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The recent release of leaked documents on Mossack Fonseca has information on corporations and individuals using the firm's services for, among other things, tax evasion:

The massive security breach shows how a global industry of law firms and big banks sells financial secrecy to politicians, fraudsters and drug traffickers as well as billionaires, celebrities and sports stars. [...]

Using complex shell company structures and trust accounts Mossack Fonseca services allow its clients to operate behind an often impenetrable wall of secrecy. Mossack Fonseca's success relies on a global network of accountants and prestigious banks that hire the law firm to manage the finances of their wealthy clients.

Panama Papers and Mossack Fonseca explained, Australian Broadcasting Corporation

What are "shell companies" and how can they be used to hide money or avoid paying taxes?

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    $\begingroup$ I'm, uh, asking for a friend, by the way. $\endgroup$ – isanae Apr 5 '16 at 15:38
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Another key feature of those shell companies is that they hide the ultimate beneficiary of the transactions. Banks, insurance companies and most financial services firm must make enquiries as part of the "Know Your Customer" (KYC) regulations: they should be able to find out who will benefit ultimately from the transactions, or in the name of whom they are carried out. THeoretically (ate least in the EU), if they fail to identify an ultimate beneficiary, they should refuse to carry out the transaction AND warn the responsible authority (typically the local equivalent or representative of the FATF - Financial Action Task Force)

But a succession of shell companies in different countries, in particular in countries which apply a strict confidentiality of the investors of a company, make it very hard to be sure that the beneficiary identified is indeed the ultimate beneficiary.

Thus, those shell companies also serve the purpose to hide their owner to their counterparts. This feature is most appreciated for tax evasion and money laundering (obvisouly).

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  • $\begingroup$ How would someone then transfer "known" money to a shell company so that it becomes untrackable by a government or its agencies? $\endgroup$ – isanae Apr 5 '16 at 15:37
  • $\begingroup$ For people trying to evade taxes, the most difficult is probably to be discreet when sending the money abroad. Once it is there, it travels around and is invisible. Usually you rely on the discretion of your banker to achieve that. Swiss banks (and luxemburgish in the past) have been known to carry out any transactions, no questions asked, and to protect the identity of their clients at all costs. Then, you can also have specific skemes to send the money abroad (through complex structures involving loans, numerous but small transactions, etc.) $\endgroup$ – Hector Apr 5 '16 at 16:58
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A shell is simply an inactive company - there is a market for shell companies because it allows ordinary persons to buy a ready to go business - for example public traded shells with a stockmarket ticker allow you to skip all the paperwork.

Back to topic. A Limited company is a legal person, thus it can buy / sell and hold other companies and assets - sue and get sued, lend and take loans by other legal persons and of course conduct trade.

Then there are trustee directors and shareholder offered by various offshore formation companies - the whole thing is very simple, when you register a offshore company, you also eventually pay a trustee shareholder and director - both sign their letters of resignation before they start the job. This construction allows you to hold a company and a bank account which belongs to you, but technically the name on the paper is somebody else - your trustee service partner.

The last part of the construction is the jurisdiction - there are jurisdiction where it can be very fortunate to store wealth tax wise.

Concerning the case you refer too, as im aware the cashout was handled with loans - ie the offshore company loans amount X to a private person (which can be a trustee too).

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Your shell performs all your business transactions and records the profit. Thus all your profit seems to take place in the Cayman Islands and not the US, reducing taxes.

There are other ways to use shells. For example, other people can pay you by making an equity investment in your company, which is untaxed. Look up Corp to corp/S corp tax evasion.

In general, a shell company is a company with no assets besides that required for some very narrow purpose such as evading taxes. A somewhat circular definiton, but that's what people call it.

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