CORPORATIONS HAVE FOUND a plethora of ways to cover their assets; the vexing aspect of which for the anxious compliance officer pursuing the final revelation, is that these methods are often legal.
The most popular is the creation of shell companies. A shell company can be defined as a non-operational company – that is, a legal entity that has no independent operations, significant assets, ongoing business activities, or employees.
A service provider may set up a shell corporation for a client and open accounts in the name of that shell corporation, in order to disguise the client’s ownership of the account or certain assets. It is then virtually impossible to find out the true owner of the assets. Shell companies tend to have no physical office at the listed address.
The issuing of bearer shares is a rather old device used to obscure real share ownership. Essentially, bearer certificates could be passed from person to person; the person in possession having de facto ownership. Beneficial ownership would be impossible to establish and many countries including Barbados do not recognise incorporation with bearer shares.
Misuse of legal entities is often viewed almost exclusively as being a problem of non-operational companies. A significant proportion of corruption cases involve the misuse of operational companies (that is, “front companies”).
Legitimate operational entities have inflows and outflows of assets, which enable streams of illicit assets to be mingled with legitimate funds and thereby laundered.
It is a difficult situation to monitor. It is the reason why when accounts are being opened, banks will ask for anticipated deposit inflows which they assess as realistic or not based on business plans and likely business activity.
In addition to making deposits from its own legal activities, a legally constituted company may accept and deposit funds from other parties passing them off as their own.
Two quite different examples are “nesting” and “cuckoo smurfing”. Nesting involves the unauthorised use by a financial institution of correspondent banking accounts to facilitate money transfers for another financial institution which has no authorised correspondent banking arrangements.
Cuckoo smurfing on the other hand takes it characterisation from similarities between this typology and the activities of the cuckoo bird. Cuckoo birds lay their eggs in the nests of other species of birds which then innocently take care of the eggs believing them to be their own.
Cuckoo smurfing requires collusion between criminals and corrupt money remitters who allow criminals to pay funds into the accounts of entities who are expecting the funds from another source and are unaware of the criminal origin of the funds paid into their accounts. Details of both convoluted schemes can be found on the internet.
When you drill down below the blanket country designations of “high risk”, the unauthorised use of accounts at legitimately established corporations on behalf of other parties is one of the fears correspondent banks have in granting correspondent banking facilities and is another driver of the de-risking crisis.
Though used infrequently, the misuse of trusts was found to be a favoured concealment artifice used by corrupt government officials in all parts of the world.
In principle, a trust service provider may serve as trustee and thereby ostensibly manage the trust, however in practice, the originator of the trust (“the settlor”) may exert influence through other mechanisms. Some trusts facilitate the appointment a “protector”. A protector has the authority to appoint or remove directors thus exerting influence and control.
The event which bears the closest resemblance to the striptease is the pursuit of beneficial ownership involving complex ownership structures. Complex ownership and control structures involve many layers of shares registered in the name of other legal persons. An ownership chart for such an entity can sometimes resemble a snakes and ladders board game.
Offshore legal operations don’t mean that fraudulent financial transactions are taking place. The vast number of businesses who use offshore entities and sophisticated legal structures use them for valid reasons such as asset protection, estate planning, privacy and confidentiality.
Financial Institutions need to be extremely careful when distinguishing between legitimate and suspect activities. The level of risk associated with the entity is determined by the financial institution and dictates the level of customer due diligence or enhanced due diligence measures required.
Louis Parris is a certified anti-money laundering compliance audit professional, consultant and publisher of the Caribbean Banking Intelligence AML Compliance Newsletter. Email: louisp@caribsurf.com
