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The Secret World Of Sham Directors

The Secret World Of Sham Directors

By Bastian Brinkmann, Frederik Obermaier and Bastian Obermayer

While Panama might seem like an usual base for the Bavarian Pretzel Factory, the company is listed in the official register there. Even more peculiar is the pretzel factory’s apparent managing director: a certain Michael Jackson. Clearly, this particular Michael Jackson isn’t the late King of Pop. But it’s a delightful combination nonetheless.

Michael Jackson is a sham director, a person who regularly signs important contracts and approves documents, even though he has no decision-making power. People like him often appear in the Panama Papers, and there are thousands of them in the Central American country’s publicly accessible company registers. These people carry out the tasks that the true owners of shell companies entrust them with. And they do this for hundreds, thousands, or even more than ten thousand companies. Without knowing it – after all, no one can possibly read so many documents – they even sign papers that drug cartels, autocrats, and tax evaders use to cover up their illicit business activities. Sham directors are needed to make shady dealings work. They lend their names so that the true owners remain hidden.

Bank robbers often hide behind a ski mask, a disguise that’s easily removed by police when they’re caught. But when investigators want to find out who is behind a shell company, they often find little to go on, and this is largely the result of the sham director system. Mossack Fonseca uses this system, as do other service providers in Panama.

As a result, no one knows who really controls the accounts and manages business. Even the authorities can only access data available in public registers. In most tax havens, this information is particularly wanting. At the very least, many registers list the names of managing directors in addition to company names. But the names aren’t real, and this is where you run into people like Michael Jackson.

In polite terms, these sham directors are referred to as trustees. This sounds like an honorable job in the world of finance. In reality, sham directors are the offshore industry’s foot soldiers. Nothing works without them, and yet they are easily interchangeable – and cheap.

There seems to be a pattern in the selection of sham directors: they are generally people with low levels of education who aren’t likely to understand the various documents they are signing. In fact, they are often people from Panama’s lower classes who barely speak English – like Leticia Montoya, one of the Mossack Fonseca sham directors whose name most frequently appears in the Panama Papers. For decades, she has served as the director of tens of thousands of companies. The data contains a copy of her passport. A few weeks ago, she stated in a phone call that she didn’t know the details of the shell companies she presides over. She did not respond to Süddeutsche Zeitung’s written request for comment.

Mossack Fonseca has denied that the law firm provides "shareholders with structures supposedly designed to hide the identity of the real owners". The law firm’s services are "always supported by the existence of legally recognized vehicles utilized for such purposes by all service providers in this industry."

Leticia Montoya lives in a suburb of Panama City that the wealthy consider a no-go area. She was generally paid a paltry 500 dollars a month for her services. And yet Mossack Fonseca has earned millions as a result of her work: at Mossack Fonseca, the sham director service costs about 150 dollars per year. In most cases, Mossfon uses two or three sham directors per company. According to the Panama Papers, Montoya served as sham director for almost 3200 shell companies. Multiplied by the 150 dollars per year that the law firm charged per company, Montoya earned Mossack Fonseca almost half a million dollars in just twelve months. She has been a sham director at the law firm since the early 1980s.

The pen: the sham director’s most important tool

In the course of the most recent revelations, another name has appeared again and again: Aida May Biggs. Apparently, she presides or presided over almost 20,000 companies in Panama that were administered by one of Mossack Fonseca’s competitors. Her name is also listed in company registers in England, where her date of birth also appears: January 1923. Aida May Biggs is 93 years old. Until just a few years ago, she was still being used as a sham director for a very high number of companies.

In many tax havens, sham director is a common profession, also because it’s an easy one. It doesn’t require any formal training. All that is needed is a pen – and a name that hasn’t yet been linked to any kind of illegal business activity. When a new shell company is set up, sham directors sign three initial documents that are sent to the true company owners. The first is a waiver declaring they won’t pursue claims against the true owners or their companies. The second is a power of attorney that ensures the sham director hands over control of the company to the true owner. And the third is the sham director’s termination of employment letter, which is signed without a date. This way, true company owners can fire their sham directors retroactively at any time.

In addition to these three documents, sham directors sign papers such as the forms required to open a bank account, or the minutes of annual general meetings. Such minutes are required even in tax havens, even though everyone knows they are fake.

Sham directors: the outer layer of the system of secrecy

In some respects, sham directors are a basic disguise. Parties interested in achieving a higher level of secrecy apply an additional layer in the form of bearer shares. Available in some tax havens, these anonymous ownership shares do not bear a name. Bearer shares come in the form of a simple piece of paper – whoever holds all of these shares owns the company. They present the ideal tool for any type of business transaction that shouldn’t leave any traces. Closing a deal is as simple as putting money on the table and handing over the bearer shares.

As a result of international pressure, most tax havens have now banned anonymous bearer shares. It became increasingly difficult to justify that these shares – an ideal tool for money-laundering operations – should continue to be legal. But there are other ways to conceal a company’s true owner. Many of the companies in the Panama Papers are set up like Matryoshka dolls: their shareholders are other companies, and looking into the ownership structures of these companies reveals other companies still, and so on, and so on.

Bogus shareholders can also be used to veil the truth. They can be people or shell companies that hold shares in trust, meaning that they hold someone else’s shares. This, too, is generally legal, in contrast to a service that Mossack Fonseca also apparently offered: the service of a real person who posed as the company’s true owner, without being the actual owner.

Despite the many legal veils of secrecy, anti-money-laundering laws require that real people own companies, regardless of whether they uses sham directors or have offshore companies as shareholders. Today, any reputable bank will only open an account for offshore companies if the ultimate owner is named. The bank is then required to run a background check to make sure it knows who it’s doing business with.

Premium services

According to the Panama Papers, Mossack Fonseca repeatedly offered its customers the possibility of avoiding these background checks. For a five-digit sum, the law firm offered to have a person pose as the true company owner. One of these premium sham directors appears to have been a man named Edmund W., who happens to be ex-father-in-law of Ramon Fonseca, one of the law firm’s owners. W.’s job was to pose as the man behind the multiple veils of secrecy. Mossfon denies that it ever offered this service, and W. has declined to comment.

The offshore world can only succeed because there is an endless supply of people who are willing to act as front men at various levels by lending their names to all kinds of shady business activities. They do this despite the fact that they can theoretically be prosecuted for the legal violations of the very companies they preside over on paper. Carlos Barsallo, the former chairman of the ethics committee at Panama’s bar association, has confirmed this. Sham directors can even be made to pay millions in damages. If they had to go to court for the activities of just one company, it would likely be their ruin.

In 2010, a sham director in New Zealand was convicted after anti-tank rifles, rocket launchers, and air defense systems were found at Bangkok airport. The weapons were from North Korea, and may have been on their way to Iran. The only person who faced charges in the case was Lu Z., a Chinese exchange student in New Zealand. For 20 New Zealand dollars, she had accepted to have her name listed as the sham director of a shell company. According to the judge in New Zealand, she was the only real person that investigators could find in the complex global network of companies that was behind the arms shipment. Every lead was a dead end.