• Cross-Border Tax Evasion, Corporate Governance, and Anti-Money Laundering: A Case Study of Bestec Co.

Abstract

In 2002, the Taiwanese company Bestec Power Electronics Co., Ltd (hereafter referred to as BESTEC) was preparing to file a public listing application. The company’s management orchestrated a fraudulent share scheme to secure absolute control for Chairman Chen’s family. BESTEC initially announced a considerable capital increase. They wired US$ 5.1 million in cash, under the disguise of processing fees to a Mauritian paper company’s OBU account. Top Tier Co., Ltd was established under the name of a young family member, who was a student at the time, and therefore had no substantial business presence. On the following day, US$ 5 million was wired back to Taiwan from the same OBU account and was deposited into five domestic bank accounts that belonged to Chairman Chen’s close relatives. Subsequently, US$ 5 million was funneled back to BESTEC as payments for purchasing nearly 90% of the new shares that were issued in the company’s seasoned common stocks offering.

Moreover, after the aforementioned fraudulent capital increment, BESTEC consecutively distributed numerous lucrative cash and stock dividends, most of which went to members of the Chen family. At this time, a series of suspicious offshore cash flows and potential income tax evasion were detected by the Central Bank of Taiwan, who relayed the information to the tax authorities in Taiwan. However, the tax authorities concluded the investigation, declared it as pure tax avoidance, and charged additional tax assessments and fines based only on a small portion of the considerably wider illegal gain scheme. In this case, the tax authority did not handle the capital arrangement scheme and even “legitimized” some of the embezzled company funds for the Chen family.

This case study demonstrates that severe company and securities frauds can be hidden beneath apparent tax evasion. From a corporate governance perspective, such suspicious and irregular arrangements and cashflows often trigger other increasingly severe legal issues, including anti-money laundering investigations and the expropriation of company assets through the control of shareholders. This study identifies the sources of illegal gains, the true victims of frauds, and the malfunction of corporate governance and securities supervision. A “whole-of-government” approach, comprising a cooperation platform and an interagency information sharing mechanism, is essential for amending the current regulatory loopholes.

Keywords: Corporate Governance, Cross-Border Tax Evasion, Securities Supervision, Interagency Information Sharing, Anti-Money Laundering