Dummy Corporation: Everything You Need to Know
A dummy corporation is a firm that is quickly established so it can act as a front for one company or multiple companies.3 min read
A dummy corporation is a firm that is quickly established so it can act as a front for one company or multiple companies. Such a corporation allows its owner to hide their identity and avoid paying taxes.
What Is a Dummy Corporation?
A dummy corporation, which is also called a dummy company or shell company, is a firm that can be quickly established to act as a front for at least one company. While dummy companies seem real, they are controlled by the companies and entities they're shielding.
Dummy companies are often associated with organized crime, so they receive special attention from the police and FBI agents. As such, the dummy companies enable the following:
- Drug smuggling
- Gaming the stock market
- Gun running
- Human trafficking
- Money laundering
- Ponzi schemes
- Tax scams
A dummy corporation is a limited liability company, so it allows the principal (the person who founded it) to hide their identity. Usually, the owner of a dummy company can avoid lawsuits and prosecution, but the principal's name will be revealed if the entity is declared a dummy company in court.
Many shell companies have been set up in countries and territories like the Bahamas, the British Virgin Islands, Panama, and Switzerland. However, Kenya and the United States are the two countries where it is easiest to set up dummy corporations. For example, Mossack Fonseca incorporates dummy corporations in the United States, especially in states like Florida, Wyoming, and Nevada. Mossack Fonseca is a Panamanian law firm that has numerous operations around the world and has been used by a collection of criminals, wealthy individuals, and heads of state.
How a Dummy Corporation Is Set Up
In 2014 — over a year before the Panama Papers were leaked — Ken Silverstein incorporated a dummy corporation with Mossack Fonseca and reported on his experience in the December 2014 issue of VICE. Since it was so easy to set up shell companies in the United States, that was where Silverstein's investigation took him.
Silverstein found out that overall process for setting up a dummy company was relatively cheap and quick. It can cost less than $1,000 and the company will be registered in less than a week.
- First, Silverstein found out that the process could be initiated in 15 minutes online or over the phone. If done in person, it can take an hour to fill out the paperwork.
- The principal must provide the name of a contact person. Usually, a dummy corporation will be set up by an attorney or representative, so the principal can move money while being undetected. The representative's name will not show up in public records, either.
- In states like Nevada, a manager or local registered agent will have to be identified. The manager can be an actual person or another anonymous company.
As Silverstein was told, criminals usually “layer” their networks by setting up dummy companies then creating subsidiaries. Additionally, criminals usually set up offshore bank accounts so they can move their money around the world.
How Blackwater Used Dummy Corporations
In 2010, news reports revealed that Blackwater Worldwide, a defense contractor now known as Academi, set up a network of 30 dummy corporations and other incorporated businesses after being scrutinized for its role in the Iraq War. In 2007, guards employed with the contractor killed 17 Iraqi civilians. While it was not clear how many of those shell companies received government contracts, at least three were paid by the Pentagon and the CIA.
All of this was uncovered by an investigation initiated by the Senate Armed Services Committee, which also found that some of the subsidiaries were in tax havens. According to anonymous government officials and former Blackwater employees, the contractor's network allowed it to hide its illegal activities from the government and to fool government officials who were responsible for signing contracts.
In 2009, Leon Panetta, who was the CIA director at the time, ended a contract it had with Blackwater, then known as Xe, to load missiles on Predator drones in Pakistan. However, the contractor used at least two affiliates, XPG and Greystone, to secretly work with the CIA to provide security for CIA operatives.
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