Foreword

How are “corporate vehicles” (like companies and partnerships) misused by criminals to control, conceal and convert illicit finances? 

This is the subject of investigation by Dr Nicholas Lord (University of Manchester), Professor Liz Campbell (Durham University) and Dr Karin van Wingerde (Erasmus University Rotterdam) in a two-year research project (2016-18) funded by the Partnership for Conflict, Crime & Security Research (PaCCS) and supported by project partners Police Scotland and Ciroc (the Centre for Information & Research on Organised Crime) in the Netherlands.

Those involved in serious crimes for gain need to manage their illicit finances, avoiding detection by regulators and law enforcement agencies. They want to obscure the source of their illicit finances and hide their criminal identity. One way to do this is by using “corporate vehicles”.

The term “corporate vehicle” refers to legal structures such as Trusts, Foundations, Limited Partnerships and Companies. Such vehicles provide a range of commercial activities including the control and movement of wealth and assets in the financial system. For instance, they permit businesses to incorporate companies in low or no tax regimes, provide flexibility in global markets, and reduce the level of regulation, particularly when set up in jurisdictions that offer great confidentiality. Large flows of monies move through the global financial system in this way and this has become a central feature of business in market-based economies.

Such corporate vehicles provide opportunities for those involved in serious crimes for gain to manage their illicit finances. This misuse of corporate vehicles came to prominence in the 2016 leak of 11.5 million files at the centre of the Panama Papers scandal, as well as the Paradise Papers leak in 2017. The Papers illustrated how such legal structures are being misused and abused for illicit and illegitimate purposes, such as the evasion and avoidance of tax by wealthy individuals, the concealment of corrupt funds by public officials, and money laundering, amongst others.

One group of professionals facilitating this are Company Formation Agents (CFAs) or Trust & Company Service Providers (TCSPs) who set-up and manage corporate vehicles on behalf of others. These are usually legitimate service-providers, such as accountants, lawyers, notaries, or specialists in company formation. Little is known about the motivations of those professionals who assist criminal enterprise in this way, but some form of collusion or assistance – whether witting or unwitting (or wilfully blind) – is usually required. 

This Policy Brief outlines our findings and recommends responses to the misuse of corporate vehicles. In all cases we come across, corporate vehicles provide opportunities for managing illicit finances that individuals alone cannot access, but which require some element of third-party collaboration and facilitation. We recommend further research and policy focus on these facilitators.

Dr Nicholas Lord, The University of Manchester, UK.

Findings

Our findings are based on three primary methods: i. a Rapid Evidence Assessment of the state of the art empirical literature examining corporate vehicles; ii. interviews with over 40 (so far) informed stakeholders (e.g. from regulation, supervision and enforcement, from the private sector and civil society, etc.); and iii. case study analysis. For further details on the research see here and here.

1. Illusion of Legitimacy: The Misuse of Legitimate Business Arrangements

The misuse of corporate vehicles provides an illusion of legitimacy. This allows criminals to gloss their illicit behaviours with an appearance of lawful action given the close approximation of these financial arrangements to normal business practice. This illusion is constructed in three ways:

Organisational forms

Particular structures create an obscure ownership arrangement. For instance, individual ‘A’ can control companies ‘X’ and ‘Y’ through corporate vehicle ‘Z’, enabling the individual to use these structures to conceal their own involvement.

Organisational relations

Fabricated trading relations are created between those structures. For instance, individual ‘A’ can enter companies ‘X’, ‘Y’, and ‘Z’ into contractual or service arrangements that have no substance but enable falsified records to be generated.

Organisational practices

Once structures and relations are in place, fictitious invoices and paper trails enable finances to transfer via these structures (or appear to), concealing and legitimising illicit funds. For instance, company ‘X’ can send electronic invoices to company ‘Z’ that acts as an interlocutor to company ‘Y’.

In cases of misuse, the relationship between natural persons (i.e., the ultimate owners) and corporate vehicles is either concealed or misrepresented.

2. Effective Anonymity (and Insulation)

Corporate vehicles are attractive for criminals, unethical individuals and groups when set up in jurisdictions that provide anonymity and/or confidentiality to their owners and the transactions processed through them become difficult to trace. Anonymity is a central purpose of using a corporate vehicle. Illicit actors are not entirely concealed, as there will always be some level of connection between the actors and the finances even where this is well-obscured.

Anonymity is often discussed in the context of offshore financial centres; but in practice, these offshore jurisdictions do regulate CFAs and TCSPs and have registers of ownership that can be provided to law enforcement. We also see major issues with onshore centres, including in the UK, where regulation and supervision is fragmented and under-resourced; this leads to the misuse of vehicles such as Scottish Limited Partnerships (SLPs) by illicit actors from overseas.

3. Third-Party Facilitation and Market Stratification

The illusion of legitimacy and effective anonymity almost always require facilitation by expert or professional third-party collaborators (e.g. accountants, lawyers, and notaries). With their help, corporate vehicles can usually be created and/or dissolved in onshore and offshore locations without proof of identity. This, in turn, enables the creation of bank accounts in other jurisdictions through which illicit funds can be diverted. (We saw such issues in the Russian Laundromat case, amongst many others). CFAs and TCSPs enable criminals to engage in legitimate business transactions and relations and to obscure the provenance and ownership of income, wealth, and assets by exploiting regulatory gaps and differences in legal and enforcement regimes.

Recommendations

Our initial findings indicate that corporate vehicles (i) provide opportunities for managing illicit finances that individual, human actors alone cannot access and (ii) require some element of third-party collaboration and facilitation. We recommend further research and policy focus on these facilitators.

There are major gaps in our knowledge about the actual motivations of professionals to facilitate organised crime activities, illicit money management in particular, and how certain professionals are identified and recruited for these purposes. Further data are needed on the pathways into facilitation for these actors and of the tipping points that incentivise this. The strategic and operational responses of law enforcement authorities at the national level in particular, such as the UK and Dutch Financial Intelligence Units, the National Crime Agency and the Serious Fraud Office in the UK, and the Anti-Money Laundering Centre in the Netherlands, amongst others, would be greatly informed by improved data on the motivations and susceptibility of professionals to assist criminals.

In policy terms, improved regulation and supervision of these third-party professionals offers the most plausible route to minimising the misuse of corporate vehicles. In general terms, our findings challenge parliaments in the UK and the Netherlands (and Europe more widely) to take a much stronger position in the debate with regard to creating an attractive economic and fiscal climate for businesses and preventing the movement of illicit finances.

More specifically, regulatory authorities such as HMRC, the main supervisor of TCSPs in the UK (there are over 20 supervisory authorities), the Financial Conduct Authority and other supervisors in the UK, and Justis, the Fiscal Intelligence and Investigation Service (FIOD) and the Financial Supervision Office in the Netherlands, would benefit if more stringent reporting requirements were placed on TCSPs to better understand the nature of their clients’ finances. By improving supervision, opportunities for facilitation can be reduced as the risks of engaging in facilitation increase. For instance, improved due diligence of clients by CFAs and TCSPs can be required in order to remove excuses for poor oversight, to make it more difficult for them to assist in moving illicit finances and to remove the rewards gained through facilitation.

This Policy Brief was first published by PaCCS here.

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