they have some time before the government authorities catch on. Before that time, these corporations are shut down. New corporations are started up. And there could be some understanding that the tax authorities do not rock this boat too hard.
Like organized crime, money moves through several holding companies before the agency people can use it for their own pleasure. Maybe it goes offshore, then comes back to the USA. Maybe taxed; maybe not taxed.
And the final business gets the labor it needs, probably at a cheaper rate than legal workers would agree to.
Again, I can’t prove this money movement. But I haven’t heard of any other explanation how so many undocumented workers can work in the USA for decades.
International Companies
In one of my first articles on Medium, I mentioned how one of my employers moved money around the world to put the profits in the lowest tax jurisdiction.
The Tax Shell Game
This tax avoidance technique was from circa 1980. It may still be used, but I suspect the techniques are more sophisticated. Some companies listed on the New York Stock Exchange are — legally speaking — are only fronts for offshore companies.
There are many cries from activists about how global companies do not pay any tax. We should be careful in making similar assertions just because someone else made that assertion.
Rather some investigation is required. All public companies are obligated to report their basic financial information. It should not be that difficult for amateurs to investigate whether their profits are taxed. Here’s a list:
1. Compare the stated profits to the taxes paid.
2. Compare the dividends to the taxes paid.
3. Compare the stock buybacks to the taxes paid.
The taxes should be about 20% of at least one of these three entities. If the taxes are less than 10%, then the business empire is employing serious tax avoidance techniques. If 5%, that would be a sign of tax evasion.
Unfortunately, the financial data for private corporations is not so easily found. We have no idea at how nefarious these actors are, in a collective sense.
Conclusion
Earlier in this series, I have alluded to the corporate laws that make it easy for businesses to do business. If we were to tighten up these laws to be more diligent about the shady use of corporations, real businesses would be putting more energy toward following rules than conducting business. Not efficient — and will impact the economy.
My solution will come later in this series.
Published on Medium 2024
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