In October of 2021, news media across the world reported on what was said to be the largest leak ever of offshore data, exposing the rampant use of anonymous shell companies by the rich and the powerful. Branded the Pandora Papers, the leak featured a Panamanian law firm that purportedly created at least 14,000 shell companies and trusts in offshore jurisdictions – entities with no real business operations or assets that are frequently used to facilitate illicit activities ranging from drug trafficking to tax evasion. The Pandora Papers leak followed other massive document-leaks over the past several years that have inspired a burgeoning scholarly literature and news stories critiquing the use of anonymous shell companies. This attention has in turn ushered in a wave of legislative reforms aimed at bringing transparency to the ownership structure of business organizations. Among them is the Corporate Transparency Act, passed by Congress in 2021, which requires “reporting companies” to submit a report to the U.S. Department of Treasury identifying each beneficial owner of corporations, LLCs, and other similar entities that are formed or registered to do business in the United States.

Against this backdrop, my new paper reveals an unsung virtue of anonymity in the ownership of business enterprises. Anonymous companies, whose owners are practically untraceable, are not always “getaway cars” deployed for illicit purposes but can arguably serve socially beneficial functions. For instance, anonymous companies were instrumental in bringing the first abortion drug to the United States at a time when no pharmaceutical company was willing to do so for fear of drawing an anti-abortion backlash. Those anonymous companies were formed in the Cayman Islands in the 1990s with undisclosed investors and came to operate Danco Laboratories, the now well-known distributor of the drug Mifeprex. Today, a growing number of other anonymous companies have been formed by, for example,  Black entrepreneurs who want to conceal their race to avoid market biases and survivors of intimate-partner violence who need to ensure their safety and guard against retribution. To satisfy the demand for privacy, boutique law firms and registered agents in states like Delaware, Wyoming, and Nevada specialize in forming anonymous companies so entrepreneurs can do business without fear of harassment, cyber-stalking, or doxing online.

Anonymous companies thus reveal a prevalent, yet under-theorized function of modern business entities: mediating the dissemination of information related to their owners. In particular, my article documents how protecting the identity of investors from public disclosure – “identity shielding” – can advance important economic and humanistic interests.

The concept of identity shielding enriches discussions about the function of modern business entities. Today, corporate law is typically discussed as a way to deal with the risks of business failure to a firm’s equity owners. Thus, for instance, discussions of limited liability involve whether and to what extent the law ought to encourage entrepreneurial risk-taking by limiting the potential loss borne by business owners. These accounts are largely agnostic to the privacy interests of investors, conceptualizing “liability” as the loss of capital accrued to entrepreneurs in the event of business failure. In reality, privacy greatly affects the propensity of individuals to take on business risk. In this sense, identity shielding can be understood as providing limited reputational liability, rather than limited capital liability, to business owners. Like limited liability, identity shielding can encourage commercial activities that not only result in desirable products and services for consumers, but also may generate tax revenues and technological innovation for the benefit of society. The link between identity shielding and innovation should be of no surprise, given that innovation often requires the capacity for critical perspective on the status quo.

Of course, the ability of anonymity to serve important economic and moral interests does not mean that identity shielding must be pursued at all costs. Rather, it’s important to understand what is at stake when we think about the role of anonymity and business enterprises. Take, for example, the doctrine of limited liability. Although credited with encouraging socially productive risk-taking, limited liability can also lead to cause devastating events like oil spills or the release of toxic materials by shifting much of the costs and risks to third parties. Similarly, anonymity may in some circumstances facilitate financial crime, create moral hazard, and encourage the flow of capital to businesses that are morally unpalatable to mainstream society. Yet, mandatory disclosure laws – particularly ones that mandate disclosure to the public rather than just government agencies – come at the cost of undermining identity shielding that is already important to the modern economy. By developing a theoretical account of identity shielding, I hope to encourage policymakers and scholars to engage in a more nuanced discussion of regulating and harnessing anonymity.

This post comes to us from Professor Will Moon, an associate professor at the University of Maryland School of Law. It is based on his recent article, “Anonymous Companies,” forthcoming in the Duke Law Journal and available here.