Shell Companies: Why it Still Pays to be a Pharaoh

Have you ever wondered why so many companies choose to incorporate in Delaware? Fortunately, there’s a relatively simple explanation to that question. The state of Delaware is the corporate domicile of choice for the vast majority of Fortune 500 companies because of its business-friendly legal environment that is distinguished by its Court of Chancery, which provides expedited resolutions to business disputes through bench trials decided by judges rather than juries. 

Delaware may be considered a downright conventional place to incorporate, given that over 1,000,000 businesses call the Blue Hen State their home, but today I want to discuss a less conventional option. The Pyramids of Giza. According to a 2024 report from Moody Analytics, 22,686 companies are registered at the Pyramids of Giza. That’s an eye-poppingly large number of registrations, given that the only residents of these pyramids are pharaohs that have been deceased since 1700 BCE. 

Why would so many companies choose to incorporate their businesses at such a far-flung destination as the pyramids? Beyond the mystique of aligning with one of the world’s most ancient wonders, there exists a rationale as compelling as the one that attracts businesses to Delaware. Unlike the business-friendly legal environment of Delaware, known for its Court of Chancery and expedited dispute resolutions, the choice of the Pyramids of Giza as a corporate haven taps into a different set of incentives. This unconventional choice may raise eyebrows, yet it underscores a broader narrative where companies seek out unique jurisdictions that offer distinct advantages, be they fiscal benefits, privacy protections, or the sheer branding intrigue of being associated with such a prestigious location. The Pyramids of Giza, thus, emerge not just as a testament to ancient architectural prowess but as a beacon for modern businesses navigating the complex tapestry of global incorporation strategies.

Incorporating a business in Egypt, or at its most emblematic site, the Pyramids of Giza, can be driven by a variety of both innocuous and more concerning motivations. On the benign end of the spectrum, Egypt offers a strategic geographical location bridging Africa, Asia, and Europe, coupled with a growing economy and government incentives aimed at fostering entrepreneurship and investment. This can provide businesses with access to emerging markets, a favorable regulatory environment, and potential tax advantages, making it an attractive proposition for legitimate enterprises seeking to capitalize on regional growth and trade opportunities. Conversely, the darker side of offshore incorporation implies efforts to obscure ownership, facilitate tax evasion, or launder money under the guise of legitimate business operations. The allure of regulatory environments perceived as less stringent can be exploited by those wishing to operate in the shadows of international finance and commerce, leveraging the prestige of historic locales as a smokescreen for activities that undermine global efforts to promote transparency and combat financial crime. This dual-natured landscape underscores the complexity of international business incorporation, where the line between leveraging strategic advantages and veering into the realm of malfeasance can be both fine and fraught with implications.

Let’s talk about the elephant in the room, or the tomb in this case. Lots of the firms that are registered at the Pyramids of Giza are shell companies. Shell companies are essentially legal entities established with no significant assets or operations, serving as vehicles for various financial maneuvers rather than direct business activities. Their creation is a testament to the ingenuity of corporate financial structuring, offering a spectrum of use cases that straddle the divide between ingenuity and opacity. Where are these companies registered at the pyramids located on that spectrum? While some may be at either extreme, it is difficult to make a sweeping judgment about this interesting class of geographical outliers.  

On the legitimate side of the spectrum, shell companies play a crucial role in the modern corporate landscape. They facilitate transactions like mergers and acquisitions, act as holding companies for assets in multiple jurisdictions, and enable businesses to manage risks by isolating different operations legally. These entities can streamline administrative processes, protect intellectual property, or serve strategic tax planning purposes, thereby contributing to a company’s efficiency and operational flexibility. Such applications underscore the utility of shell companies as tools for sophisticated corporate strategy, reflecting a nuanced understanding of the global regulatory environment.

However, the opacity that makes shell companies so valuable in legitimate business contexts also renders them susceptible to misuse. In less scrupulous hands, they become instruments for illicit activities such as money laundering, tax evasion, and the concealment of ill-gotten gains. The very characteristics that afford legitimate businesses the opportunity to navigate the complexities of international markets—privacy, jurisdictional flexibility, and legal simplicity—also provide a veneer of legitimacy for those intent on subverting the law. This dual capacity highlights the critical challenge facing regulators and policymakers: balancing the need for business efficiency and innovation with the imperative to deter and detect financial malfeasance.

High-profile cases of criminal activity facilitated by shell companies, such as the activities revealed by the Panama Papers and the subsequent fallout, reveal the extent to which shell companies can be exploited for tax evasion and concealing the proceeds of corruption. Another noteworthy example is the case against 1Malaysia Development Berhad, where shell companies were used to misappropriate billions of dollars in a complex web of financial fraud that implicated financial institutions and government officials across multiple countries. Similarly, cases involving sanctions evasion, such as those linked to North Korea’s attempts to circumvent international restrictions, often feature shell companies as key components in the schemes to obfuscate the origins and destinations of illicit funds. These examples underscore the dual-edged nature of shell companies in the global financial ecosystem, highlighting the critical need for robust regulatory frameworks and diligent oversight to distinguish between their legitimate use and abuse.

The 1Malaysia Development Berhad (1MDB) scandal is one of the most infamous cases of financial fraud and corruption of the 21st century, involving billions of dollars in misappropriated funds, high-profile political figures, and global financial institutions. The United States Department of Justice (DOJ) became involved in this case under the Kleptocracy Asset Recovery Initiative, seeking to seize assets that were allegedly purchased with money embezzled from 1MDB.

The 1MDB scandal led to multiple lawsuits and legal actions, but the most prominent legal action taken by the DOJ does not have a single, universally recognized “name” akin to typical court cases. Instead, the DOJ’s actions are part of a broader initiative under its Kleptocracy Asset Recovery Initiative. The legal actions initiated by the DOJ to seize assets linked to the 1MDB scandal were filed as civil forfeiture complaints. 

The DOJ’s decision to employ civil forfeiture complaints rather than criminal charges in the 1MDB case offered the government several strategic benefits. Civil forfeiture cases require a lower burden of proof compared to criminal prosecutions, and they also allowed the DOJ to work within the framework of international law and cooperation more fluidly. By filing civil complaints, the DOJ was able to publicly document and highlight the alleged illicit activities and the mechanisms of the 1MDB scheme in detailed filings. This not only informed the public and deterred similar conduct but also laid the groundwork for potential future criminal actions by mapping out the scheme’s operations and involved parties.

These complaints were aimed at recovering more than $1 billion in assets that were allegedly misappropriated from 1MDB. The series of filings by the DOJ began in 2016 and continued over several years, involving various assets around the world. The complaints are officially titled as civil forfeiture actions and are typically referenced by their filing date or the specific assets they seek to recover. For instance, one of the newest filings in July 2016 is formally titled “United States of America v. Certain Rights to and Interests in the Viceroy Hotel Group,” among others, related to assets believed to be purchased with funds embezzled from 1MDB.

These civil forfeiture complaints detail the alleged laundering of billions of dollars from the fund and the subsequent use of those funds to acquire a wide array of assets, including real estate, artwork, luxury goods, and investments in entertainment and other sectors. The case titles themselves are often lengthy and descriptive of the assets or transactions they pertain to, rather than bearing a succinct case name.

In AP-Fonden v. The Goldman Sachs Group Inc. (AP7), a 2023 case related to the 1MDB scandal, where Sjunde AP-Fonden acts as the lead plaintiff in a securities fraud class action lawsuit against The Goldman Sachs Group Inc. and certain individuals associated with Goldman Sachs. The case arises from Goldman Sachs’ decision to underwrite $6.5 billion of 1MDB debt and its receipt of $600 million in fees for this transaction. The lawsuit alleges that significant portions of these funds were misappropriated, contributing to corruption and political patronage in Malaysia.

Key aspects of the AP7 lawsuit include allegations of securities fraud tied to misstatements and omissions by Goldman Sachs regarding its work with 1MDB and its awareness of the corruption associated with the fund. The misrepresentations reportedly led to inflated stock prices for Goldman Sachs, with subsequent corrections causing financial losses to shareholders like Sjunde AP-Fonden. The court’s discussion highlights various actionable statements and omissions identified by Judge Vernon S. Broderick, including misrepresentations about compliance with ethical principles, Goldman Sachs’ denial of Jho Low’s involvement in 1MDB bond transactions, and claims about the standard nature of fees and commissions paid to Goldman for the 1MDB transactions.

The court granted AP7’s motion to amend its complaint a third time post-fact discovery, allowing the inclusion of new allegations and adjustments to the class period based on further analysis and evidence uncovered. The document underscores the legal principles of securities fraud, the significance of accurate corporate disclosures, and the implications of such disclosures on investor trust and stock valuations.

The 1MDB scandal exemplifies how shell companies can be exploited for money laundering, corruption, and fraud. Funds were misappropriated from 1MDB and laundered through a complex network of bank accounts and shell companies across multiple jurisdictions. This highlights the vulnerability of the global financial system to sophisticated schemes that abuse legal entities for illicit ends. 

Finally, the scandal illustrates the critical importance of transparency in beneficial ownership information of corporate entities. Knowing the actual individuals behind business transactions is crucial for preventing financial crimes. The 1MDB cases support arguments for global standards and more stringent regulations requiring the disclosure of beneficial ownership to prevent the misuse of corporate structures like shell companies.

Back