The mainstay of this book is a global field experiment based on soliciting thousands of offers for shell companies. But what are shell companies? Why are they important? And what are the challenges in regulating their use? This chapter is devoted to answering each of these questions.

The antics of the American comic Stephen Colbert illustrate some of the challenges associated with shell companies. In the lead-up to the 2012 US Presidential election, Colbert satirized the artifice and conceits involved in election fundraising by creating both a Super-PAC and an anonymous shell corporation to hide its donors. His lampoon gets to the heart of the separation between legal form and substantive reality that provides the rationale for shell companies.

Colbert ’s spoof began with a Super-PAC (Political Action Committee), i.e. a group that may receive unlimited funds for election campaigns, but must stay ostensibly independent of any candidate or political party. While Super-PACs maintain a legal i ction of independence, in reality they appear to coordinate with a candidate, such as Mitt Romney ’s Restore Our Future Super-PAC or President Barack Obama’s Priorities USA Action. Mocking this pretense of independence coupled with the reality of close control, Colbert set up his own Super-PAC called “Dei nitely Not Coordinating with Stephen Colbert.

The notorious Lu Zhang

In December 2009 Thai special forces seized a cargo plane at Bangkok Airport. The manifest claimed the airplane carried drilling equipment intended for oil exploration. Instead, 35 tons of weapons crammed the hold – arms that included rocket launchers and anti-aircraft missiles. The weapons originated in North Korea and were bound for Iran, mocking the United Nations arms embargo that targeted two of the three “Axes of Evil” (Michaels and Coker 2009).

Law enforcement officials traced the arms shipment to an obscure Chinese national, Lu Zhang, who was a recent immigrant to New Zealand. The 28-year-old woman served as the sole director of SP Trading, the company that hired the plane and apparently engineered this arms trade. In fact, Lu directed scores of other companies.

But, apparently, Lu Zhang had no idea that she was a notorious arms trader and international i nancial criminal until ofi cials contacted her. Rather, she had worked as a short-order cook at a Burger King in Auckland. Representatives of the GT Group, a shady incorporation service specializing in setting up companies for others, had hired Lu as a patsy. To supplement her income, for fifteen dollars each she signed the documents they placed in front of her.

Serious profit-driven crime depends on some measure of financial secrecy. Shell companies that cannot be traced back to their real owners have become one of the most important means by which criminals obtain this secrecy. Regulating shell companies thus poses a major challenge for many facets of global governance, but it also represents a point of entry from which we demonstrate the utility of a new approach to studying world politics: the experimental science of transnational relations. We premise this new approach on rigorous study of transnational relations and non-state actors through field experiments. Experiments have long been acknowledged as the most powerful way to accurately determine causal relationships. But conventional wisdom has presupposed experiments in international relations to be either impractical or unethical; we hope we have dispelled this myth through the extended example of our Global Shell Games experiments. We provide additional examples of Experimental TR in the pages to follow.

As would-be global governors seek to regulate a wider swath of human activity, the key agents of compliance are increasingly non-state actors such as firms and individuals rather than sovereign states. Global rules may depend on international agreements, but they both shape and are shaped by transnational relations.

In June 2011 we sent a Placebo email from our Denmark alias, Mikkel Pedersen, to a service provider in Indiana. Shortly thereafter we received a response indicating that the information needed for incorporation was the name of the company, the “assumed” name of the company, the company address, the dissolution date (the provider recommended “perpetual”), whether the company would be managed by its members, and the name and address of the registered Indiana agent. The provider offered to serve as the agent for no additional charge. Finally, the provider complimented us on our English, praising it as “better than some Americans!” Nothing else was required save the payment by check or credit card. As per our protocol, we coded this response as non-compliant: the provider required no proof of identification for the beneficial owner. This type of non-compliant response was quite common for our US subjects. Indeed, as noted earlier, more than 40 percent of providers replying to our inquiries in the United States required no photo identification documents whatsoever.

But a curious thing happened with the same firm in May 2012, when we sent a second inquiry. The email came from the Norwegian alias, Lukas Hansen, and it was equivalent to the first email save for one additional sentence, which read, “My internet searches show that United States law, enforced by the Internal Revenue Service, requires disclosure of identifying information when forming a company.” How did our genial service provider so complimentary of our English skills react? We received no response, even after we pestered with two follow-up emails.

Preface

A critic of the scientific approach to international relations might wonder how much “knowledge” has accumulated in half a century. In the pages of World Politics in 1966, Morton Kaplan defended the scientific method as the best means of studying international relations. Taking issue with E. H. Carr’s assault on science in The Twenty Years’ Crisis, Kaplan noted that the “traditionalist asserts that those who aspire to a ‘science’ of politics insist upon precision, rigor, quantification, and general theory. The traditionalist further claims that the complexity of international politics is such that these goals cannot be attained nor the important questions of international politics be investigated by these means” (Kaplan 1966: 7). Our sense is that this basic debate still seethes today with little resolution. This book is an attempt to move the discussion forward.

Advocates of science as a means to understanding international politics face at least two significant challenges. First, transnational relations is, in effect, infinitely complex – many millions of individuals, firms, organizations, and agencies from different countries and international organizations interact daily. Second, progress in the science of international relations requires the identification of causal effects, and observational scientific methods can only suggest correlations. The target is thus much too big, the instrument much too limited. In this book we argue that the first problem contains the answer to the second: the sheer number of transnational actors can serve as subjects in field experiments capable of revealing causal effects in international relations. The vastness of transnational interactions thus offers the means for precisely testing important theories of international relations.

As discussed in Chapter 1, to the extent that untraceable shell companies are easily available, law enforcement authorities will find it very difficult to make progress apprehending money launderers, tax evaders, corrupt officials, and a wide range of other criminals. At the most general level, what do the overall descriptive findings from the field study tell us about how well or how badly global rules actually work in practice when they mandate that shell companies be traceable back to the real people in control? This chapter presents the broad-brush results from the 7,456 solicitations made to the corporate service providers, compares them to what might have been expected, and seeks to explain the patterns that emerged. The broad finding that almost half (48.2 percent) of the replies received did not require certified identity documents, and more than a fifth (22.1 percent) did not require any photo identity documents at all, provides evidence for a significant compliance problem. But is this result a surprise? Though based mainly on reading laws rather than assessing actual practice, FATF reports have long indicated that both member and non-member countries have had trouble meeting the standard whereby authorities must be able to identify companies’ real owners. On this basis, perhaps non-compliance rates might have been expected to be even worse.

The next step is to break the results down to allow comparisons of compliance rates between rich developed countries, poor developing nations, and offshore tax havens. Unlike the overall level of compliance, this move reveals some definite surprises. Perhaps the greatest is that tax havens, long reviled as scofflaws of the global financial regulatory regimes, have an outstanding level of compliance far ahead of the average, and far above major OECD countries in particular. Also intriguing and running directly counter to expectations is the fact that poorer developing countries sometimes prove more compliant than developed nations (though not as compliant as tax havens). Given how wide of the mark it has proved to be, why has the conventional wisdom been that developed countries should have had much higher compliance rates than poor countries and tax havens? After describing the logic of these expectations, we explain the counter-intuitive results in terms of a campaign of international pressure against tax havens since the late 1990s.

In 1998 behavioral economists Uri Gneezy and Aldo Rustichini performed a now-famous experiment at ten daycare centers in Israel. Many parents at the daycares had been arriving late to pick up their children, so Gneezy and Rustichini, after a four-week observation period, imposed a fine of three dollars on late parents at six of the ten daycare centers – randomly assigned, of course. The result? The rate of late arrivals increased significantly, and the tardiness did not diminish even after the fines were removed (Gneezy and Rustichini 2000). The experiment illuminates one of the core debates in the social sciences: Do actors behave more appropriately when threatened with penalties for violating the rules or when they are normatively constrained?

Gneezy and Rustichini’s findings suggest that, before and during the observation period, parents were inclined to feel socially obligated to show up on time so that the daycare workers would not have to stay after hours to wait for them. But once a fine was imposed, it implied that tardiness could be recompensed by paying a monetary price, and it induced the unintended consequence of increased late arrivals. The threat of penalties can therefore backfire. The experiment also presents an illustration of the possibility that the effects of social norms and penalties may be more complicated than commonly assumed in international relations, especially when considering sub-national actors (March and Olsen 1998; Checkel 2001). Furthermore, this study illustrates how experiments can surprise us and confound our preconceived notions of how the world works. The experimental results presented in this chapter are similarly surprising in disconfirming many of our expectations (some derived from IR theory, others just simple intuitions) about why actors comply with or defy international rules. In some instances treatments we thought would make a big difference to compliance rates made none, whereas in other instances the effect was exactly the opposite of what we had expected.

In 2004 a gruesome video from Iraq went viral on the internet. It showed a 26-year-old American telecommunications worker, Nicholas Berg, seated on the floor in front of a phalanx of masked terrorists. One terrorist, believed to be Abu Musab al-Zarqawi, produced a long knife and promptly beheaded Berg in what must be one of the most graphic episodes ever aired on YouTube. In the ranks of al-Qaeda terrorists, few men descended to the depths of al-Zarqawi, who was linked to the deaths of more than 700 people before the US military killed him in a 2006 airstrike (BBC News 2004; Miklaszewski 2004; Burns 2006).

Like many terrorists, al-Zarqawi depended on financing from abroad, and his key lieutenant, Shaqwi Omar, apparently produced some of the funds through a set of elaborate money laundering and fraud schemes perpetrated by his brothers, nephews, and other accomplices in the United States. According to a US federal indictment, in one of several such conspiracies Shaqwi Omar’s brother, Bassam, formed a shell corporation in Utah called Wasatch Front Construction Services. He and his nephew, Alaa Ramadan, used the shell to perpetrate an intricate mortgage fraud involving sham improvements on two Utah houses and a “straw buyer” to swindle a title company out of more than $121,000 at the closings on the sales of the homes, both of which quickly went into foreclosure. Multiple indictments placed the sum of all the known Omar schemes at more than half a million dollars. The FBI has traced some of the money to wire transfers to Jordan where, again, the trail has gone cold due to the multilayered shrouds common in modern international finance. Despite an ongoing FBI investigation, a definitive link to al-Qaeda has not yet been made (MSNBC 2006; NBC News 2006; Dollar 2006).

General Background

Data on the corporate service providers were collected from April 2010 to June 2011. Email communication with all of the service providers occurred between March 2011 and July 2012. As discussed below, we carried out the overall project in multiple stages and the results from each stage are pooled together.

We carried out the experiment with the help of a large group of research assistants (RAs) at Brigham Young University. The group’s size l uctuated with up to seven RAs working on the project during the busiest times and as little as one working on it between waves of the experiment. A total of 25 RAs (11 women and 14 men) worked on the project over a period slightly longer than two years. One RA worked on the project for a year and a half, but RAs generally worked on the project for an average of four months before leaving the project to graduate, study abroad, accept other employment, or return home for the summer.

Dustin Homer and Brock Laney each led the research team at different times. Research team members included: Allyson Adams, Jessica Allred, Lauren Barden, Peter Carroll, Drew Chapman, Zach Christensen, Stephanie Dowdle, Madeleine Gleave, Dano Gunderson, Matt Hadley, Ben Haymond, James Juchau, Diana Kunakaeva, Robert Morello, Catie Nielson, Brian Reed, Wayne Sandholtz, Tara Simmons, Megan Spencer, Deborah Sutton, Brittany Thorley, Dane Thorley, and Danny Walker.