Are "Shell" Companies Illegal? The Panama Papers Leak Raises The Big Question

Now that findings from the Panama Papers have been released, shell companies can no longer fly under international radar. The popular method by which elite figures hide money offshore is being heavily scrutinized for financial corruption. Though the inactive corporations aren't illegal, shell companies can be criminally prosecuted for intentionally allowing their clients to hide money from banks. Based on an analysis of its database, the Panama-based Mossack Fonseca, the world's fourth-largest offshore law firm, is quite fond of establishing these entities for all of the wrong reasons.

Though shell companies — more commonly known as "personal investment firms" — can operate legally as vehicles for business transactions, they can also double as money laundering establishments. Like the super PAC loophole in campaign finance law, shell corporations are a viable way to essentially stash money. For example, throughout history, they have been used in black market operations to cover up criminally-obtained sums of money that would otherwise raise suspicion. That's because shell businesses can technically serve a lawful purpose while remaining operationally dormant. When that purpose is revealed as being corrupt, however, personal investment firms straddle a fine line.

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In 2014, Vice reported that according to FBI agents, cracking down on the formation of shell companies is one of the most effective ways of preventing organized crime and money laundering. Dennis Lormel, the first chief of the FBI's Terrorist Financing Operations Section, told Vice that shell corporations enable the secretive flow of money globally:

Terrorists, organized crime groups, and pariah states need access to the international banking system. Shell firms are how they get it.

In addition to allowing clients to bypass banks, shell firms also allow the owner of the funds to remain anonymous while investing assets and making transactions. Though these legal corporations are known for facilitating illegal finance activity, they are allowed in almost every part of the world, including all 50 states. According to a study conducted in 2012, the United States is the second-easiest place in the world in which to conduct illegal operations via the establishment of a shell firm. Only Kenya is more friendly toward the process.

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In fact, the Panama Papers include record of a 2009 email between Mossack Fonseca and American millionaire life coach Marianna Olszewski, in which the law firm explains how it can help her hide her earnings from the bank:

We may use a natural person who will act as the beneficial owner… and therefore his name will be disclosed to the bank. Since this is a very sensitive matter, fees are quite high.

Mossack Fonseca denied the allegations in a statement released shortly after findings from the papers were published:

Your allegations that we provide structures supposedly designed to hide the identity of the real owners, are completely unsupported and false ... We do not provide beneficiary services to deceive banks. It is difficult, not to say impossible, not to provide banks with the identity of final beneficiaries and the origin of funds.
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Hiding funds, as well as the sources of those funds, is what makes shell firms' activities so difficult to track. It also explains why a "trail" of $2 billion dollars has only been "linked" to Russian president Vladimir Putin through his acquaintances. According to the International Consortium of Investigative Journalists, the allegations could result in criminal charges against Mossack Fonseca and its clients for their abuse of shell companies. Finalizing those charges will first require investigators to pick apart a complex puzzle which extends across more than 200 countries and involves hundreds of thousands of people.