Bringing Business Back Ashore: Buenos Aires issues world’s first ban on offshore shell companies

By Lucy Komisar,
CorpWatch, April 4, 2005

In December of 2004, there was a horrific fire in a Buenos Aires disco called the Cromagnon Republic. Three rock fans shot off flares that set fire to the ceiling and engulfed the overcrowded discotheque in flames and smoke. In the rush to get out, 200 people were killed and 700 injured, most from trampling and smoke inhalation. The main entrance had been wired shut, and some of the emergency exits were locked, blocking escape.

In the days that followed, thousands of the victims’ parents and friends marched in the streets and demanded justice. A judge started proceedings for manslaughter and froze $20 million belonging to the owner, Omar Chaban. However, investigators soon discovered that Chaban appeared in no official disco documents; he was just the administrator.

The legal owners of the property and the disco company were offshore shell corporations registered in the tax haven of Uruguay, the neighboring country. The listed owner of the enterprise was a Uruguayan straw man in his 70s who had no money.

Ricardo Nissen, photo Lucy Komisar.

The tragedy gave political space to a deceptively unassuming lawyer named Ricardo Nissen, Inspector General of Justice for Buenos Aires, who is committed to fighting the system of tax haven shell companies that is the underbelly of illegal global finance.

He told CorpWatch, We think the owner of the discotheque is a single owner who divided it into offshore companies. In response, Nissen has taken a step that is the first of its kind, anywhere in the world. Six weeks after the deadly fire, he banned offshore shell companies from doing business in the capital district of Buenos Aires.

The Inspector General’s directives, issued in February and March, build on two resolutions he issued in 2003 and ban offshore companies that cannot prove they have real business activity in their places of registration. The new rules apply only to the capital district of Buenos Aires, the sphere of Nissen’s authority. After the tragedy of Cromagnon, Nissen says, It seemed that the legislation had to become stronger.

There are around three million shell companies in the world. The term shell is used to mean front or mailbox companies. They are also sometimes called International Business Corporations (IBCs) or Personal Investment Companies (PICs). They are set up with secret beneficiaries to own bank accounts or property, to effect phony transactions, to hide or launder funds, and to evade legal responsibility.

Nissen’s directive is a shot across the bow of the world financial system, which relies on offshore shell companies and bank accounts to move money seamlessly around the globe. But it is not an isolated act. Rather, it is one in a series of indications of the confidence of the new Argentine government, following their success in defying international financial institutions such as the International Monetary Fund (IMF).

The New Argentina

The current government of President NĂ©stor Kirchner came to power in late 2001, after street protests against the IMF caused the previous government to collapse. It has since brought about a series of a small economic miracles — including the reduction of unemployment from 20 percent to around 13 percent and lowering the poverty level nearly 10 points in the last three years by encouraging cooperatives and worker-owned factories.

With the backing of the protestors, who blamed the high rates of poverty and unemployment on the strict debt repayment program imposed by the IMF and other major bank creditors, Kirchner refused to repay the country’s crushing $81.8 billion debt owed to bond holders. When the lenders were forced to negotiate (with the added bonus of a rebounding economy that repudiated the IMF’s policies) Kirchner struck an agreement that forced creditors holding $62.2 billion of the debt to write off about 70 percent of the value.

Much of the debt that Argentina has been saddled with (around $155 billion in all) is the direct result of the offshore banking system. It began under the dictator General Videla, who came to power in 1978. A judicial inquiry by the Argentine Federal Court in 2000 showed that many of the loans granted to the nation at the time — by banks like Citibank, Chase Manhattan Bank, Deutsche Bank and Hannover Bank — were diverted directly to front-companies set up in offshore tax havens. Some of the money was simply stolen and some was spent on weapons. None could be paid back.

Another large chunk of debt was acquired by the Carlos Menem government in the 1990s, which privatized government industries such as telecommunications and the airline industry, and sold them to companies who bought them with discounted debt bonds from the banks, paying fire-sale prices. At the same time, companies that borrowed money did not pay their own debts, and the corporate-friendly Menem government nationalized the private debt. And, like the regime before it, the Menem government also stole billions, which it shipped to offshore secret accounts.

Kirchner’s refusal to play by the rules of creditors, who for years had turned a blind eye to the wholesale robbery of the government coffers, is a challenge to the international financial system. Ricardo Nissen’s ban on offshore companies is a second, more direct challenge to the system.

Article on CorpWatch site

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One Response to "Bringing Business Back Ashore: Buenos Aires issues world’s first ban on offshore shell companies"

  1. Archana   Feb 10, 2007 at 3:34 pm

    This is really interesting, Lucy. I am studying tax evasion in Guatemala, and Nissen’s actions seem very relevant to the situation here. Instead of offshore shell companies, a major debate here concerns the maquilas that receive a 10-year exemption from all taxes. It is said that many such factories shut down and reopen under a different legal name (but with the same board, shareholders, and operations) just to take advantage of another 10-year exemption. Perhaps this is something that can be handled on a local level instead of waiting for the Congress to enact nationwide reform.


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