Money Laundering Using Trust and Company Service Providers

The document “Money Laundering Using Trust and Company Service Providers” from the Financial Action Task Force has some interesting case studies of how money is laundered.

It should be noted that they are not saying that Trusts are necessarily a bad thing; in fact they say that:

“Trust and Company Service Providers (TCSPs) play a key role in the global economy as financial intermediaries, providing an important link between financial institutions and many of their customers. They provide often invaluable assistance to clients in the management of their financial affairs and can therefore significantly impact transactional flows through the financial system.”

Bearer Shares

Mention of these have featured a lot in the recent Mossack Fonseca data breach. They work like a £5 note, a “promise to pay the bearer”, where the bearer is whosoever happens to be holding them. Hence they lend themselves to money laundering, and a number of jurisdictions, including Jersey, do not permit companies to be formed with bearer shareholdings. Here is the case study by FATF:

Case: Concealment of beneficial ownership information through use of bearer shares

As a result of a drug importation investigation, approximately USD 1.73 million was restrained in combined assets from residential property and bank accounts. These assets were located in four countries in various regions. Significant assets restrained involved two offshore companies incorporated in Country A. Investigators also seized original bearer shares of three offshore companies and original articles of incorporation.

The investigation revealed that one of the suspects used the services of a lawyer from Country B to design a money laundering scheme that included the incorporation of offshore companies with bearer shares. The lawyer hired the services of a management company in Country C, who in turn used the services of a company in Country A to incorporate bearer share companies in Country A.

There was no requirement to register the names of the shareholders at the corporate registry office, company head office or anywhere else. The only names that appeared were the original incorporators of the company in Country A, who then forwarded the bearer shares and articles of incorporation to the Country B management company.

The management company then forwarded the original bearer shares and articles of incorporation to the lawyer, who in turn handed them over to his client. The files held by the management company only contained the names of the nominee directors, nominee administrators and the directions given by the Country B lawyer who acted on behalf of the suspect shareholder.

The use of bearer shares companies and professional intermediaries in this investigation almost offered absolute anonymity to the person in possession of the bearer shares and is clearly a powerful tool to conceal proceeds of crime.

If investigators had not seized the bearer shares in the possession of the suspect, it would have been impossible to determine the owner of these companies and ultimately to identify and restrain their assets as proceeds of crime. In this case, the offshore companies held significant assets alleged to be the proceeds of crime - bank accounts in Country C, and residential property in Country B and Country D

Beneficial Ownership

Some jurisdictions like Jersey require identification of the ultimate beneficial owners of an entity which must be disclosed to the regulatory authorities. That is not the case in the USA, and states like Delaware provide services that are ripe for money laundering, because there is no requirement in the U.S. for the identification of beneficial ownership at the time of incorporation. When a call is made to close “tax havens”, it is often islands like the Crown Dependencies that are thought of, whereas in fact states like Delaware are still far less well regulated.

Case: Registration process that does not require identification of beneficial ownership

In 2002, U.S. Immigration and Customs Enforcement (ICE) (through its legacy agency U.S. Customs) received a request for assistance from a foreign customs service concerning alleged customs fraud with respect to the importation of various kinds of used trailers, semi-trailers, container-transporters, and transport vehicles equipped with supplemental cranes.

The foreign customs service alleged that the invoices and customs entry documents undervalued the actual cost of the vehicles, and misrepresented the country of origin of the merchandise. The customs entry documents and accompanying invoices identified a US-based company in Washington DC as the exporter of the vehicles.

As a result of the foreign request, ICE was asked to interview company officers located in Washington, DC, in an attempt to determine the origin of the suspected fraudulent invoices. The investigation revealed that the suspect company was incorporated in the District of Columbia and the Registered Agent was a Washington, DC “corporate registration agency.”

The President of this corporate registration agency was interviewed and told agents that his company “provides assistance to mostly foreign companies with U.S. export documentation, and serves as a U.S. incorporation agent.” He went on to advise that his company had been requested by a corporate registration agency from Delaware to assist in filing the District of Columbia incorporation papers on behalf of the suspect company. He advised that approximately 60% of his business was referrals from the Delaware corporate registration agency. The agents were told that no documents relating to the suspect company were maintained by his registration agency and they should contact the Delaware registration agency for those documents.

Agents contacted the Delaware registration agency and were told the suspect company was “ordered and paid for” by a foreign corporation registration agent. The agents were told that if they wanted additional information, they would have to contact the foreign corporate registration agency located in an offshore jurisdiction. According to its website, the foreign corporate registration agency provides advisory, management, and administrative services relating to offshore companies.

Because there is no requirement in the U.S. for the identification of beneficial ownership at the time of incorporation, the ICE investigation was unable to obtain the information that the foreign customs authorities had requested.

Case: Inadequate beneficial ownership information requirements

Acting on information from the foreign Central Bank and STR from an Austrian Bank, the Austrian FIU conducted enquiries into suspected cases of tax evasion and money laundering being carried out by foreign banks with correspondent relationships with banks in Austria. The STR related to transactions by the foreign banks involving different offshore companies amounting to about USD 45 000 000. The A-FIU analysed the transactions relating to the correspondent banking accounts and tried to link these transactions with a predicate offence. The A-FIU also made requests to several FIUs in other jurisdictions.

The responses received from these foreign FIUs, and also the A-FIU's own investigations, confirmed that the transactions involved approximately 72 offshore companies (as sender and receiver) but no information regarding the beneficial owner or the registration country of the different offshore companies involved was able to be obtained. The A-FIU were able to establish and trace the existence of only six offshore companies (receiver of the money) and made requests for further information. However unfortunately the only information available was that the companies were registered but the work regarding the due diligence and the real beneficial owners was done in another jurisdiction by lawyer companies.

Shell companies

Shell companies are especially vehicles made for corruption. Shell companies that cannot be traced back to their real owners are one of the most common means for laundering money, giving and receiving bribes, busting sanctions, evading taxes, and financing terrorism. The Book “Global Shell Games” gives the methods and results of testing how much checking of companies goes on, and how robust the compliance regime is. The results are surprising:

“The Dodgy Shopping Count for tax havens is 25.2, which is in fact much higher than the score for rich, developed countries at 7.8 – meaning it is more than three times harder to obtain an untraceable shell company in tax havens than in developed countries.”

“Some of the top-ranked countries in the world are tax havens such as Jersey, the Cayman Islands and the Bahamas, while some developed countries like the United Kingdom, Australia, Canada and the United States rank near the bottom of the list. It is easier to obtain an untraceable shell company from incorporation services (though not law firms) in the United States than in any other country save Kenya.”

Case: Use of shell companies to facilitate corrupt payments

An operational business goes through a TCSP with the objective of getting control (via a fiduciary/trust contract) of a shell company domiciled under European law, giving it the appearance of being operational. The objective is to pay the shell company a compensation for fictitious consulting services. This fee is then paid by the TCSP, on behalf of the shell company, to a third person who in turn is responsible for bribing a public official who grants access to a public exchange to the above-mentioned operational business. This corruption can be done with or without the knowledge of the TCSP.

The book “Shell Games” gives other examples:

“In December 2009 a plane searched in Bangkok was found to be carrying North Korean arms bound for Iran, in violation of international sanctions. The plane had been leased by a New Zealand shell company, but there was no information on the individual who controlled the company.”

“Corrupt Russian tax officials used shell companies from Cyprus and the British Virgin Islands to steal hundreds of millions of dollars in a case that led to the imprisonment and death of Russian whistle-blower Sergei Magnitsky.”

Russian arms dealer Viktor Bout was convicted in November 2011 of conspiracy to provide aid to a terrorist organization. Bout’s illicit activities were crucially dependent on a network of shell companies in Texas, Delaware, Florida, and elsewhere around the globe.”

And finally....

It is worth noting that the US state of Delaware probably has the worst record when it comes to lack of accountability, and beneficial owner registers. But amazingly one hears very little of this from Jeremy Corbin and Vince Cable. Can it be that it is easier to pick on Crown Dependencies - regardless of their regulation - than to ask America to put its house in order?

A guide by Harvard Business Services Inc, called "Asset Protection for Non-Resident Aliens", says this:

What do the best-informed international business owners know? Delaware is better than off-shore!

Single-member Delaware LLCs are "disregarded entities" according to IRS regulations, which means they have no U.S. income tax and no reporting due. (In some cases, it is advisable to use the combination of a Delaware LLC and another entity, such as a Delaware corporation, or a UK Limited Company to gain specific tax advantages. Check with your attorney or financial advisor.

To our many international customers, confidentiality is important. Many of our customers select single-member Delaware LLCs as one component of their asset protection strategy. The Delaware LLC provides this confidentiality that most international jurisdictions do not offer.

As a Delaware registered agent, Harvard Business Services, Inc. is not required to keep any information on the beneficial owner, and the state of Delaware does not require that the beneficial owner's identity be disclosed.

Owners of real estate in international locations have a range of options to shelter their ownership including holding the title/deed in the name of a Delaware LLC. The structure has the flexibility to account for estate planning issues as well as asset protection.

As the Daily Mail comments:

"Experts have now revealed the reason for the low number of people involved might be because shell companies are being formed under authorities' noses in Wyoming, Delaware or Nevada - meaning Americans do not need to go to Panama."

The Institute of Tax and Economic Policy notes the lack of regulations requiring beneficial owners to be checked and held in a central registry. In a 2015 report, it stated:

"While no U.S. state requires disclosure of beneficial ownership information for business entity formation, Delaware is one of the easiest jurisdictions in the world to set up an untraceable shell company. Setting up a company in Delaware requires less information than signing up for a library card."

"At the federal level, Congress could and should pass legislation requiring states to require beneficial ownership information from businesses. The Incorporation Transparency and Law Enforcement Act, which would mandate that states require the name and address of each beneficial owner of a company at the time of incorporation and after any change in ownership, has been proposed in the last several Congresses but has never come to a vote in either chamber. "