Frankenstein Inc.

February 29, 2012

These days you don’t have to be Dr. Victor Frankenstein to create a person—that is, a “legal person.”  Throughout the novel, Mary Shelley’s monster has no name, no soul and no sense of responsibility other than to itself. As it runs riot, it is clear that the monster belongs to no one, certainly not to Dr. Frankenstein.

Rather than relying on spare body parts recovered from the morgue and a few thousand volts of electricity, a legal person can be created simply by registering a new company and paying a small fee. This company can then create other companies, which in turn can do the same again. This practice allows the real owner to hide his or her identity within this maze of corporations, permitting unscrupulous businesspeople and corrupt officials to stay out of the clutches of regulators and Interpol.  It was once difficult to establish a new company, but this changed with the passage of the Companies Act of 1852, which got rid of the need to obtain a government charter.  Anyone could set up a new company for any purpose.

According to a report published by the World Bank at the end of 2011, The Puppet Masters shows how corrupt politicians hide behind complex corporate structures that allow them to salt away corrupt earnings.  Based on 150 cases, the World Bank found that a total of $50 billion in illicit assets had been whisked away into numbered banks accounts.  Surprisingly, many of these shell companies were set up in the US, although they were largely used by corrupt officials in developing countries.

To illustrate how easy it is to game the system, the authors give an account of a contract for printing passports.  Despite receiving a low bid from a French firm, the Kenyan government signed a contract for five times that amount ($43 million) with Anglo-Leasing and Finance Ltd., an unknown UK shell company whose registered address was a post office box in Liverpool. The winning bidder then subcontracted the actual work to the French company, with corrupt politicians pocketing $35 million.   Investigators could not prove where the corrupt payments went because it was impossible to find out who really controlled Anglo-Leasing.

Another advantage of the modern corporate structure that made it so popular is its limited liability, which means the company is only liable for debts up to the capital it holds, which can be quite minimal.   When added to the ability to hide the beneficial owners, this is a strong incentive to conceal assets in case of an environmental disaster. It has become common practice for shipping companies to register each ship in its fleet as a separate company.  In the event of a spill causing millions of dollars of damages to the environment, the only assets at risk is the ship, which probably only has a minimal salvage value. Importantly, no claim can be made on the rest of the fleet.

The World Bank report recommends tightening the definition of “beneficial ownership,” but this will do little to curb the practice, as over 200 separate jurisdictions would have to change their corporate registration systems.  The report, in fact, admits as much when it identifies compliance with rules as the weak link. So, strengthening legislation will do little.

There is a much simpler solution: Create an international corporate register and a single agency for rooting out corrupt and illegal corporate activities. If globalization is to work, then it needs to be able to regulate global corporate citizens with strong international agencies.

Going back to Mary Shelley’s horror story, at one point the monster says to Dr. Frankenstein, “You are my creator, but I am your master – obey. … Beware; for I am fearless, and therefore powerful.”  Corporations, when they are able to hide too easily are no less monsters, whose very anonymity makes them fearless and powerful.

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