Ethereum vs Mossack Fonseca: The IBC and it’s blockchain alternatives

Hiding assets in plain site

It is common to imagine offshore as sending money away to Panama or Cayman Islands. Yet that is not how it is mostly done now. The whole idea of using offshore structures is to avoid that.

The assets or money that you are hiding is hidden in plain site in London or the US. You just change ownership of it. Hiding the ownership is what modern offshore jurisdictions is all about.

Several different structures such as IBC’s (see below), on-shore companies, trusts (next article), foundations etc etc are combined to restructure ownership and different kinds of revenue efficiently. But the raw assets rarely move more than a single book entry in a title registry or bank database.

IBC’s the basic building block of offshore ownership

The most basic way of structuring ownership both in your own country and offshore is by creating a company. The IBC or International Business Company as they are often called is just a company registered in a offshore jurisdiction.

It has all the same properties as a company registered in your own company. Directors, shares, separate legal identity etc.

The primary reason they are used is that in offshore jurisdictions it is pretty easy to hide ownership and control over it.

Note that UK and several US states like Nevada and Delaware are actually very popular offshore jurisdictions in their own right.

In most countries/states the officers and often shareholders have to either be entered into a public registry or at least filed with a government entity.

In many offshore jurisdictions the legal requirements are much looser.

Traditional legal uses for IBC’s:

• Holding company, basically hold shares in other companies around the world
• Own real estate. It is often simpler to transfer ownership of an IBC than ownership of a property.
• Concentrate income from international sources in a zero or low tax regime.
• Invest in a country you are not allowed to invest in directly. This used to be the case for Taiwanese businesses investing in mainland China
• Own Intellectual Property with an “on-shore” operating company handling day to day operations.
• Special Purpose Vehicle for international angel investors investing in a single startup in a non traditional place like Kenya
• International Joint Ventures. Eg a Danish and Japanese company wants to work together on buying coffee from Central American growers, for sale in each others home markets.

Illegal uses for IBC’s:

• Redirect your personal income and not pay tax
• Take bribes from abroad
• Build fake revenue streams for laundering money

Blockchains for nefarious purposes

You could use Bitcoin or Ethereum for the above illegal uses. I would not recommend it though.

Every transaction is stored permanently on the blockchain and as we speak startups like Coinalytics analyze and trace even complex chains of transactions with ease.

Rest assured that law enforcement agencies worldwide are kind of happy about the Blockchain. It is new technology yes, but it makes their job a lot easier that trying to subpoena and steal information from law firms and banks around the world.

Remember any wannabe drug lord can not bomb the blockchain to get rid of transaction history and other kinds of evidence.

All of this is actually great news for those of us wanting to use the blockchain for legal purposes. It is lot easier trust something that you can see and control instantly, than faxing personal identity documents to a number in the Seychelles.

The Ethereum account the simplest possible alternative to an IBC

In Ethereum an account can be created by just creating a large random number. So for many of the above examples you just create a new account for each purpose. Which you can do in less than a minute in any Ethereum wallet.

An Ethereum account is simply a bucket that can hold Ether the currency behind Ethereum and take part in any Smart Contract. Which could be for example an investment in a public DAO like Slock.it

However if you have a primary account and you transfer money into another account, you have now created a public link between these two accounts.

For any of the legal uses above, this is probably not that big of an issue. But if you are trying to evade tax or take bribes it can be traced back to you easily using tools like Ether.Camp

Ethereum Smart Contracts

An Ethereum Smart Contract is basically a piece of code that can receive funds and interact with other Smart Contracts.

I don’t think it’s always good to model existing legal structures in Ethereum, but you can think of Smart Contracts as simple companies on the block chain.

They are more like entities than a plain common law contract in that they have their own “identity” and balance. See my article From Contract to Smart Contract in Ethereum.

Multiple Shareholders can use a DAO like Smart Contract

Joint ventures and Special Purpose Vehicles could be organized like the Decentralized Autonomous Organization (DAO) Smart Contract.

A group of investors investing in a Kenyan startup could create a DAO, financing the startup with a monthly payment.

The investors send Ether to the Smart Contract address to purchase shares.

This is a good example of why a DAO may be better than a traditional IBC. The DAO has transparent ownership.

Many entrepreneurs in the developing world countries face huge issues receiving investments due to a combination of red tape in their country as well as lack of trust in their financial institutions.

Control and Ownership

Where you have to watch it is that an Ethereum account that you control is according to most countries laws yours. So any income received is yours.

This is also kind of true with IBC’s. If you are the only shareholder of a Panamanian IBC and you’re a US citizen, I believe it is treated as US corporation by US law.

This is true if you declare it or not. I believe you have to declare it or your are due some heavy fines. These secrets may end up coming out whether you like it or not.

Nominee directors and shareholders

A popular service offered by Mossack Fonseca and almost all other offshore providers is the nominee director and shareholder service. They basically pay some one to be director and sole shareholder of the company. Their name is on all the paperwork.

You then receive a signed, undated and un-filed document assign over the shares to you. This allows you date it and take control at will.

This provides an additional sense of security, removing your name from the corporate papers and registry. In theory you are not a shareholder and then some people are led to believe you don’t have to tell creditors or your home country about this IBC.

The little legal wriggle here is that you actually do still have control, due to that signed piece of paper. You might end up in a world of trouble if this relationship was all of a sudden leaked due to an un-patched Drupal installation.

Ethereum equivalent?

There isn’t really much of a point of a direct equivalent, but you could in theory model the same approach using an Ethereum Smart Contract.

contract Nominee {
    address owner;
    function Nominee(){
        owner = msg.sender;
    }

    function transferOwnership(address _owner) {
        // Only the current owner can transfer ownership
        if (msg.sender != owner) throw;
        owner = _owner;
    }

    // Allows the owner to send funds and interact with other contracts
    function forward(address destination, uint value, bytes data) {
        if (msg.sender != owner) throw;
        if (!destination.call.value(value)(data)) {
            throw;
        }
    }
}

You could pick a nominee for example Mossack Fonseca to create the above contract. They could then create a signed transaction transferring ownership that hasn’t been sent to the blockchain.

This could then be provided to you with the same functionality and risks as the signed document in the above IBC example.

Your nominee could in theory steal any funds being sent to them, but you would run the same risk in a traditional IBC example.

Which is why trust is everything in that world and why Mossack Fonseca were able to build up the reputation and client base they have. We’ll see what current events will do to that trust though.

In my next article I cover Offshore Trusts and how we can replace them using Ethereum.