HIDING THE MULA

There is an important element of any modern society that by its nature holds a federalist character and, at the same time, does not.  The modern corporation, by its very structure, has the very federal element of being owned by the voluntary affiliation of stock owners – ostensibly forming a federation through that ownership. 

Yet, it does not have, among those stock owners, any sense – except perhaps for a select few who own large number of shares – any sense of ownership of that entity.  They, in terms of their consciousness, own stock shares, not a corporation with all its human attributes and qualities.  As such, their “pride” in ownership does not stem from ownership, but from any transactional profit they might derive from said ownership – the first step of detachment.

          Its worth mentioning, the typical stock purchaser does not care about the company he/she is buying ownership into which in a vast number of cases amount to a miniscule portion of the total ownership.  All that person cares about is the price for which he/she is purchasing the shares and how much the anticipated price he/she can sell it at some future date.  In most cases, the person anticipates a higher price and, therefore, a profit from the transactions.  Just another way to make a buck.

          This posting needs the reader to understand these basic elements of stocks, corporations, and stock ownership to make its points.  But the main point being made here is not directly associated with these elements, but with how the notion of corporation is used to establish the processes that lead to unsavory results.  This is aided by, to various jurisdictions being fast and loose with attaining identifiable information with those establishing corporations. 

And those results, as is cursorily explained below, come about from a detachment system – detachment between ownership and business – that allows certain practices to take place.  But before this established process came into being, it was an idea, but an idea with important consequences. 

Its manifestation has probably done more to advance what Jonah Goldberg[1] calls “the Miracle” than just about any other development.  As the reader is probably aware, the formation of corporations provides the vehicle for the accumulation of financial capital to fund the purchases of physical capital allowing the expansion of smaller businesses.[2]  In turn, that allows the businesses, if successful, to go national or even global.

          With those physical assets, as well as human capital, a business company can buy machinery, set up distribution facilities, set up sell operations, rent the necessary office spaces, acquire the use of buildings, on and on.  In the process, by the willful, chosen course of action, investors – who supply the money – in a formal way, form a type of “partnership.”  On paper, they become federated one to the other.  So much so, that the scholar, Daniel Elazar, cites this process as one that helps demonstrate that America is a “thoroughly” federated system.[3]

          But hold on.  Oliver Bullough points out a missing federal quality in these arrangements.  In his description, he explains how corporations have attained the ability to hide money and other assets and this has led to very un-federated realities.  He writes:

… there is more going on here than just [corporate] lawyers being dishonest – turning a blind eye, or otherwise.  It was not a crooked London solicitor or a dishonest New York attorney that made it so easy to create companies [instrumental in hiding money]; that was the work of government.  The crucial attribute of corporate vehicles is that they are legally separate from their owners and their owners’ liability for their debts is limited.  What that means in practice is that, if you operate through a company, society as a whole is taking responsibility for your debts.  It’s a kind of insurance.  If your business fails, only the assets of the limited liability company will be at risk, not those of its owners.[4]

Of course, it is this “insurance” that helps persuade investors to invest in “start-up” companies despite all their inherent possibilities for failure.  So far, so good; but this process, by avoiding direct attachment to the business in question, through this “insurance” scheme, accomplishes an important – second – step toward non-identification of ownership.

          Naturally, corporate structuring has a history and it is relevant to what is currently going on.  The first corporations of note popped up in the early 1800s.  England and the Netherlands were the first two nations to employ them.  But they were initially highly restricted.  For example, in England, Parliament had to give permission for the creation of one and that, in turn, limited the number that were created under that supervisory regime. 

But leave it to the good ole USA – even in its more federalist years – to give it its current form.  New York first legislated the limited liability form in 1811 and by the 1850s, that structural form was in full use.  By the early twentieth century, modern incorporated entities accounted for 95% of the market.  Citing the Economist, Bullough reminds his readers, “Limited liability is … ‘the key to industrial capitalism’.  Companies are good, without them, our modern prosperity would have been impossible.”[5]

So, there is an upside, but there is also a downside.  It turns out, that not only people can buy stocks or form corporations, but for a variety of reasons – some reasonable and honest, some not so much – corporations (legal persons) can also form them – sometimes many times over.  And this layering of ownership provides the third, and perhaps most important, structural basis for hiding ownership and with it, the ability to hide money.

And hark, the problem comes into focus.  Through this anonymity, a lot of shenanigans take place.  From spouses who want to hide their assets from divorcing mates to Mafia and other illicit, organized groups who use this structural capacity to hide money, how it is earned, and how it is used.  And this includes corrupt politicians on the take.  Some of those activities include fraud, bribes, embezzlement, and tax evasion.  And, of course, these activities have social consequences.

If the way the money is “earned” happens to be illegal (dirty money), the ill effects of that activity is problematic – take drug dealings or a blind eye to shoddy construction by public inspectors.  But people can find such hiding not only associated with “dirty” money, but also with “naughty” money. 

Tax evasion, in the eyes of many (not including this writer), is not dirty, it’s naughty.  People also see spending on extra marital affairs, for example, and other such expenditures as less than dirty but not honorable.  They result in embarrassment, so through the efforts of some skillful lawyers, those funds can become de-embarrassing through certain practices and incorporating, in certain ways, plays an important role.  

There are countless reasons why people want to hide money.  And since the uses of money have social consequences – as just pointed out – society has every right to ferret out where and by whom money is owned and controlled.  But they can only do so if the important information is recorded and accessible – they are too often neither.  In terms of the US, these practices go against the very notion that Americans are, constitutionally, a federated people.

Central to these unfederated consequences, created by hiding money, is the function corporations fulfill in such efforts.  So, an issue civics classes can have students investigate – at the risk of encouraging future practitioners – is the ability of individuals or groups to partake in these practices including those associated with corporations that are set up for these dishonorable and even illicit purposes.

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[1] Jonah Goldberg, Suicide of the West:  How the Rebirth of Tribalism, Populism, Nationalism, and Identity Politics Is Destroying American Democracy (New York, NY:  Crown Forum, 2018).  The “Miracle” refers to the explosion in economic wealth since the seventeenth century.

[2] This is especially the case when investors buy into an IPO, an initial public offering, of a promising, relatively young business.

[3] Elazar, D. J.  (1994).  How federal is the Constitution? Thoroughly.  In a booklet of readings, Readings for classes taught by Professor Elazar, (pp. 1-30) prepared for a National Endowment for the Humanities Institute. Conducted in Steamboat Springs, Colorado.

[4] Oliver Bullough, Moneyland:  Why Thieves and Crooks Now Rule the World and How to Take It Back (London, England:  Profile Publishers, 2019), 92.  Emphasis added.

[5] Ibid., 93.