Three ways in which corporate vehicles are useful for money laundering and fraud

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Do you sometimes find yourself wondering why money launderers go to all the effort of setting up companies, fashioning obscure money trails and operating across borders with various corporate service providers, lawyers and accountants? It’s all part of the money laundering cycle, and the more carefully buried the trails are, the bigger the return. 

Here are three ways in which company formation helps money launderers.

1. Companies help a criminal look legitimate

Companies engage in transactions routinely as part of their daily operations. This means that transactions look less suspicious if they can be covered up as business activity. 

For example, consider ‘carousel fraud’:

A scam in which traders import goods, sell them to themselves via related companies, before exporting them and claiming back VAT that they never paid… (source: The Guardian

We previously wrote about terrorist groups that encourage their supporters to engage in such scams that can help them raise the necessary funds for their objectives: ‘VAT and business fraud are … highly lucrative sources of financing’ (see our article on this). This is part of developing a new breed of terrorist that is self-financed, individualist and an experienced criminal. 

Moreover, we have to remember that fraudsters try to be a step ahead of the game when it comes to effective regulation. They know that AML due diligence procedures in a financial institution will require scrutiny of documents accompanying a transaction, like trading invoices or signed trading agreements. So they will keep the façade as best they can, for as long as they can.

Did you know?

It is reported that around £100 billion is laundered through the UK’s financial system.  
2. Dealing through companies helps obscure the money trail

If you are looking to spend your ill-gotten gains quietly and effectively, there are a variety of tools at your disposal. The recently prosecuted case of Paul Manafort – Donald Trump’s former campaign manager – is instructive. 

At the centre of the Paul Manafort case was his work as a consultant and foreign lobbyist for Ukrainian political interests. He got into trouble for failing to report his work as a foreign agent to the US government and for trying to hide this income from the US tax authorities. To be able to spend this money in the US without declaring it, Manafort laundered it. 

The way Manafort got paid for his services was by setting up a number of shell companies and bank accounts in Cyprus, the Seychelles and St. Vincent. From there, money was then wired to the US to pay for various personal expenses: ‘from custom suits to home landscaping services, according to evidence presented by prosecutors’ (source: Buzzfeed). 

3. Law enforcement is still catching up

The UK, which has a reputation for stability and rule of law, introduced new laws in 2016 which require identifying the company’s controlling shareholder. This was done in an effort to prevent British companies from being used to hide illicit gains. However, research into this has found that substantial amounts of companies have not identified their controlling shareholders (source: Financial Times).

The problem seems to be lax enforcement of the rules at Companies House, the UK’s registrar of companies. Whereas financial institutions and financial services firms are regulated by Anti-Money Laundering laws and regulators enforcing those, Companies House, being an executive agency of the UK government, is not regulated for AML purposes (source: The Guardian).  

Part of the problem is the ease with which companies can be incorporated online with Companies House, at a very low fee of some £12. But this is costing the UK taxpayer because there are no resources to check the legitimacy of the growing number of newly created companies. 

The proportion of companies created directly with Companies House, rather than via regulated intermediaries, is increasing every year and is approaching 50%. If the ownership information for half of all new companies is non-verified, that brings the integrity of the entire registry into question. (Source: The Guardian)

According to Anneliese Dodds, a shadow Treasury minister, the government does not yet understand the scale of the problem, and therefore has been slow to respond to it. 

Unfortunately, with money laundering, the problem is just as much about enforcement of rules as it is about having them!


You can read more about the risks associated with shell companies here


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