Popular culture has created the impression that shell corporations are primarily based in offshore jurisdictions with lax disclosure standards. However, by some measures, the United States is the most lenient jurisdiction regarding the transparency of beneficial ownership.[1] Certain American jurisdictions, such as Delaware, Nevada and Wyoming, are more popular than others for incorporating purposes. These jurisdictions are attractive given their lack of rigid disclosure requirements and large business taxes and fees.[2] The absence of disclosure requirements allows the true owners of the corporation to anonymize their affiliation with the entity; by anonymizing beneficial ownership, shell corporations can move funds, open bank accounts, and purchase real estate without implicating the owner of the entity or incurring tax liabilities from the owner’s country of origin.[3] Beneficial ownership is the entity or individual who enjoys financial benefits from partial or full control of a business enterprise. The relative ease of opening an account or purchasing real estate through a shell corporation enables parties to launder illicit gains and make them appear to be legitimate income.[4] National tax authorities and law enforcement agencies have grappled with money launderers’ use of shell corporations for decades but recent scandals evidence the inadequacies of current policy measures.[5] Recent scandals involving the 1MDB sovereign wealth fund and the Mossack Fonseca have placed a spotlight on the risks involved with beneficial ownership and the harm of money laundering in general.
1MDB Scandal
The perpetrators of the 1MDB scandal used shell corporations as well as other techniques to affect their theft of billions of dollars from Malaysian taxpayers. 1MDB was conceived by Jho Low, the nominal head of the fund, as a sovereign investment vehicle comparable to other sovereign wealth funds, like the Mubadala Investment Fund in the U.A.E., which would earn returns on taxpayer money and invest the proceeds in Malaysia.[6] However, 1MDB became nothing more than a personal slush fund for Low and Najib Razak, the Malaysian Prime Minister. For example, 1MDB’s first transaction involved a purported $1 billion buy-in to a joint venture with PetroSaudi, a business with drilling rights in Turkmenistan and Argentina.[7] Low arranged for $700 million of this amount to be transferred from 1MDB to a Swiss bank account.[8] Low was eventually able to use these funds for personal use after channeling them through offshore shell companies and anonymous accounts.
Anonymous beneficial ownership enabled Jho Low to recklessly spend 1MDB’s investment capital. The Swiss account’s beneficial owner was listed as Good Star Limited.[9] Good Star was incorporated in the Seychelles as a bearer-share company.[10] This meant that whoever physically possessed the physical stock certificate of the company was its beneficial owner, but no public registry would exist which would indicate the entity’s true owner.[11] Ultimately, Jho Low was revealed to be Good Star’s beneficial owner.[12] After distributing the spoils between his co-conspirators, Low transferred $148 million from the Swiss Account to an American law firm’s IOLTA account.[13] IOLTA accounts are trust accounts created for the purposes of pooling client’s money and using the interest proceeds to fund pro bono work.[14] These accounts anonymize the owners of the funds when they are used for transactions such as property purchases.[15] For Low, an IOLTA account allowed him to anonymize the $85 million he spent on “alcohol, gambling, private jets, renting yachts, and celebrity appearances.”[16] While Low’s spendthrift habits ran into the billions, the cumulative effect of his efforts were primarily felt in Malaysia.
While Low was the primary orchestrator of the 1MDB fraud, he was assisted by a number of parties. In particular, Goldman Sachs substantially aided Low’s fraud by assisting the sovereign wealth fund in raising $6.5 billion in capital through bond offerings.[17] Under Lloyd Blankfein, Goldman Sachs had aggressively pursued investment banking opportunities in East Asia amidst a post-financial crisis malaise in American deal making.[18] One of Goldman’s investment bankers, Timothy Leissner, became deeply embedded within Low’s scheme. Leissner, aiming to boost Goldman’s fees and his own pay from work related to 1MDB, assisted Low in diverting capital from the bond offerings to Low, Najib Razak, and himself.[19] As part of a Department of Justice indictment, it was revealed that Leissner had profited to the tune of $200 million by aiding Low.[20] As a result of Leissner and other Goldman bankers role in the 1MDB scandal, Goldman Sachs is negotiating a $2 billion settlement with the Department of Justice, but has failed to reach a settlement with the Malaysian government.[21] Although this scandal’s impact was largely in Malaysia, it demonstrates the global nature of money laundering efforts; other money laundering scandals effected through shell corporations were more global in their impact.
Panama Papers Scandal
In 2016, Suddeutsche Zeitung, in affiliation with other newspapers, published client information and other documents leaked by a source at the law firm Mossack Fonseca.[22] The leaks demonstrated that Mossack Fonseca had created thousands of shell corporations for clients in order to facilitate tax avoidance, bribery, money laundering and other offenses.[23] The list of implicated figures is expansive and includes Vladimir Putin, Xi Jinping, Lionel Messi, Tiger Woods, and Simon Cowell.[24] While Mossack Fonseca has since dissolved, its tactics laid bare not only the international scale of money laundering and tax avoidance schemes but how threadbare disclosure requirements enabled Mossack Fonseca’s clients to avoid regulatory scrutiny.
In order to accommodate its client’s illicit activities, Mossack Fonseca made use of the lax regulatory environments in Wyoming, Nevada, the Virgin Islands and other jurisdictions.[25] In the United States, on the state level, there was a “race to the bottom” to accommodate investors interests in corporate anonymity by reducing disclosure requirements.[26] In exchange, states received franchise fees and business taxes which filled a large portion of their budget.[27] Wyoming and Nevada were attractive for Mossack Fonseca’s purposes because, apart from their tepid regulatory oversight, they did not require the disclosure of shareholders; additionally, shell corporations could be listed as corporate officers.[28] Without information about corporate officers and shareholders, tax authorities struggle to discern the beneficial owners of shell corporations. Therefore, without a corporate registry, governmental efforts to combat money laundering would need to be targeted operations based on information gained outside of public documents; however, these targeted enforcement efforts are not sufficient to stem broader outflows of capital through shell corporations.[29]
Both of these scandals evidence how anonymous beneficial ownership has abetted the flow of illicitly-gained funds. However, recent trends demonstrate governmental efforts to combat anonymous beneficial ownership through the creation of corporate registries. Corporate registries require disclosing the beneficial owners of a corporation.[30] The United Kingdom and the Cayman Islands, both significant shell jurisdictions, have instituted corporate registries.[31] Apart from instituting a corporate registry, the European Union has discussed creating a new money-laundering authority which would oversee financial institutions’ compliance with anti-money laundering measures.[32] The necessity of reform in the European Union was made clear by the revelation that Danske Bank facilitated $200 billion in money laundering through a single bank branch.[33]
In line with global efforts to promote transparent beneficial ownership, Congress and executive agencies have pushed measures aimed at implementing public disclosures about anonymous beneficial ownership. The House of Representatives recently passed the Corporate Transparency Act.[34] This bill would institute a national registry of beneficial owners of business entities incorporated in the United States.[35] Beneficial ownership, under the proposed legislation, would be classified as “exercising substantial control over a business, owning a quarter or more equity stake in the company, or receiving substantial economic benefits from the assets.”[36] The White House has signaled its support for the legislation indicating that partisan divides will not stall the legislation’s passage.[37] Federal agencies have also instituted a number of regulations designed to combat transactions by anonymous corporate entities. For example, FinCen’s CDD Rule requires banks to verify the beneficial owners of shell corporations when they open accounts.[38] This coincides with Section 326 of the Bank Secrecy Act which requires that when an entity or individual provide identifying documentation when they open an account at a financial institution.[39] All of these measures seemingly indicate that the unperturbed era of corporate anonymity is drawing to a close.
Endnotes:
[1] Casey Michaels, The U.S. is a Good Place for Bad People to Stash Their Money, The Atlantic (July 13, 2017), https://www.bloomberg.com/opinion/articles/2012-06-08/how-delaware-became-the-king-of-u-s-corporate-charters
[2] Id.
[3] See U.S. Treasury Dep’t, National Money Laundering Risk Assessment (2018).
[4] Id.
[5] Id.
[6] Tom Wright & Bradley Hope, Billion Dollar Whale, 57 (1st ed. 2018).
[7] Id at 72.
[8] Id at 75.
[9] Id at 75.
[10] Id at 76.
[11] Id at 76.
[12] Id at 87.
[13] Id at 87.
[14] Id at 86.
[15] Id at 86.
[16] Id at 87.
[17] Liz Hoffman & Aruna Viswanatha, Goldman Sachs in Talks to Admit Guilt, Pay $2 Billion Fine to Settle 1MDB Probe, Wall St. J. (Dec. 19, 2019), https://www.wsj.com/articles/goldman-sachs-in-talks-to-admit-guilt-pay-2-billion-fine-to-settle-1mdb-probe-11576760406?mod=article_inline
[18] Nicole Hong et al., Justice Department Charges Ex-Goldman Bankers in Malaysia 1MDB Scandal, Wall St. J. (Nov. 1, 2018), https://www.wsj.com/articles/justice-department-to-charge-former-goldman-bankers-in-malaysia-1mdb-scandal-1541077318?mod=article_inline
[19] Id.
[20] Id.
[21] Liz Hoffman & Aruna Viswanatha, Goldman Sachs in Talks to Admit Guilt, Pay $2 Billion Fine to Settle 1MDB Probe, Wall St. J. (Dec. 19, 2019), https://www.wsj.com/articles/goldman-sachs-in-talks-to-admit-guilt-pay-2-billion-fine-to-settle-1mdb-probe-11576760406?mod=article_inline
[22] See Luke Harding, What are the Panama Papers? A guide to history’s biggest data leak, The Guardian, (Apr. 5, 2016), https://www.theguardian.com/news/2016/apr/03/what-you-need-to-know-about-the-panama-papers
[23] Id.
[24] Melissa Chan, Here are the International Figures tied to Panama Papers Leak, Time (Apr. 4, 2016), https://time.com/4280413/world-leaders-panama-papers/
[25] Kevin Johnson, Panama Papers firm has Nevada ties, Reno Gazette J. (Apr. 6, 2016), https://www.rgj.com/story/news/2016/04/06/panama-papers-firm-has-nevada-ties/82695166/
[26] Michaels, supra note 1.
[27] Id.
[28] Johnson, supra note 20.
[29] Supra note 3 at 28
[30] Inter-American Development Bank, A Beneficial Ownership Implementation Toolkit, 18 (2019).
[31] Id at 19.
[32] Francesco Guarascio, EU heavyweight states push for joint supervisor against money laundering, Reuters (Nov. 9, 2019), https://www.reuters.com/article/us-eu-moneylaundering-reform/eu-heavyweight-states-push-for-joint-supervisor-against-money-laundering-idUSKBN1XJ04D
[33] Frances Schwartzkopff et al., U.K. Shell Companies Forced Into Danske Laundromat Limelight, Bloomberg (Nov. 21, 2018), https://www.bloomberg.com/news/articles/2018-11-21/britain-s-llps-get-dragged-into-the-danske-laundromat-limelight
[34] Will Parker, House Passes Bill to Expose Owners of Shell Companies, Wall St. J. (Oct. 22, 2019), https://www.wsj.com/articles/house-passes-bill-to-expose-owners-of-shell-companies-11571785516
[35] Id.
[36] Corporate Transparency Act of 2019, H.R. 2513, 116th Congress (2019).
[37] Parker, supra note 28.
[38] Supra note 3 at 28.
[39] See 31 C.F.R. § 1023.220
