A recent joint report published by Global Witness and Global Financial Integrity, Chancing It: How Secret Company Ownership is a Risk to Investors, sheds light on the various ways in which anonymous companies can expose investors to fraud, corruption, and huge financial losses. Anonymous companies, also known as shell companies, often use their opaque structure to hide bribery, tax evasion, or use of stolen state assets.
Chancing It makes the case that in order for investors to make responsible investment decisions they must know who they are doing business with. The report cites a recent an EY survey that found that 91% of Senior Executives think it is essential to know who the beneficial owners are of the companies they do business with. Investors are unable to accurately predict the level of risks they are taking when investing in an anonymous company. It is for this reason that as of September 2016, institutional investors managing over $740 billion in assets have sent letters to Congress calling for legislation on beneficial ownership transparency.
The report highlights several case studies of shell companies engaged in corrupt behavior that have left investors with huge financial losses. In 2010, Cobalt International Energy (a Texas-based company) went into a joint venture with two anonymously-owned Angolan companies. In 2014, it was revealed that one of the anonymous companies was owned by three powerful Angolan government officials. As a result the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) launched an investigation into whether Cobalt violated the U.S. Foreign Corrupt Practices Act (FCPA). The scandal around the investigation caused Cobalt’s stock to plummet 11% in share price. This anecdote is just a sliver of the corruption and risk that anonymous companies expose investors to.
In the report, Global Witness and Global Financial Integrity have included various recommendations on how investors can both protect their investments by assessing how companies disclose their owners and also how they can call on public officials to support legislation on beneficial ownership transparency.