Winning the war on criminal shell companies

Cassandra began working in a Toronto massage parlor as a teenager. She spent the next ten years in fear, kept in line by violence. A recent analysis uncovered 700 illicit parlors in Canada linked to transnational crime syndicates. There is strong evidence these criminal organizations used shell companies to launder their human-trafficking profits – dragging respectable financial institutions down into a world they would not have engaged with, had they known who they were dealing with.

The problem of organized criminals involving financial institutions in their activities spans the globe, encompasses various types of financial crime, and has real-world effects on governments and individual victims. Fortunately, new technologies are giving organizations the tools they need to win the war on criminal shell companies

Hiding money in real estate
There are so many examples of abusive shell corporations that it’s difficult to choose just a few. What follows should give a sense of the range of organized criminal activity involving financial institutions.

In the UK, some £4.2 billion worth of properties was bought by politicians and public officials with suspicious wealth. Not only does that give criminals a place to hide their illegally acquired assets, but it also drives up property prices, and puts tenants and future buyers in tenuous situations.

Another report identified 766 corporate vehicles alleged to have been involved in laundering approximately £80 billion. Nearly half of the companies involved were based out of just eight addresses – which would have raised suspicion, if anyone had noticed.

Money laundering
In January 2017, the UK’s Financial Conduct Authority (FCA) and the New York Department of Financial Services (DFS) fined a European bank for failure to identify, prevent and report $10bn of Russian money laundering.

The DFS commented: “The selling counterparty was typically registered in an offshore territory… and none of the trades demonstrated any legitimate economic rationale.” In addition, “The bank’s Know Your Customer (KYC) processes were weak, functioning merely as a checklist… Virtually all of the KYC files for the companies involved in the scheme were insufficient.” 

Earlier that decade, some 5,140 companies and 732 banks in 96 countries were involved in the immense so-called “Russian laundromat,” in which 21 fictitious companies (most registered at the Companies House in London), laundered somewhere between $20 and 80 billion out of Russia.

Sanctions evasion
The US government has recently issued a warning to companies to be vigilant for Russia-related sanctions evasion, with regulatory expectations that businesses inside and outside the country should maintain effective compliance programs to minimize the risk of evasion. The UK government claims that Russian nationals have taken advantage of weak AML to launder war profits stolen from Ukraine.

Human trafficking
Cassandra’s case was far from isolated. When the data on suspicious massage parlors was cross checked with other databases, the full international scale was revealed. A spokesperson for Thomson Reuters Special Services commented, “These are not just individual massage parlors trafficking women but are globally-connected enterprises like a cartel.”

Human trafficking is often transnational by its nature – victims are isolated far from support, in countries where they don’t know the laws or even speak the language. In Europe, over 900 potential victims were found in just one investigation last year. Another 200 victims of a Chinese “conveyer belt of sexual exploitation” were rescued in Belgium and Spain this February.

Around the world, human trafficking and money laundering are linked. ACAMS Today reports on a White House fact sheet stating that, “approximately $150 billion in illicit proceeds are generated each year by these criminals globally; monies that will subsequently be laundered through our legitimate financial systems.”

Red Flags
Many of these cases share common themes:

• weak KYC processes, where the checkbox approach was used,
• the use shell companies which appeared to have no employees and/or apparent business activity
• company formation services in offshore locations,
• nominee directors and shareholders,
• common ownership and addresses,
• the country of operations, the registered office and where the payments flow is completely different and unconnected,
• the countries where the funds end up or flowed through often lacked effective AML regimes,
• involvement of/to politically exposed persons directly or behind the shell companies,
• the volume and value fund transferred over 12 to 36 months so substantial that it did not make economic sense,
• there were payments to seemingly unrelated business and individuals,
•  accounts used as flow-through and the purpose of the wire payments is inconsistent with the stated businesses of the send and receiver – e.g., fees, commissions, and other information.

We now have the tools to connect the dots – to redefine due diligence, go beyond a checklist and use data to form a clear picture. It’s possible for financial institutions to integrate their data with external data, including from corporate registries, adverse media and law enforcement agencies. A 360° view of the client and Perpetual Know Your Customer (pKYC) technology can help banks and financial institutions form a fuller picture of their clients over time, and react in real time to suspicious activity.

Cassandra made it out of the parlors and went on to found an organization that supports women and girls in her situation. Is your institution doing its part?