Obfuscating Ownership

When property rights are weak, wealthy individuals may obscure their ownership of assets through proxy frontmen, related individuals, shell companies, and offshore firms. We formally examine the decision of such “oligarchs” to obfuscate ownership to protect property from legal assault and confiscatory taxation, emphasizing that both the benefits and costs of obfuscation may be greater for oligarchs with better political connections. We explore these relationships empirically in a study of Ukraine around the time of the Orange Revolution. Combining information from investigative journalists on control of over 300 key enterprises with rich data on formal ownership ties, and employing various strategies for identification, we find that oligarchs who were in the opposition before the Orange Revolution were more likely to obscure ownership through various mechanisms. Moreover, oligarchs who had been closely connected to the regime prior to the Orange Revolution reversed behavior afterward, turning to foreign entities to protect their suddenly vulnerable assets. Exploiting presumed geographic variation in political connections, we find similar patterns in a larger sample of over 14,000 firms.