Facts:
Back in 2016, an anonymous source leaked the confidential files of offshore law firm Mossack Fonseca — a scandal that came to be known as the Panama Papers.
These documents revealed how the wealthy and powerful use shell companies to hide their assets.
But shell companies can also be exploited by drug cartels, mafia clans, fraudsters, and other bad actors to hide their shady business dealings.
A Cautionary Tale
The Ethan Allen was a 40-foot, glass-enclosed tour boat, operated by Shoreline Cruises. On October 2, 2005, the boat capsized on Lake George in upstate New York. The accident claimed the lives of 20 victims, most of whom were elderly.
Afterwards, Shoreline went to file claims on their liability insurance, only to discover that they were not, in fact, insured. Later on, an investigator revealed that the company they had purchased the bogus policy through was actually a series of offshore shell companies — created with the help of Panama law firm Mossack Fonseca.
Following the incident, an accountant named Malchus Irvin Boncamper, who resided in the West Indies, was prosecuted for helping the insurance con artists — operating under the name “Global Property Owners Association” — launder fraudulent proceeds.
Boncamper was a “nominee director” for 30 companies created by the law firm. After he was arrested, Mossack Fonseca employees were told to replace Boncamper as director of these companies, and to backdate records to make it appear as if this change had happened earlier.
The Netflix film The Laundromat, depicts the unfolding of these events as a means of illustrating just how many lives are affected by this type of financial chicanery.
The Larger Scheme at Play
Fraudsters and crooks steal hundreds of billions of dollars every year, but how do they manage to cover up such a large money trail? And where do all of those illicit funds end up? The answer lies in the global financial system, which fraudsters use to “clean” funds of their illegal origins. This process is known as money laundering, and it is notoriously difficult to investigate and prosecute.
To keep it short, effective money laundering requires three stages:
Placement, where funds are moved away from their criminal source and placed into circulation via financial institutions, businesses, and so on.
Layering, which makes it difficult to detect the laundering activity, by disguising the money trail to elude authorities.
Integration, is all about making the newly-washed funds available to the criminal, once again, in such a way that they appear to be normal business earnings.
By the time the money has made it through this complicated process, its origins have been deconstructed and buried — making it near impossible to connect the funds back to the initial crime.
Source: UNODC
In order to make all of this work, criminals rely on shell companies.
Shell company n.: a company that exists only on paper. There are no employees, no offices. Often, these are registered to the address of a service that specializes in setting up shell companies, and which may act as the agent for receipt of legal correspondence.
Panama law firm Mossack Fonseca specialized in creating these shell companies, which, in turn, made it harder for the asset holders’ governments to tax them or figure out whether he or she was involved in any less-than-kosher business dealings.
Despite being morally dubious, shell companies are completely legal. That is, until they are used for criminal purposes like money laundering. And because setting up a shell company doesn’t require a whole lot of identification, — and offshore service providers are sworn to secrecy — this approach has become the preferred method of criminals all over the world.
How It Works
In July of 2019, The Guardian published a five-step guide detailing the process of creating a shell company in the UK. For the full article, check out the resources section below. For the summarized version, keep reading.
Step One: Forget about sunny, offshore tax havens and come to the UK instead.
If you want to steal a lot of money, forget about using cash. Large amounts of cash create all kinds of logistical problems — from the amount of space it takes up to transporting it through customs to figuring out how to spend it.
A far better solution is a bank account. Why? Because electronic cash weighs nothing and is relatively easy to move. The only problem with using a bank account is that it has your name on it. Not to worry though, this is why shell companies were invented. So long as the company’s ownership information is hidden from the authorities, you can use it to open a bank account, and sleep soundly knowing that no fingerprints are left behind. It’s what all the sensible crooks are doing.
Now the question is, where do you register this shell business? A quick Google search for “offshore company” will populate a wide selection of service providers — most of which exist in exotic places like the Cayman Islands or the Seychelles. But in the aftermath of the Panama Papers, these jurisdictions have been forced to keep better records of company ownership — and hand over these documents to law enforcement upon request. Not an ideal situation for the wannabe money launderer.
Lucky for us, the UK’s company registration system contains a giant loophole, which makes Britain our new best friend.
Step Two: Take advantage of the super-easy Companies House web portal.
Now it’s time to form your company, using the Companies House website. This is the UK’s registry of all corporate entities, which allows any interested party to verify their legitimacy. Fortunately, the process is straightforward — all you’ll need is £12 (approximately $16) and a few minutes to enter the details of your new business. In other words, anyone with an internet connection, anywhere in the world, can create a UK company in about as much time as it takes to order a pizza — and for approximately the same amount of money.
There’s a 24-hour processing window, but other than that, you should be good to go.
Worth noting is that there are almost no jurisdictions left where you can create a genuinely anonymous shell company, but Britain is an exception. It doesn’t bother with traditional “due diligence” formalities, which works in your favor when registering your business on the Companies House website. Step three will explain in further detail.
Step Three: Enter false information when registering.
Back in 2016, the UK government passed a law that made it mandatory for anyone setting up a company to name the individual who actually owns it — also known as “the person with significant control”. But here’s the secret: no one checks the accuracy of the information you provide when you register. Therefore, this rule is not enforced. Go ahead and try it; type in whatever you want — the Companies House will accept your details without question.
As additional reassurance, take the case of Atlas Integrate Services LLP. The company was registered by an owner whose date of birth revealed her age to be just two months old. Not only had she found time to start a business in her first two months of life, but she had also apparently gotten married, since she was listed as “Mrs”.
If you still don’t feel comfortable listing a person as your company’s owner, the Companies House will also allow you to say that your company doesn’t know who owns it. (Yes, you read that right.) Alternatively, you can list multiple companies in multiple jurisdictions. That way, no investigator without the time and resources of the FBI could ever properly check up on you.
Step Four: Make sure that the information you enter is plausible enough to deceive a casual observer.
In order to successfully commit fraud, your company needs to look legitimate. People need to take you seriously. In other words, be clever when making up your registration details. In fact, if you really want to be safe, steal a real person’s name and put that on the company documents. Rather than putting your own address in the registry, rent a virtual office that offers mail forwarding. And if you truly want to go the extra mile, file genuine-looking financial documents and claim that they’ve been audited by an accountant. All you have to do is go online and find an accounting firm. Then use their name in your claim. Again, no one will verify this information.
Step Five: Don’t worry about getting caught.
At this point you might be skeptical, even panicked by the prospect of doing this. Surely, it can’t be this easy. So what’s the catch? There is none. If you look at what British officials do, rather than what they say, you’ll start feeling a lot more secure about this whole plan. After all, with zero checks and no connection to a verifiable identity, setting up your UK company should be about as easy as opening a Twitter account.
Editor’s Note: The original rationale behind this all-too-easy registry process was that it would unleash latent entrepreneurship within the UK. Instead, it has paved the way for money laundering schemes for the better part of a decade — and nothing of significance is being done to stop it.
Take Steps to Protect Yourself
Due to the complicated nature of shell companies and money laundering schemes, it can be difficult for individuals and businesses to fight back. Ultimately, it’s up to lawmakers to enforce stronger security measures and hold perpetrators accountable. But for now, here’s how to avoid getting tangled up in the web of money launderers:
Ask a lot of questions. When approached with a business opportunity, there are a number of questions you should ask to vet the legitimacy of the offer. Start by asking about the amount of money and whether other investors are involved. Also, why are they interested in you? If the answers are vague, too good to be true, or don’t make any sense, you should probably walk away.
Educate yourself on money laundering schemes. There are many ways for criminals to launder money, including putting illegal cash in your account, layering proceeds through wire transfers, and converting cash to other financial instruments. They can also make wealth obtained via illegal activity look legitimate by falsifying invoices or over-billing. Knowing these kinds of tricks can help you avoid bad actors. To learn more, check out the resources provided below.
Do your due diligence. Thoroughly investigate anyone you conduct financial transactions with. This applies to complete strangers who say they want to give you a large sum of money, as well as clients, vendors, investors, and business partners. Protect yourself by knowing the identities of these individuals and conducting online background checks to see if any of these people have been previously investigated or charged with a crime. Furthermore, when vetting a potential partner or client, check to see how their company is registered and whether they have received any complaints in the past. You can do this online by checking with the trading standards authority or a local government office that keeps this information on file. This is particularly important if foreign countries are involved.
Final Notes and Updates
Financial crimes rely on exploiting anonymous companies and trusts, as well as the secrecy of jurisdictions like the UK. Not only does Britain provide a layer of legitimacy, it also makes the whole process of setting up shell companies a no-brainer. Therefore, it remains an attractive destination for all kinds of money launderers.
Why isn’t the government doing anything about this? According to Treasury Minister John Glen, Companies House simply can’t afford to check all of the information provided during these registrations, as that would cost hundreds of millions of pounds. But while the burden of cost is one thing, the cost to the rest of the world — created by the money laundering enabled by UK corporate entities — is far greater.
Useful Resources
The Guardian’s Five-Step Guide to Getting Away with Stealing Millions:
Money Laundering News from ACAMS:
https://www.moneylaundering.com
SEC’s Compliance Information:
https://www.sec.gov/spotlight/moneylaundering.htm
Editor’s Note: Have you been affected by fraud? Most people have, in some form or another. If you have a story you would like to share, we’re sure our readers would benefit from hearing it. Please send an email to editor@theconartist.pub detailing your experience, and we will be in touch. Your privacy and any wishes of anonymity will be respected.
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