Organized crime depends on financial secrecy. Untraceable shell companies are the most important means of providing this concealment. Recognizing this danger, the international community has responded by mandating that authorities must be able to look through the corporate veil to find the real individuals in control of shell companies. Yet, until now, no one has known how effective these policy measures have been. My co-authors and I designed a global field experiment, the first ever in International Relations, to address this gap.
Specifically, our research team created a variety of treatments by impersonating a mix of low- and high-risk customers, including would-be money launderers, corrupt officials, and terrorist financiers when requesting the anonymous companies. Evidence is drawn from more than 3,500 email solicitations to Corporate Service Providers that form and sell shell companies in 178 countries. The experiment allows us to test whether international rules are actually effective when they mandate that those selling shell companies must collect identity documents from their customers.
What were the main results of our field experiment? Firms in tax havens obey the rules significantly more often than in Organization for Economic Co-operation and Development (OECD) countries, whereas services in poor nations sometimes prove more compliant than those in rich countries. Raising the risk of terrorism or specter of the Internal Revenue Service in our email solicitations decreased offers for anonymous incorporation from Corporate Service Providers, but they also lowered compliance. Offers to “pay a premium” reduced compliance among Providers. The risk of corruption decreased response rates but, alarmingly, also decreased compliance rates. We found that raising international law had no significant effect.
By identifying the serious weaknesses in the existing regime on corporate transparency, we hope to provoke governments to much greater efforts in enforcing corporate transparency.
About the Authors: Michael G. Findley is an Associate Professor of Government at the University of Texas at Austin, Daniel L. Nielson is Professor of Political Science at Brigham Young University and J.C. Sharman is Professor and Future Fellow at Griffith University. Their article, “Causes of Noncompliance with International Law: A Field Experiment on Anonymous Incorporation”, addressing details of the field experiment, will appear in a forthcoming issue of the American Journal of Political Science.