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. "

So what has Mossack got under its Panama Hat?

So what has Mossack got under its Panama Hat?

Mossack is a Panama-based law firm whose services include incorporating companies in offshore jurisdictions such as the British Virgin Islands. It administers offshore firms for a yearly fee. Other services include wealth management.

The OECD Supplementary Report on Panama reported:

“The 2014 Supplementary Report concluded that six of the ten essential elements were in place. Two of the essential elements were determined to be “not in place”. These were the availability of ownership and identity information (Element A.1); and the availability of accounting records (Element A.2).”

“One essential element related to Panama’s network of information exchange mechanisms with all relevant partners (Element C.2) was determined to be “in place but certain aspects of the legal implementation of the element needed improvement”.

“Another essential element concerning Panama’s ability to provide information in a timely manner (Element C.5) involves practical issues that will be assessed at a later stage.”

And it notes that:

“Panama has enacted new legislation to strengthen its anti-money laundering (AML) framework. Under the new AML legislation, resident agents are required to hold detailed records of their clients, including those of final beneficiaries. These measures help to ensure the availability of identity and ownership information on companies and private foundations. However, it appears that resident agents are not required to hold information on all shareholders and beneficiaries, but just on the natural persons that have the final control on the legal entities for whom they are acting as resident agents.”

“With respect to companies, a regulation to the new AML legislation clarified that resident agents are required to identify and verify the identity of final beneficiaries holding 25% or more of the shares of the legal entity. In any event, the new obligation imposed by the amended Commercial Code on all legal entities to keep updated share registers for nominal shares, subject to penalties for non-compliance, is sufficient to ensure the availability of ownership information with respect to shareholders where nominal shares are concerned”

But there are problems where trusts and foundations are concerned:

“Accounting requirements are not in place in Panama for entities other than companies and partnerships that carry on business in Panama. In addition, the Panamanian law does not specify the type of records and minimum retention period related to accounting documents pertaining to trusts and foundations”

It also noted that the Trust Law and Foundations Law were silent on the type of records required to be kept and their retention period, and recommended that these requirements be clarified to ensure that reliable accounting records are maintained for a five year period. This has been improved since but the report did note that:

“Foundation incorporation documents that do not contain the founder’s identity information cannot be notarised, and this is an essential requirement in order for the foundation to formally and legally exist. However, identity information about the beneficiaries is not included in the Public Registry.”

With regard to companies, there are two forms of companies in Panama: Sociedades Anónimas

(SAs or corporations) and Sociedades de Responsabilidad Limitada (SRLs).

Both SAs and SRLs are required to have a resident agent. The names and addresses of the owners of an SRL must be published in the Public Registry But SAs are the most commonly used anamanian companies by both resident and foreign investor

SAs are created by public deed which must be registered in the Public Registry. They must have a resident agent at all times who must be a lawyer admitted to practice in Panama

Panama has anti-money laundering legislation, and this has been tightened since the OECD made their initial review. These require look through on legal persons. A natural person is a human being, but holdings can be held by a trust, foundation or another company. The law states that: “in the event that the final beneficiary is a legal person, due diligence will prolong until getting to know the natural person that is the owner or controller.”

But what is not clear is how close the Panamanian regulator monitors how well this is done. In Jersey, the Financial Services Commission can seem very heavy handed, but by contrast, the Panamanian authority seems more lax.

The JFSC conducts continual and detailed reviews of compliance with the law, going into firms, examining records in detail, and making recommendations for any weakness in process or data, and will continue to ensure it is satisfied that any rectification of weakness in a regulated company are fixed. There are large sanction lists of individuals which must be checked against final beneficial owners, and any trading with these would lead to prosecution. It is not clear that the Panamanian regulator does this.

The leaked records comprise more than 11 million documents - emails, bank accounts and client records – which represent the inner workings of Mossack Fonseca for nearly forty years, from 1977 to December 2015 . They reveal the offshore holdings of individuals and companies from more than 200 countries and territories. And they suggest that the Panamanian oversight is not robust enough in its monitoring and investigation of companies like Mossack,.

As the Irish Times reported:

“They recount example after example of ethical and legal wrongdoing by some clients and provide evidence of a firm happy to act as a gatekeeper to the secrets of its clients, even those who turn out to be crooks, members of the Mafia, drug dealers, corrupt politicians and tax evaders.”

And it is interesting to note how increased regulation led to changes in the inner workings of the company Back in 1987, Mossack Fonseca made its first big move to establish a branch in the British Virgin Islands, which a few years before had passed a law that made it easy to set up offshore companies without public disclosure of owners and directors. Bearer shares in BVI companies were also a good way of keeping anonymity and have featured heavily in the reports.

When shares are bought and sold, a registered shareholder name is included on share certificate details. Bearer shares bypass this by not including the name of the holder on a physical share certificate. Incidentally, the issue of bearer shares is not permitted in Jersey companies.

But when the British Virgin Islands cracked down on bearer shares in 2005 , as the Irish Times notes, Mossack Fonseca moved that particular business to Panama. In other words, as centres of operations like BVI became better regulated, and required more compliance, Mossack seems to have shifted to jurisdictions that were less fussy.

As the Guardian reports, “over a decade, more than 600 official law enforcement requests from the BVI Financial Investigation Agency (FIA) shows that in multiple cases Mossack Fonseca had no idea for whom it was acting. Performance improved in 2015. A name was given in response to all but one of about 90 request”

The Guardian sees the BVI as been licensing the firm even though it knew it was not fulfilling its legal obligations, but it could be seen from the increased compliance with requests that the BVI was strengthening its control.

There are different narratives here, the Irish Times taking the view that a more robust compliance regime lead to Mossack leaving BVI, the Guardian seeing BVI as still being involved, despite itself reporting the rather contradictory fact that performance with requests had improved.

What we don’t know, which is standard in cases like this, is what kind of rectification programme was put in place to correct past deficiencies, and what timetable was set out to do so. Until that information is forthcoming, it is difficult to know how good the BVI regulation has been.

But there are loopholes in legislation. Mossack Fonseca often appears not to have stored information on beneficial owners. Instead it used a loophole in the legislation that allows company agents to rely on an “introducer” to carry out due diligence.

Yet it must have been having some impact, because if all jurisdictions were regulated alike, Mossack would not have started moving business away from BVI as the pressure on requests became more insistent. The Irish Times notes that Mossack began moving from BVI to Panama and Anguilla and Samoa as a result of increasingly stringent BVI regulation.

The Sydney Morning Herald reports this “As you are aware, we have been deliberately stalling the proposals from OECD countries to enter into Tax Information Exchange Agreements (TIEA)," the chief executive of the Samoa International Finance Authority, Erna Vaai, wrote to the Panama firm in June 2007.

And it noted that “While Samoa eventually signed the TIEA with Australia in 2009, in practice Australian information requests to Samoa can take more than three years to process.”

Of course we saw something similar with the French blacklisting of Jersey for delays over TIEAs which was only rectified when legislation was amended to ensure that there would not be extensive delays in the process.

The Irish Times also notes that the fall-out could be extensive:

“Although many of the operations could be deemed legal, which has been admitted by the ICIJ itself, the potential tax-evasion dealings are bound to have serious political ramifications across continents.”