US Shell Companies Aid Crime Groups in Latin America and Beyond

Mexican criminal organizations have laundered billions of dollars through the US financial system in recent years.
Mexican criminal organizations have laundered billions of dollars through the US financial system in recent years.

(Q24N) A new report highlights how criminal groups use anonymous shell companies to help launder illicit proceeds, and how a simple legal change could help law enforcement tackle the issue.

The report (pdf), published August 1 by the research and advocacy organization Fair Share Education Fund, outlines the basic process of laundering money using anonymous companies and cites several cases in which Latin American crime groups have used these entities to hide dirty cash from authorities.

Money laundering occurs in three stages, the report explains. In the first stage, known as “placement,” ill-gotten gains are generally converted from cash to a form that is easier to transfer, like an electronic bank deposit, a check or a pre-paid stored value card.

Money Laundering: the concealment of the origins of illegally obtained money, typically by means of transfers involving foreign banks or legitimate businesses.

Next, money launderers “layer” the funds to make their origin harder to trace. This often involves routing the money through many different shell companies in numerous transactions. Once the money is “clean” enough, the launderers move to the “integration” stage, where the funds can be used for legal and illegal purposes. (See Fair Share’s infographic to the right)

Shell companies can be used for legitimate purposes. But as the Fair Share report points out, anonymous shell companies play a crucial role in the money laundering process. A county sheriff from Iowa cited in the document described these entities as “financial getaway cars — companies set up to move ill-gotten money without leaving anyone to be held accountable.”

The use of anonymous shell companies made headlines earlier this year when the leaked “Panama Papers” exposed how a Panamanian law firm helped powerful elites and alleged criminals set up anonymous corporations in tax havens like Panama and the British Virgin Islands in order to help the firm’s clients hide their wealth.

However, as the Fair Share report notes, a large number of anonymous companies are also established in the United States, where no state currently requires people establishing companies to disclose the corporation’s “beneficial owner” — that is, the “living person or persons that own, control and ultimately ‘benefit’ from the company’s existence.”

An investigation published earlier this year by the McClatchy news service likened certain US states to the Cayman Islands — a well-known money laundering center — and reported that a Nevada-based shell company had been used to hide money embezzled as part of the huge corruption scheme involving Brazil’s state oil company Petrobras.

Perhaps the most infamous instance of a Latin American criminal organization using a US-based shell company to launder dirty money is the Zetas’ use of such companies to purchase race horses, an investment that helped the group launder millions of dollars in drug proceeds.

Mexican criminal organizations have laundered billions of dollars through the US financial system in recent years. In several cases, drug trafficking groups took advantage of lax monitoring by large US financial institutions like HSBC and Wachovia, a bank acquired by Wells Fargo in 2008. Both of those companies paid huge fines for their role in the laundering. Recently, some banks have started closing branches near the US-Mexico border in order to prevent criminals from using their services.

Citing US government estimates, the Fair Share report states that “it is likely that 98.5% of the proceeds derived from drug trafficking” — more than $60 billion per year — “remain in the hands of traffickers” thanks to money laundering schemes.

The conclusion of the Fair Share report is simple: it “recommends that [US] federal law makers end the use of anonymous shell companies by mandating the collection of true beneficial ownership information from all companies.” Collecting beneficial ownership information and making it readily accessible to law enforcement will help investigators trace illicit proceeds back to the people involved in criminal activities, the report argues.

The US Treasury Department’s Acting Under Secretary for Terrorism and Financial Intelligence Adam Szubin argued in favor of this reform in an op-ed published last month in The Hill.

“Criminals have learned that American companies have an easier time obtaining bank accounts, and so they incorporate here in large numbers. The result is that our financial investigators often come across US shell companies in their money hunts — and that may be where the trail ends,” he wrote.

But, Szubin argued, “It does not need to be this way. Congress could close this loophole by passing a simple, two-page law requiring the beneficial owner of a company to be identified whenever a US company is formed.”

In the absence of legislation mandating the disclosure of beneficial ownership information for all companies, the Treasury Department has instituted temporary, targeted regulations requiring the collection of such information from companies in sectors prone to money laundering, such as the high-value real estate market.

A number of experts have said that the ease with which criminals can launder their money using anonymous US shell companies damages the credibility of US efforts to push other countries to improve their anti-money laundering practices.

In congressional testimony (pdf) given in 2009, then-District Attorney for New York county Robert Morgenthau said, “Simply put, we lag behind many other countries in the world in this regard, and it makes our statements concerning transparency and tax evasion ring hollow and hypocritical.”

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