Th is project centered on two audit studies involving the solicitation of off ers for shell companies from a range of Trust and Company Service Providers (TCSPs). Th e data were supplemented with in-depth interviews conducted with TCSPs. Th e use of a direct approach to testing regulatory compliance in the form of an audit study is unusual. Collecting data by soliciting off ers for shell companies is premised on a sim- ple a fortiori logic: If it is possible for people who are essentially amateurs to obtain anonymous corporate vehicles for a few thousand dollars via the Internet, then par- ticipants in grand corruption schemes, professional money launderers, and others should have no diffi culty whatsoever. Th e project serves two purposes: On the one hand, this eff ort complements the data of other projects with a “what-happens-in- practice” perspective as to what really occurs when one seeks to obtain corporate
The Five Component Projects: Methodology and Summary of Findings I 135
vehicles for unseemly purposes. On the other hand, it also addresses the additional issue of the lack of source information on the role of TCSPs in grand corruption cases, occasioned by their (relatively speaking) lower profi le when implicated in the aiding of money launderers to obtain corporate vehicles. Th us, the approach adopted in the TCSP Project corresponds to this report’s emphasis to go beyond mere examination of such rules-on-the-books as may exist. All fact-gathering for this project was conducted independently of the Stolen Assets and Recovery (StAR) Initiative, from November 2008 to August 2010.
3.2 Methodology
Th e research for this component developed a substantial evidentiary base amassed through the most direct and powerful technique for judging the availability of compa- nies that leave the identity of the benefi cial owner unknown: Seeking off ers for such vehicles, and in three cases, purchasing the vehicles in question. Such an approach pro- vides answers to two key questions:
1. How easy or diffi cult is it for would-be criminals and others to purchase compa- nies while hiding their underlying controlling interest?
2. Does the recommendation that all corporate vehicles should be able to be linked to their benefi cial owner really make any diff erence?
Even if only a few jurisdictions are failing to adhere to the proper standards (compli- ance with FATF Recommendations 33 and 34) with regard to collecting benefi cial own- ership, the exceptions may well dominate the rule. In July 2008, the president of the FATF observed the following:
We live in an increasingly interconnected world and money launderers and terrorist fi nan- ciers will exploit any gaps between countries. Consistent application of recognised interna- tional standards is essential. Th e weakest link gives the strength of the chain.90
Th anks to online incorporation systems, it is likely that criminals, and unscrupulous TCSPs, can eff ortlessly arbitrage to form companies in the jurisdictions that require the least identifi cation and verifi cation (if any) with regard to the benefi cial owners. Th e rigor of the many may be rendered irrelevant by the laxity of the few.
Early on in the Trust and Company Service Providers Project, a decision was reached that the solicitation of off ers by TCSPs would be geared toward obtaining shell entities (that is, corporations, limited liability companies, or jurisdictional variants of the same). Because of pragmatic considerations having to do with ensuring that this subcompo- nent would be manageable, the omission of other forms of corporate vehicles (trusts, foundations, partnerships, etc.) is nevertheless justifi able for two reasons: (a) the total numbers of such alternate corporate vehicle forms are an order of magnitude smaller compared with total of all types of existing corporate vehicles (at the highest end, there
136 I The Puppet Masters
are only an estimated 40,000 Liechtenstein Anstalten91 and 26,000 Panamanian founda-
tions92) and (2) reference to Database Project fi ndings suggests that corporate vehicle
misuse in grand corruption cases has most frequently implicated companies.
Decisions as to which TCSPs would be approached were informed to some extent by the distribution of TCSPs and corporate vehicles around the globe. To begin with, a minor note must be made of the conceptual diffi culty involved in determining what or who counts as a TCSP. It is typically not possible to strictly delineate between TCSPs and fi nancial institutions and “designated nonfi nancial” businesses and pro- fessions, because a business may off er one such service as a primary function and the other(s) as an ancillary service, or they may market themselves as a one-stop pro- vider of both (or all three) functions in equal measure. It is easiest to quantify those TCSP providers who fall under the purview of a jurisdiction with a regulated-TCSP regime (most typically found in the “off shore fi nancial centers” [OFCs]—those juris- dictions whose corporate vehicles are primarily used by nonresidents) because, whether as primary or auxiliary function, all those seeking to engage in the provision of such services must be licensed.93 Th e larger OFCs usually have 80–120 licensed
TCSPs, whereas smaller OFCs may have 6–20. Attempts to count the TCSPs operat- ing in so-called onshore jurisdictions (those jurisdictions whose corporate vehicles primarily are used by domestic individuals) prove more problematic, as most of the onshore jurisdictions do not require TCSPs to obtain licenses within a regulatory framework, and oft en any range of individuals or companies belonging to the financial, designated non-financial businesses and professions (DNFBPs), or unre- lated sectors can engage in the creation and sale of these corporate vehicles as a pri- mary or ancillary service to their clients.
Some of the largest TCSPs are headquartered in the United States, the United Kingdom, Panama, the Isle of Man, and Hong Kong SAR, China.94 Individually, larger TCSP fi rms
(for example, Off shore Incorporations Limited [OIL], Off shore Company Registration Agents [OCRA], Mossack Fonseca, etc.) may off er company incorporation and man- agement services in up to 30 diff erent jurisdictions and are responsible for incorporat- ing thousands of corporate vehicles each year. Divisions oft en exist between wholesale and retail TCSPs—the former forming companies in bulk, the latter selling or establish- ing individual vehicles for particular clients.
Th e numbers of OFC-based international business companies (IBCs) are relatively well known: the British Virgin Islands has about 40 percent of the market with around 500,000 active companies, and about 70,000 new companies are formed each year.
91. Based on a 2007 interview by the Trust and Company Service Provider project leader. 92. According to Off shore Investment Company Formation Survey 2009.
93. Even in these jurisdictions, legal arrangements are seldom regulated to such an extent—perhaps with the exception of certain codifi ed variants. A few countries do register trusts. Liechtenstein, South Africa, and Bahrain are three such exceptions.
94. According to interviews with TCSPs in the United Kingdom; Panama; the Isle of Man; Hong Kong SAR, China; Seychelles; Samoa; and the British Virgin Islands.
The Five Component Projects: Methodology and Summary of Findings I 137
Panama is second with perhaps 320,000 total active companies, then Belize, the Sey- chelles, the Bahamas, and the Caymans with 50,000–75,000 total active companies each.95 It is relatively safe to assume that most of these are shell companies and that all
are owned by nonresidents. Th e small populations of these jurisdictions and the legal prohibition on IBCs conducting business domestically indicate they are held by non- residents, as the name international business company suggests. Th is point is unani- mously confi rmed in both public documents and interviews with CSPs and regulators in these jurisdictions. Less easy to determine are the data on those shell companies mixed into the sizable numbers of corporate vehicles formed in the onshore jurisdic- tions. By way of example, the U.S. Senate Permanent Subcommittee on Investigations estimates that 2 million corporations are formed each year in the United States,96 with
more than 18 million corporations and limited liability companies currently active.97A
very large number of U.K. companies are also formed each year, with 362,000 formed in 2009–10.98 Evidence from interviews with TCSPs and advertising material suggests
that a not-insignifi cant portion of these are formed as shell companies, oft en by non- residents and thus are functionally equivalent to the classic OFC-based corporate vehi- cles. Here, the example of the André Pascal England and Wales company (see box 3.6), set up as part of the fi rst audit study, is illustrative.
Given the uncertainties in the universe of TCSPs and corporate vehicles, the sample of TCSPs that were chosen never could constitute a statistically representative sample. A major focus was on those jurisdictions whose TCSPs are under no specifi c AML- relevant obligations pertaining to verifi ably identifying benefi cial ownership. Consid- eration was given, however, to the possibility that the rules that obtain in theory may oft en prove ineff ectual and irrelevant (for instance, because of failures of implementa- tion or enforcement, driven by a lack of capacity or of political will) in infl uencing the actual behavior of individuals. So, even in cases in which TCSPs are regulated entities subject to AML requirements, failures of regulation might render them likewise inef- fectual. A mix of the two groups was selected from jurisdictions around the globe, with specifi c providers being identifi ed from advertisements in the specialist investment media, general media outlets, and dedicated online searches.
Once the TCSPs to be included in the study had been identifi ed, the fi rst step of the practical element of this exercise was to compose a short approach e-mail using accounts created for the purpose. Th is letter was designed to emulate the profi le of a representa- tive would-be miscreant, based on recurring elements identifi ed in the various reports. In a manner intended to set off “red fl ags,” this e-mail stressed the need for confi dential- ity and tax minimization as part of an international consultancy project, as consulting fees oft en are used as plausible justifi cation for illicit cross-border fl ows.
95. Off shore Investment Company Formation Surveys, 2007, 2008, 2009.
96. Th e U.S. fi gure is from Senate Committee on Homeland Security and Governmental Aff airs Committee Hearing June 17, 2009, on S.569 Incorporation Transparency and Law Enforcement Assistance Act. 97. J. W. Verret, “Terrorism Finance, Business Associations and the Incorporation Transparency Act,” Lou- isiana Law Review 70, no. 3 (Spring 2010): 857–910.
138 I The Puppet Masters
In two rounds of testing, 217 service providers were contacted, of which 102 returned valid replies.99 A valid reply consisted of a service provider’s recommendation of one or
more corporate structures that could achieve the goals set out in the approach letter, together with a pricing schedule. Responses commonly included a brochure specifying further services, and encouraged further contact, which was, wherever possible, carried out via e-mail.
Th ese replies were compiled and coded in terms of the nature and domicile of the cor- porate vehicle off ered, whether the service provider would supply such a corporate vehicle, and what, if any, documentation was required by the TCSP to verify the identity of the benefi cial owner for the transaction to move forward. Analysis was then per- formed to understand what (and in what circumstances) variance of standards may occur: across countries, between diff erent types of countries (for example, OFCs versus onshore jurisdictions) or in line with diff erent regulatory regimes (for example, whether a requirement existed to license TCSPs), thus off ering the potential to provide a better diagnosis of where the existing weaknesses lie and to suggest possible solutions. As a fi nal step, in-depth interviews were conducted with corporate service providers from six major company-formation jurisdictions. Th ese interviews checked and vali- dated the fi ndings of the TCSP component of the study as well as the more general conclusions. A specifi c focus was given to whether these service providers performed due diligence checks in line with the standards of their home jurisdiction, or according to the standards of the jurisdiction in which companies were being incorporated, or whether they were dictated by separate group standards.
As with the other practitioner consultations, strict confi dentiality was assured to ensure forthright participation.
3.3 Summary of Findings
Th e fi ndings of the TCSP Project (fi rst and second audits, and combined results) are summarized in tables B.4 through B.6.
Service Provider
Shell Company Jurisdiction
ID
Required? Bank ID Required?
Bahamas Anguilla Yes Bahamas Bahamas Yes Bahamas Bahamas Yes
99. In the initial round of testing, occurring in 2008–09, 54 service providers were contacted, of whom 45 returned valid responses; in the second round (2010), 163 service providers were contacted, with 57 valid replies. Please note that a forthcoming study by Brigham Young University and Griffi th University of over 3,500 company service providers confi rm the fi ndings of the present TCSP Project.
TABLE B.4 Complete Results of First Audit Study
The Five Component Projects: Methodology and Summary of Findings I 139
TABLE B.4 Complete Results of First Audit Study (continued)
Service Provider
Shell Company Jurisdiction
ID
Required? Bank ID Required?
Belize Belize Yes Bermuda Bermuda Yes British Virgin
Islands (BVI)
BVI Yes
Cayman Islands Cayman Islands Yes Cayman Islands Cayman Islands Yes Cyprus BVI, Panama, St.
Vincent and the Grenadines
Yes
Czech Republic BVI, Seychelles Yes Dominica Dominica Yes Gibraltar Turks and Caicos Yes Gibraltar BVI, Delaware,
Gibraltar, Panama, Wyoming, etc.
Yes
Hong Kong SAR, China
BVI Yes
Hong Kong SAR, China
BVI; Hong Kong SAR, China; Seychelles, etc.
Yes
Hong Kong SAR, China BVI Yes Labuan (Malaysia) Labuan Yes Liechtenstein Liechtenstein Yes Nauru Nauru Yes Panama Panama Yes Panama Panama Yes Panama Belize, Nevis,
Panama, Seychelles, Vanuatu, etc.
Yes
São Tomé and Príncipe
São Tomé and Príncipe
Yes Seychelles BVI, Seychelles Yes Singapore Bahamas, BVI,
Delaware
Yes Singapore Singapore Yes
140 I The Puppet Masters
Service Provider
Shell Company Jurisdiction
ID
Required? Bank ID Required?
Switzerland BVI, Delaware, Panama
Yes
Belize Belize No Belize Yes Canada BVI, Ontario, Panama,
Wyoming, etc.
No Latvia, Panama
Yes Hong Kong SAR,
China
Delaware No Hong Kong SAR, China
Yes Singapore BVI; Hong Kong SAR,
China; Seychelles (Gruppo 20)
No Cyprus Yes
Spain Belize No Belize Yes United Kingdom Belize, BVI England,
Nevada, Panama, etc.
No Isle of Man Yes United Kingdom Belize No Hong Kong
SAR, China Yes United Kingdom Cyprus No Cyprus Yes United Kingdom Belize, BVI, Delaware,
England, etc.
No Hong Kong SAR, China
Yes
United Kingdom England (A. Pascal) No Latvia No (pre-2007), Yes
Uruguay Seychelles No Hong Kong SAR, China; Panama
Yes
United States Wyoming No United States Yes United States Nevis No Belize Yes
Liechtenstein Somalia Yes Somalia Yes (unnotarized) United Kingdom Belize, BVI,
Delaware, Nevada, Panama, etc. No St. Vincent and the Grenadines Yes (unnotarized)
United Kingdom Seychelles No Montenegro Yes (unnotarized) United States Nevada (BCP
Consolidated)
No United States Yes (unnotarized) United States Wyoming No United States No (pre-2008),
Yes (unnota- rized)
Source: Authors’ compilation.
The Five Component Projects: Methodology and Summary of Findings I 141
CSP Jurisdiction Vehicle Jurisdiction Photo ID Required?
Malaysia BVI Yes
United Kingdom Seychelles, BVI, England No
Jersey Jersey Yes
United States non-U.S. Trust Yes United Kingdom U.K. Trust Yes Singapore Singapore Yes Costa Rica Seychelles, Belize Yes United Kingdom Seychelles, BVI, Belize Yes
United States Nevis, Belize, Bahamas No
Hong Kong SAR, China Nevis No
Thailand Thailand No*
Dominica Dominica Yes
Panama Panama Yes
Mauritius Mauritius Yes New Zealand NZ Trust Yes
Dominica Dominica Yes
Cyprus Seychelles, Cyprus Yes United Kingdom Seychelles Yes
Barbados Barbados Yes
Belize Belize Yes
United Kingdom BVI Yes
Dominica Dominica No
United States Delaware No
United States Delaware No
United States Wyoming No
United States Delaware Yes
United States Delaware No
United States Delaware No
United States Delaware No
Philippines Philippines Yes Seychelles Seychelles Yes New Zealand Vanuatu Yes
Panama Panama Yes
Neth. Antilles Neth. Antilles Yes
TABLE B.5 Complete Results of Second Audit Study (noncompliant
responses in italics)
142 I The Puppet Masters
CSP Jurisdiction Vehicle Jurisdiction Photo ID Required?
Mauritius Mauritius Yes Mauritius Mauritius Yes New Zealand New Zealand Yes
New Zealand New Zealand No
United States Nevada Yes
United States Nevada No
United States New Mexico No
United States California No
United States Nevada No
United States Nevada No
United States Nevada No
United States Delaware No
United States Nevada No
United States Delaware No
United States Nevada No
United States Nevada No
United States Nevada No
Singapore Singapore Yes Singapore Singapore Yes Seychelles Seychelles Yes Seychelles Seychelles Yes Hong Kong SAR, China Hong Kong SAR, China Yes
United States Delaware No
Source: Authors’ compilation.
Note: * The Thai service provider did not require an ID, but did require a personal visit.
TABLE B.5 Complete Results of Second Audit Study (noncompliant
responses in italics) (continued)
Valid responses Compliant Noncompliant
1. Sampled OECD countries 47 12 35 (a) United States 27 3 24
(b) Other OECD 20 9 11
2. Other countries 55 49 6
(a) Tax havensa 36 34 2
(b) Non-tax havens 19 15 4
3. Total-Worldwide 102 61 41
Sources: Authors’ compilation with some data from J. C. Sharman, “Shopping for Anonymous Shell Companies: An Audit Study of Financial Anonymity and Crime,” Journal of Economic Perspectives 24 (Fall 2010): 127–140.
Note: OECD = Organisation for Economic Co-operation and Development. a. Those jurisdictions identifi ed as tax havens by the OECD in 2000.
The Five Component Projects: Methodology and Summary of Findings I 143
Project 4. The Registry Project