Corporate Vehicles and the Organisation of Illicit Finances: A Criminological Perspective
In July 2018, a joint report from the Financial Action Task Force (FATF) and the Egmont Group provided an overview of the range of techniques and mechanisms that criminals use to obscure their ownership and control of illicitly obtained assets, in particular via schemes that exploit otherwise legal arrangements and structures. This is the latest in a series of reports concerned with the misuse of some types of ‘corporate vehicle’ (that is, legal structures such as Trusts, Foundations, Limited Partnerships and Companies) for laundering the proceeds of crime.
For the most part, corporate vehicles simply enable legitimate financial arrangements, providing a range of commercial activities including the control and movement of wealth and assets in the financial system. For instance, they can be setup in low or no tax regimes, provide flexibility in global markets, and reduce the level of regulation, particularly when setup in jurisdictions that offer great confidentiality (or secrecy). Large volumes of money move through the global financial system in this way, and these arrangements have consequently become a central feature of the business landscape in market-based economies.
Yet corporate vehicles also provide opportunities for those involved in serious or organised crime to manage and obscure the source of their wealth and hide their identity, allowing them to avoid detection by regulators and law enforcement agencies. The misuse of corporate vehicles has been on the policy agenda for some time, but really came to prominence in the so-called Panama Papers, Bahamas Leaks and most recently Paradise Papers. These exposés illustrate how such legal structures are being misused and abused for illegitimate purposes, such as the evasion and avoidance of tax by wealthy individuals, the concealment of corrupt funds by public officials, and money laundering by organised crime groups.
From a criminological perspective, a key question arises: how are criminals able to realise or create opportunities to misuse such corporate vehicles and what are the conditions that generate these opportunities? This question establishes an enquiry into the understanding of the dynamics between harmful actors, those who facilitate such harm, and the conditions and circumstances that enable their interactions. Here, we focus on some of the social conditions that have shaped this contemporary environment.
We suggest that opportunities for misuse have arisen as a result of an interesting mix of permissive and enduring legal and financial frameworks (domestically and internationally); the emergence of a professionalised market of third-party facilitators; and a fragmented and asymmetrical (global) regulatory and supervisory architecture. Each of these points are briefly expanded below.
First, taking the UK as an example, domestic laws have historically allowed corporate vehicles, such as Limited companies, to be set-up with minimal information, providing the scope for potential money laundering. However, to counter this, since 2008, under Section 155 of the Companies Act 2006, all registered Limited companies require at least one director to be a natural person. Whilst this was a step in the right direction, criminal activity was largely simply displaced to alternative methods such as the use of Scottish Limited Partnerships (with limited liability), as found in cases such as the Global Laundromat.
Notable legal and policy gaps made this displacement possible. For instance, not all these vehicles require human persons to be directors or partners (thereby obscuring the ‘beneficial owners’), nor are they required to hold UK bank accounts (this would increase the Know Your Customer and due diligence requirements in line with Anti-Money Laundering regulations). This allows actors to set up UK corporate vehicles from abroad (on behalf of UK actors too) for which bank accounts in other jurisdictions can be created and through which illicit funds can then be siphoned.
Second, the management of wealth, assets and finances is now firmly embedded within the financial services sector as a competitive core profession. One group of professionals at the centre of the misuse of corporate vehicles are Company Formation Agents (CFAs) or Trust & Company Service Providers (TCSPs) who set up and manage corporate vehicles on behalf of others. Whilst these are mostly legitimate service-providers, such as accountants, lawyers, notaries, or specialists in company formation, some facilitate money laundering, serving different market segments to their legitimate counterparts, such as high-end global and corporate elites involved in corruption or fraud, or criminal networks involved in drugs. Little is known about the motivations of those professionals who assist criminal enterprise in this way or how they are recruited (particularly at the elite level), but some form of collusion or assistance – whether witting or unwitting – is usually required. Alternatively, the high competition across jurisdictions to attract company formation means that in some cases these endeavours form a core part of their domestic revenues.
Third, the professionals outlined above operate in a highly fragmented regulatory environment. In the UK alone there are over 20 authorities with responsibility for supervising TCSPs, while some CFAs are unregulated. Companies House in particular has received criticism in relation to the types of data collected and how well this is scrutinised. The limited resources devoted to creating a restrictive regulatory environment suggests to some that political rhetoric is not transferring to practice.
Globally, regulatory environments vary considerably, enabling different structures to be misused in different ways across different jurisdictions. When connected together, this generates a complex set of arrangements that enforcement authorities often cannot permeate. This is particularly the case when dealing with authorities operating in jurisdictions with high confidentiality or with intentionally restrictive enforcement infrastructures (see this recent analysis of Nevis). In these environments, the arduous process required to access information often allows illicit finances to be moved, leaving the authorities one (or several) step(s) behind. There are also tensions for governments between wanting to attract jobs/investment and the need to regulate financial markets.
A lack of reliable sources and valid, systematic data means that the difficulties found when investigating the misuse of corporate vehicles are also an issue for researchers interested in this issue. However, improved regulation and supervision of third-party professionals offers a plausible route to minimising the abuse of corporate vehicles by reducing opportunities for misuse by their clients. It is important that governments such as the UK are challenged to match their rhetoric with a stronger position on the ground. The damage is too grave to prioritise an attractive economic and fiscal climate for business without accounting for stronger tools to prevent the movement of illicit assets. This implies the need for substantial financial investment in enforcement to support the punitive rhetoric.
Nicholas Lord is a Reader in Criminology at the University of Manchester with research expertise in white-collar and corporate crimes of a financial and economic nature, such as fraud, corruption and bribery, as well as the organisation of serious crimes for financial gain, such as ‘organised crime’ and food fraud.
Liz Campbell is a Chair in Criminal Jurisprudence at Monash University whose research looks at how the criminal law is deployed to address serious crime, with particular interests in organised/organisational crime, white-collar crime and corruption.
Karin van Wingerde is an Assistant Professor in Criminology at the Erasmus University Rotterdam with research expertise in the interplay between regulatory enforcement and the behaviour of business organizations, such as those implicated in corporate crimes.
This blog post was first published on 16 August 2018 in The Informer.