Cryptocurrencies have recently been in the headlines for their role in laundering the proceeds of cybercrime, such as ransomware.
But it’s by means of a much older invention that most dirty money is laundered—limited companies and partnerships.
According to NorthRow, a UK-based technology company, $1trn a year is stolen every year from the world’s poorest countries and laundered through a complex network of shell companies, trusts and other legal structures, some in ‘offshore’ financial centres but many in financial hubs like London.
NorthRow says that layers of corporate structures, together with a lack of standardised reporting, make it extremely difficult to identify the ultimate beneficial owners of shell companies. In turn, this makes money laundering cases near-impossible to solve.
And corporations have a dominant role in processing dark money flows. Europol recently estimated that 80 percent of active EU criminal networks are using legitimate businesses to hide their ill-gotten gains.
The UK dark money nexus
It’s ill-guided past government policy that often puts the UK at the nexus of criminal money movements, say researchers Graham Barrow and Ray Blake, presenters of a podcast devoted to money laundering called the Dark Money Files.
“The UK government has been consistently clear that it wants the UK to be an easy place in which to establish a business. And it’s so easy to do here that the criminals have flocked to set up their companies,” Barrow said on the podcast.
Corporations have a dominant role in processing dark money flows
On a recent Dark Money Files episode, Barrow and Blake gave an example of how easy it is for criminals to get around rules, brought in five years ago, requiring UK companies and limited liability partnerships (LLPs) to declare anyone owning more than 25 percent of shares as a person of significant control (PSC).
“When you see four equal shareholders in a company it’s a neat way of dodging having to name a PSC,” said Barrow.
“It’s possible to set up a limited company largely following the rules, while at the same time revealing virtually nothing about who the people who ultimately own the company.”
“Companies House [the UK’s corporate registrar] doesn’t have the resources currently to police the system, and people have if anything started taking more liberties,” Barrow said.
According to Barrow and Blake, global money launderers have recently been making use of more arcane UK legal structures, such as Scottish limited partnerships (SLPs), to move money around.
SLPs were first introduced in the late nineteenth century as a way for Scotland’s tenant farmers to manage their businesses.
“Unlike other British limited partnerships, a Scottish limited partnership (SLP) has a distinct legal personality and can do business in its own name,” said Barrow.
“You can’t currently wind up an SLP”
“A number of SLPs used in ‘laundromats’ [money laundering operations] had similar structures,” Barrow went on.
“Both the general and limited partners would be legal entities based in offshore locations such as Belize, the Marshall Islands, Dominica or the Seychelles,” said Barrow.
“If they named a PSC (and often they don’t bother, because frankly Companies House doesn’t enforce the requirement), it tended to be someone from one of the central or eastern European states like Ukraine, Belarus or Uzbekistan.”
“And SLPs don’t have to file accounts or even provide the addresses or names of the signatories to the partnership applications,” Barrow said.
Making things worse, he went on, it’s even possible to make a Scottish limited partnership disappear temporarily from view.
“You can’t currently wind up an SLP,” Barrow said.
“You can dissolve one, but for the price of a stamp and filling in the requisite form you can reinstate it at any time,” Barrow said.
“So just because an SLP might appear at Companies House as dissolved it doesn’t mean it’s dead and gone,” he said.
No more easy company formation
According to journalist and author Oliver Bullough, a past guest on the New Money Review podcast, we can’t expect the countries and company agents that benefit from money laundering to stop their work.
“There are jurisdictions all around the world that make a very good living out of essentially allowing crooks to get away with whatever they like,” Bullough said yesterday on a webinar organised by NorthRow.
Instead, he said, it’s time to make it harder for money launderers to operate in jurisdictions like the UK. A first step, argues Bullough, is to rethink the lax current rules on company formation.
“We need to get away from this whole model of thinking that it’s a good idea to sell companies cheaply,” said Bullough.
“Companies are astonishingly powerful tools for developing industrial capitalism,” he said.
“They’re a form of insurance to allow entrepreneurs to spread their risks onto the rest of society and, considering they’re an insurance policy, the idea that they can be anonymous is absolutely absurd. An anonymous insurance policy is just an invitation for fraud,” Bullough said.
Lack of usable data
There are also formidable problems facing those wishing to investigate money laundering, for example by tracing patterns of ownership and behaviour in repositories of corporate data.
According to Transparency International (TI), a non-profit organisation fighting corruption, only two of 28 European Union member states—Denmark and Latvia—provide free public access to registers of the ultimate beneficial ownership of companies.
According to Laure Brillaud, a senior policy analyst at TI, several European countries have no mandatory public register at all.
“Germany doesn’t have a national register of legal entities,” Brillaud said on yesterday’s NorthRow webinar, “and registering in a central register is only mandatory when there isn’t another register available.”
And even if national corporate registers exist, the way they grant access often makes researchers’ work difficult to perform, she went on.
“The scale of the problem is immeasurable”
“In the Luxembourg company register you can only search by company name, not by beneficial owner,” said Brillaud.
“And the data is not available as open data, in a machine-readable format, which really limits the possibility to cross-check and cross-reference with other databases,” she said.
According to NorthRow, the burden of verifying beneficial ownership information should be placed on the state, a registrar or on regulated intermediaries, rather than being left as a responsibility of the companies themselves.
And where legal structures obscure beneficial ownership, there needs to be some interpretation of the data, not just the statement a list of facts, the firm argues.
An unholy mess
In the meantime, according to Bullough, our current system of legal entities enables crime to persist on a massive scale.
“The shell company is a form of state-sanctioned identity fraud,” he said.
“We’ve ended up with an unholy mess. The scale of the problem is immeasurable.”
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