analysisBy J. R. Mailey
Eradicating shell companies won't eliminate Africa's economic and political problems overnight. But it will deprive criminals and kleptocrats of their most important asset: secrecy.
When the MT Kerala, a Greek oil tanker, disappeared off the coast of Angola on 19 January, its owners believed the ship had been attacked by Nigerian pirates.
A week later, however, Angolan authorities claimed that the supposed attack had in fact been a hoax perpetrated by the crew.
Confusingly, the company later issued a statement reiterating that it had suffered from a pirate attack that resulted in the loss of a significant amount of its cargo. One source even told AFP that "Angola is trying to cover up how a loaded vessel was taken in an area under its protection."
While it is unclear whether or not this was the first pirate attack off Angola's coast, it is certainly not the first time Angolan oil has disappeared offshore.
For decades, a tiny clique revolving around the president of Angola has deftly used anonymous shell companies to loot billions in state assets. These shell companies are incorporated in 'offshore' financial centres known as 'tax havens' or 'secrecy jurisdictions'.
Although many secrecy jurisdictions happen to be small islands - such as in the Caribbean or the English Channel - this is by no means a prerequisite for being an offshore financial centre.
Secrecy jurisdictions do not require firms to disclose the identities of their beneficial owners, the individuals who ultimately control and benefit from the company, and dozens of countries around the globe fall into this category.
Corrupt officials, predatory investors, and criminals all use these anonymous firms to evade scrutiny and operate with near impunity. This has devastating consequences for economic growth, good governance, and security.
Angola has lost far more revenue to offshore secrecy than it could ever lose to offshore piracy. In 1996, the Angolan government sought to renegotiate the repayment of its debt to Russia.
Throughout the repayment process, senior Angolan officials - including current President José Eduardo dos Santos - colluded with a trio of European business to set up an elaborate web of anonymous shell companies that allowed them secretly to siphon off $386 million.
Another $558 million was transferred to unknown recipients, according to a report by Corruption Watch UK and Associação Mãos Livres.
Decades later, the use of anonymous shell companies to loot state coffers remains a major problem. In 2010 and 2012, investigations by Maka Angola (a Luanda-based watchdog) and the Financial Times, revealed that three senior Angolan officials were the main shareholders in secretive companies with stakes in several lucrative oil blocks.
The owners of several other companies active in Angola's oil sector remain a mystery.
A legal dispute between two billionaires in London over Angolan diamond royalties revealed how the president's daughter and his first wife have used a network of shell companies in Switzerland and Gibraltar to profit from the country's mineral wealth.
Executives from Angola's state-owned oil and diamond enterprises have been listed alongside Israeli diamond merchants and an opaque group of Hong Kong investors as directors of several firms whose ownership traces back to anonymous shell companies, raising questions about who actually benefits.
The case of Angola is far from unique however. Stories involving corrupt officials using anonymous shell companies have begun to sound tragically repetitive.
The economic consequences of offshore secrecy are staggering. According to a May 2013 report by the African Development Bank (AfDB) and Global Financial Integrity (GFI), a Washington DC-based advocacy group, between 1980 and 2009 Africa lost between $1.2 trillion and $1.4 trillion to illicit capital flight.
A separate GFI investigation found that the value of illicit financial flows out of developing countries - a process enabled by the prevalence of secrecy jurisdictions - is ten times greater than the total amount of foreign aid provided to them during the same period.
Looting the coffers
Secrecy jurisdictions do not merely enable corruption. Offshore secrecy also contributes to a wide range of security threats and governance challenges facing Africa.
The cast of characters that benefit from offshore secrecy - corrupt officials, poachers, arms traffickers, drug smugglers, sanctions-busters, terrorists, pirates, and virtually any other criminal that needs to launder money - resembles the roster of a super-villain convention.
Offshore shell companies could even allow the pirates (fictitious or not) that hijacked the MT Kerala to launder their loot.
Banks meanwhile are all too willing to do business with these anonymous shell companies. A recent investigation by the International Consortium of Investigative Journalists (ICIJ) showed that UBS - the Swiss bank that facilitated many of the transfers associated with the Russia-Angola debt deal - and other prominent international banks have "aggressively worked to provide their customers with secrecy-cloaked companies in the British Virgin Islands and other offshore hideaways."
There are also countless other cases in which bankers wilfully turned a blind eye to corruption risks when doing business with phantom firms ultimately controlled by criminals and corrupt officials.
The G20, the G8 and others have pledged at various points to take steps to curb the use of secrecy jurisdictions, but there have been few concrete commitments and many key financial centres have yet to commit to beneficial ownership transparency.
According to the Organization for Economic Co-operation and Development (OECD), 27 of its 34 member countries fail to fully comply with the Financial Action Task Force's (FATF) recommendations on beneficial ownership disclosure.
It remains far too easy to for criminals, kleptocrats and foreign investors to set up anonymous shell companies, especially given that the reforms needed are so straightforward. Without exception, every country should maintain a low-cost, searchable public registry of all corporate entities registered or operating within its territory.
These registries would contain information about any individual with substantial stake of the company, including their names, dates of birth, residential address, nationality, up-to-date contact information, and any other companies used to carry their stake.
Falsifying beneficial ownership information should also be made illegal, and authorities ought to impose significant penalties against firms or individuals responsible for any such misrepresentation.
Efforts to prevent banks from doing business with anonymous shell companies have also paid off and could be enhanced.
A series of heavy fines and penalties levied against prominent banks have prompted many financial institutions to expand their compliance departments in order to fulfil their due diligence requirements. Still, regulations need to be strengthened and more can be done to effectively incentivise bankers to comply with the current regulatory regime.
For example, in the case of HSBC - which was fined $1.9 billion in 2012 for laundering money for drug cartels - none of the company's executives faced criminal prosecution, and senior HSBC executives received huge bonuses just a few months later.
This sends the wrong message. This results in part from a lack of clarity about exactly which specific individuals should be held responsible for the bank's transgressions.
To solve this problem, specified senior officials within banks should be held responsible for their institutions' compliance regime and should be held individually accountable for crimes committed by the bank.
While action is required from many international actors, governments can take measures to protect themselves from the criminals and corrupt officials that use anonymous shell companies to launder looted state assets and criminal proceeds.
Resource-rich states should require all recipients of government contracts as well as any investor active in the extractive industries to disclose the identities of their beneficial owners.
The Extractive Industries Transparency Initiative (EITI) encourages countries to require such disclosures and has developed pilot programme towards this end.
Policymakers around the globe spend billions of dollars trying to rid the world of pirates, poachers, traffickers, and terrorists. In the process, they have ignored the low-hanging fruit.
Eradicating anonymous shell companies won't eliminate all of Africa's economic, governance, and security challenges overnight, but it will deprive criminals and kleptocrats of their most important asset: secrecy.
Activists have been calling on investors for decades to "publish what you pay" to resource rich countries. The time has now come to publish who you are.