“In the rhetoric of the struggle against money laundering, as well as the plot lines of dozens of movie thrillers, banking secrecy or anonymous bank accounts is often central. In the popular imagination ‘numbered bank accounts’ provide the end point for ill-gotten gains. With few exceptions, however, banking secrecy in the form of individuals holding anonymous accounts is a problem that disappeared ten years ago. Truly anonymous personal accounts, where no one in the bank knew the identity of an account holder who was referred to only by a number, were always quite rare. As a legacy of the Austro-Hungarian empire, Austria, Hungary, Slovakia, and the Czech Republic had such anony- mous passbook accounts until pressure from the FATF forced their abolition in 2000–2001. The anonymity provided by such accounts was perfect, but the downside was that in losing the physical passbook the account holder might also lose the only means of accessing the account. In any case, these accounts had strict limits on their balances (e.g., a ceiling of $7,000 in Hungary).
A more common variant of banking secrecy was laws that made it a criminal offense for bank employees to reveal information pertaining to their clients to any party, including the local government. Such a law was passed in Switzerland in 1934 and was widely copied thereafter. Here, only one or two employees of the bank would know the actual identity of the account holder, which otherwise would be linked only to the account number. As part of the direct-testing logic, I purchased such a personal numbered account in Somalia. Perhaps not surprisingly, things did not go according to plan, as discussed below. While these bank secrecy laws remain in place, in every country they have been amended to include clauses specifying that secrecy is suspended in cases in which there is credible evidence of money laundering. Such amendments, and the abolition of anonymous personal accounts, have largely solved the problem of bank secrecy as such. The problem of corporate anonymity, however, has always been a much bigger problem, and it is far from being solved.
It is customary, but incorrect, to assume that companies must have employees, buildings, and the means necessary to produce some good or service.
In fact, legally a company is nothing more than an alternative identity, a legal person as opposed to a biological person. There is no need for companies to have buildings, employees, etc., and those that have only this legal personality are referred to as ‘shell companies.’ Although all companies must have a name to be registered and thus to exist, in the case of anonymous shell companies it is impossible to establish the identity of the real individual who owns and/or controls the company, and thus any associated bank account (perhaps strictly speaking the shell companies are ‘anonymizing’ rather than anonymous). Therefore, by establishing such a company, criminals can simultaneously enter and use the international financial system and prevent efforts to follow the money trail back to themselves. Because the company is anonymous, in that it cannot be linked with the real owner, all the transactions in which it engages are effectively untraceable and anonymous also. For this same reason, the opacity conferred by anonymous shell companies stands in direct opposition to the injunction to render the financial system trans- parent by ‘knowing your customer,’ the foundation of all AML rules. As is demonstrated, shell companies can be incorporated online in a huge variety of jurisdictions for a few thousand dollars or less, often within twenty-four hours. One example of such a service available after a simple web search reads as follows:
‘Guatemala Trust Agreement Banking—This is where the law firm forms an anonymous corporation for you. The law firm signs on the bank account. The bank does not know who you are and has no ID documents on you. You can access the online banking and obtain an anonymous no name Visa card from the Mexican bank. The startup fee is $6,000 and the law firm deducts 3% of all the incoming funds, nothing on outgoing funds. . . . We also have corporations with bank accounts open where the law firm is listed as the signatory on the account ready to go.’
Something upward of two hundred thousand shell companies are formed in offshore financial centers each year. By comparison, two million companies are incorporated in the United States annually, few of which can be traced back to their real owners, according to Levin.
The Importance of Anonymous Shell Companies
Anonymous shell companies and the policy problems associated with them are nothing new. In a 1937 letter to President Roosevelt, the secretary of the treasury complained of U.S. citizens setting up shell corporations to hide funds in jurisdictions such as Newfoundland, the Bahamas, and Panama:
‘Their corporation laws make it more difficult to ascertain who the actual stockholders are. Moreover, the stockholders have resorted to all manner of devices to prevent the acquisition of information regarding their companies. The companies are frequently organized through foreign lawyers, with dummy incorporators and dummy directors, so that the names of the real parties in interest do not appear.’
The letter then went on to complain about the use of foreign insurance companies, domestic companies, trusts, and pension trusts as legal devices to obscure the connection between individuals and particular assets or income, once more all problems that have endured to the present day. More than seventy years later, nothing has changed. Thus in 1981, the IRS report Tax Havens and Their Use by United States Tax-Payers noted that probably the most common form of abuse was ‘companies that are structured to appear to deal with only unrelated parties when they are dealing with related parties . . . hiding the fact of ownership of tax haven corporations.’ To further parallel the importance of anonymous shell companies, a 1998 UN report explained that ‘despite a myriad of complications, there is a simple structure that underlies almost all international money-laundering activities. . . . The launderer often calls on one of the many jurisdictions that offer an instant corporation manufacturing business. . . . Once the corporation is set up in the offshore jurisdiction, a bank deposit is made in the haven country in the name of that offshore company.’ The authors underline that secrecy regarding the ownership of a corporation is a much more serious obstacle to countering money laundering than banking secrecy as such.
In 2000 the European Commission published a study on the financing of organized crime. Receiving the most emphasis in the report is the centrality of establishing the beneficial ownership of companies: “company law is the most essential factor in the transparency of a financial system” Encapsulating the rationale for the focus of this chapter, the report goes on to say:
‘If [company] regulation seeks to maximize anonymity in financial transactions, enabling the creation of shell or shelf companies whose owners remain largely unknown . . . such anonymity will be transferred to other sectors of the law. Thus the names of ultimate beneficial owners or the beneficiaries of financial transactions will remain obscure, which thwarts criminal investigation and prosecution . . . if company law maximizes anonymity, then the ineffectiveness of criminal law and police and judicial co-operation is inevitable. The same effect arises in banking law, where bank secrecy becomes a marginal issue owning to the anonymity enjoyed by the companies operating the bank accounts under surveillance.’
A 2006 report by the FATF on the misuse of corporate vehicles is unequivocal in stating at the outset: ‘Faced with the vast scope of a general study of corporate vehicle misuse the study focuses on what is considered to be the most significant feature of their misuse—the hiding of the true beneficial owner.’ It quotes earlier FATF work noting ‘the ability for competent authorities to obtain and share information regarding the identification of companies and their beneficial owner(s) is thus essential for all the relevant authorities responsible for preventing and punishing money laundering,’ as well as those countering tax crimes, corruption, and fraud. A 2009 World Bank study authored by Richard Gordon identified the use of anonymous shell companies as the most common mechanism by which corrupt political leaders launder funds embezzled and received as bribes. Finally, the Tax Justice Network’s Financial Secrecy Index shares the same logic: ‘For decades it has been believed that bank secrecy . . . is the touchstone of offshore financial secrecy. This is a myth. . . . Trusts, for example, or certain kinds of anonymous companies offered by places like Delaware in the United States, are used to disguise true identities and ownerships in far more devious and effective ways.’
There are many more such expressions of official concern, but the basic point is clear: the use of companies that obscure the real owners are the single greatest obstacle to fighting money laundering and other financial crimes. Following from this, to the extent that such anonymous vehicles are easily available, AML standards are unlikely to work. Before discussing the testing for the availability of such vehicles, I briefly present some examples that show how anonymous shell companies can be used in practice to disguise the pro- ceeds of crime. Despite their differences, all of these criminal and allegedly criminal activities share a reliance on interposing a corporate structure to hide the real beneficiaries and controllers of the transactions in question.
Anonymous Shell Companies in Action
To address the issue of tax evasion first, consider Sam Congdon, a Texas-based corporate service provider, who set up and sold offshore companies and trusts for roughly nine hundred individual clients. In 2005 a potential client e-mailed: ‘I am interested in opening an offshore account to protect my assets from my ex-wife and Uncle Sam. . . . What does the offshore corporation that you offer provide above the protection offered by Swiss banks?’ Congdon replied ‘Having an offshore account won’t really protect your assets because everything is still in your personal name. What will protect you from lawsuits and such is an offshore structure.’ In an e-mail to another client, Congdon stressed ‘As long as everything is done in the name of the offshore company, then it is private and no one (including Inland Revenue) can get any information about it.’
A second corporate service provider, Lawrence Turpen, based in Nevada, premised his advice to clients on the same principle as Congdon: ‘the key to a successful offshore structure was to separate the client from the paper ownership of the client’s assets, while retaining the ability to benefit from them.’ Legal separation between the client and the funds was achieved using companies and trusts formed in Nevada and the Isle of Man, and practical control of the flows of money was retained through fictitious consultancy arrangements between the company and the individual. As Turpen related, ‘I sent $60,000 a year to my offshore corporation for advice. The advice was never worth a damn, but at the end of the year I had $60,000 in my offshore [company’s] account.’ Money was then repatriated from the company to the owner through further ‘consultancy work’ or fake loans. Besides smuggling clients’ wealth in the form of diamonds hidden in tubes of toothpaste, the Swiss bank UBS also enabled thousands of U.S. clients to evade income tax by helping them hold what were effectively personal accounts in the name of foreign shell companies. The EU also has identified anonymous shell companies as the central obstacle to enforcing its measures to tax interest earned on its citizens’ foreign savings.
Showing the same principle at work at a different order of magnitude is the British Aerospace Systems (BAE) case. In December 2006, the UK government cancelled a corruption probe into an $86 billion arms deal between BAE Systems and Saudi Arabia. The decision followed threats from the Saudi government that it would suspend all intelligence cooperation with the UK and cancel the deal if the investigation were continued. The OECD Anti-Bribery Working Group strongly condemned this decision. Details of BAE’s allegedly corrupt activity had come to light due to information from a former employee, followed up by two investigative reporters, David Leigh and Rob Evans. The scheme is described by Leigh and Evans as follows. BAE allegedly paid bribes to officials from Saudi Arabia and elsewhere in return for arms contracts using agents, the latter being separated from both BAE and bribe recipients by shell companies. The first intermediary company was Novelmight, until 1999 incorporated in the UK, then reincorporated in the British Virgin Islands. A second company, Red Diamond, was set up to channel payments to agents via accounts in New York (Chase Manhattan), London (Lloyds TSB), and Switzerland (UBS) and thence to officials from the governments purchasing BAE’s wares. These payments were excluded from mention in the public contracts but were included in parallel covert contracts for the same deals. Once more, maintaining the corporate veil was key: the British Serious Fraud Office had just obtained crucial documentation elaborating on beneficial ownership of corporate bank accounts when the Blair government cancelled the investigation, citing “a lack of evidence” as well as national security concerns.
However, in 2007 the U.S. Department of Justice began its own investigation into the Saudi sales and other BAE deals with the Czech Republic and Hungary 2000–2002. Meanwhile, the UK Serious Fraud Office continued its investigation of how BAE had won a contract to sell a £28 million radar system to Tanzania (a deal that received cabinet approval only after Tony Blair’s personal intervention). On February 5, 2010, BAE pleaded guilty to false accounting in the UK as well as conspiracy to make deliberately false state- ments regarding its compliance with the U.S. Foreign Corrupt Practices Act. Although the company was not convicted of bribery as such, its admission to the U.S. charges corroborated the substance of the allegations consistently made by the Guardian and others and just as consistently denied by BAE. In particular, it admitted knowingly using shell companies in each case to conceal payments (‘commissions’) to its ‘marketing advisors’ and encouraging the advisors to set up other shell companies to conceal the origins and destinations of these payments. BAE paid a $400 million fine to the U.S. government and £30 million to the UK, but no individuals were prosecuted. The company’s shares rose on the day the guilty plea was announced; analysts had been expecting heavier penalties.
Although much of the discussion above has generally presented a simplified structure of a one-layered corporate veil, it is more typical for miscreants, such as BAE, to use a chain of corporate entities to distance themselves from the underlying crime. An example is a Dutch drug trafficker selling ecstasy in Britain. Sales generated a million pounds in cash that was smuggled back into Eastern Europe. Here the pounds were converted into U.S. dollars and deposited into the account of a local bearer shares company (i.e., where there is no central share registry and whoever holds the physical share certificates owns the company) that had been bought from its creator. This money was then wired to a Netherlands Antilles company under a falsified invoice for ‘management fees.’ The Netherlands Antilles company was also formed with bearer shares. These bearer shares were held by another bearer shares shell company, this time formed in Panama, with the shares for this latter company held by a local lawyer. The criminal then arranged for the Antillean company to ‘loan’ the original money to a Dutch company, Real Estate Investment, of which he was the manager and sole shareholder. The money was used to buy a commercial and residential building, with the rent paying the criminal’s salary as manager and paying ‘interest’ on the ‘loan’ from the Antillean company, interest that was tax deductible.
The final examples relate to illegal arms trafficking. In Levin’s 2009 statement, he recounts the activities of Viktor Bout, the subject of the biography Merchant of Death, and accused by the United States of conspiracy to kill U.S. citizens, illegally acquiring anti-aircraft missiles, and providing support to a terrorist organization (the Revolutionary Armed Forces of Colombia, FARC), in addition to flouting a variety of other international arms embargoes. Bout was arrested in Thailand on the basis of a U.S. extradition request in March 2008 and transferred to New York in November 2010. One of the major obstacles to investigating and prosecuting Bout was again the issue of penetrating the corporate veil. According to the indictment, his arms operations not only depended on shell companies in Liberia and Moldova, but also on hundreds of millions of dollars reportedly transferred through various shell companies formed in Texas, Florida, and Delaware. As Levin glumly concluded: ‘The end result is that a U.S. company may be associated with an alleged arms trafficker and supporter of terrorism, but we are stymied in finding out, in part because our States allow corporations with hidden owners.’
Finally, the North Korean Workers’ Party Bureau 39, responsible for producing and distributing heroine, amphetamines, counterfeit U.S. currency, and other illegal products, also uses shell companies to market its wares internationally while hiding their origin. In December 2009 a planeload of suspected North Korean weapons en route to Iran were seized in Thailand. The plane was registered to a New Zealand company formed by a New Zealand corporate service provider. The latter had no idea of the real owner ‘because he only did ‘the incorporation of the company.’’
Despite the differences in the nature of the underlying crime and the scale of the operations sketched out above, the same principle applies: to the extent that the corporate veil between the legal owner and the party exercising practical control remains intact, the underlying conduct cannot be scrutinized. The regulatory reviews conducted by a variety of governments, NGOs, and international organizations, including the FATF, identify anonymous shell companies and other corporate vehicles such as trusts as the central obstacle to combating major international money laundering and related financial crimes. And as a result, a slew of international standards specify the need to establish the identity of the real individual(s) ultimately in control of any such vehicle. Thus FATF Recommendation 33 clearly states: ‘Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities.’ (Recommendation 34 imposes the equivalent requirements for trusts.) More generally, G20 pronouncements from 2009 onward are replete with calls for greater financial transparency in general and the need to establish beneficial ownership in particular.
But all these laws and ringing declarations leave the real questions unanswered: Do the rules actually work? Are the prohibitions on anonymous shell companies, a central plank of any AML policy, actually effective in practice? To return to the point made earlier, it is common place that laws and regulations are often, perhaps in many countries routinely, completely irrelevant for what really goes on. And if enforcing rules within the bounds of sovereign states is difficult, how much more uncertain is the enforcement and effec- tiveness of international rules operating in a system that by definition lacks a central authority or enforcer?”