Not least since the Panama Papers, media around the world have tirelessly repeated allegations that offshore financial centers are secrecy havens that enable financial crime. These claims are at odds with recent investigations into money laundering schemes, which show that international criminals have increasingly used companies registered in the U.K.
In November, campaign group Transparency International UK released a report that claimed in the past 14 years, U.K.-based shell companies have been linked to 52 money laundering scandals involving more than $100 billion.
Although the U.K. intended to lead the world in deterring criminals by becoming the first country to open the records and information on beneficial owners of U.K. companies to public scrutiny, it appears the greater transparency has done little to stem financial crime.
In fact, the U.K. may have attracted financial fraud simply because it is not considered offshore.
Fraudsters in Eastern Europe and elsewhere have routed money through U.K.-registered entities because they appear to many people as more legitimate than offshore-registered companies, Transparency International said.
The desire of the U.K. government to facilitate company registrations by allowing online registrations and the self-reporting of unverified identity information has contributed to the growth of an industry of formation agents who establish blocks of companies and partnerships which they then make available to overseas parties, the report noted.
Faced with U.K. demands to establish centralized public registers of beneficial ownership, Britain’s overseas territories and Crown dependencies have long criticized the insufficient quality of information based on self-reporting at U.K.’s Companies House.
Cayman Finance, the organization that represents the finance industry in Cayman, has frequently stated that Cayman’s system of financial services providers verifying the beneficial ownership information for offshore companies is superior to that of the U.K.
At the Offshore Alert conference in London in November, Cayman Finance CEO Jude Scott reiterated this point stating that service providers are much closer to the transactions and have better insight into evaluating whether these are consistent with the information they are receiving.
“The criticism of self-reporting registers is, unless you think that hardened criminals are going to certify to you that they are hardened criminals, it is really a useless tool at preventing real, hardened criminality in a jurisdiction,” he said.
The Transparency International report found 766 companies registered in the U.K. that have been directly involved in laundering stolen money out of at least 13 countries. The companies were used as layers to hide money that would otherwise appear suspicious.
The U.K.’s own defense mechanisms against this activity “have proven to be woefully inadequate,” Transparency International said, as only six staff in Companies House are charged with policing 4 million companies.
U.K. magazine Private Eye warned as early as 2013 that British limited liability partnerships were particularly popular with money launderers. In contrast to private limited companies, LLPs and limited partnerships (LPs) do not need to name a natural person as a director or member of the company.
While many of the LLPs involved in the schemes no longer exist, some remain on the U.K. public register and continue to successfully disguise the control persons behind their holding companies despite a new requirement for British-based companies to disclose any shareholders of 25 percent or more.
The extent of the problem with British companies and partnerships as a key link in fraud schemes becomes even apparent in the U.S. investigation of Paul Manafort’s business activities, which culminated in money laundering and conspiracy charges last month.
Research by The Cayman Islands Journal shows that certain companies that Manafort’s businesses dealt with were controlled by the same companies that were named in connection with large Eastern European money laundering and corruption schemes.
These cases range from government corruption in Ukraine and weapons smuggling to South Sudan to bank fraud in Moldova and Deutsche Bank’s Russian mirror trade money laundering scandal.
The various money laundering schemes all involved British limited liability partnerships and limited partnerships held by the same offshore companies.
Manafort’s Ukraine investment
In 2014, a firm belonging to Russian oligarch Oleg Deripaska filed a petition in the Cayman Islands Grand Court to wind up Pericles Emerging Market Partners L.P., a private equity firm run by Paul Manafort, Richard Davis and Richard Gates, that sought to invest in businesses in Ukraine.
The Russian aluminum magnate Deripaska, who had been Manafort’s business partner before, agreed to invest in the firm. According to court filings in Cayman and the United States, Deripaska’s Cyprus-based investment firm Surf Horizon Limited was the sole limited partner in Pericles.
In total, Deripaska’s investment firms paid $7.35 million in management fees for the partnership and $18.9 million for the only transaction Pericles ever undertook in the acquisition of Chorne More (Ukrainian for Black Sea), a cable TV and internet company in Odessa.
Surf Horizon sought the winding up of Pericles because the firm had reason to believe that the proposed structure for the acquisition of Chorne More had not been used and there were serious doubts whether the acquisition had taken place at all.
While Surf Horizon was unable to obtain the purchase agreement, other documents relating to the Chorne More transaction did not mention Pericles. Instead they indicated that EVO Holdings, owned by Gates, was to pay a purchase price of $17.8 million, less than purported to the investor, to a previously undisclosed seller named Colberg Projects LLP. Colberg was the owner of TechCorp Universal LLP, which supposedly owned the Chorne More entities through their parent Chorne More LLC, the Cayman court-appointed liquidators of Pericles said in a U.S. court filing.
Both U.K. limited liability partnerships Colberg Projects and TechCorp Universal were initially controlled by Ireland & Overseas Acquisitions Limited and Milltown Corporate Services Limited. These companies were first registered in Ireland and over the years replaced by businesses of the same name first in the BVI and then Belize.
Ireland & Overseas Acquisitions and Milltown Corporate Services were incorporated in Ireland at an address belonging to Philip Burwell, a company formation agent, who says he set up “give or take” 2,000 offshore companies during his career.
The first directors listed for the companies were Latvians Stan Gorin and Erik Vanagels. The two men, together with a number of other Latvian company directors, reached near legendary status in crime investigation circles because they nominally headed hundreds of companies, many of which were involved in serious crime ranging from Ponzi schemes to embezzlement, corruption and weapons smuggling to money laundering.
Erik Vanagels, however, is not a wealthy criminal mastermind but a man in his late seventies who allowed his passport details and signature to be used to set up companies around the world. Stan Gorin equally said he allowed others to use his personal details but he never had an active role in the companies he represented as a director.
Eastern European media uncovered a whole roster of company directors whose identities had been used to incorporate businesses they had no part in – either in return for monetary compensation or because their identity had been stolen.
Irish company agent Burwell admitted to the Irish Times in 2013 that he set up companies for other agents in eastern Europe which were subsequently involved in criminal activities or other scandals, but he said he did not provide the directors or operated these companies.
Latvian media established that Burwell worked with a company called International Overseas Services that used Latvian nominee directors.
Many corporate agents in eastern Europe took advantage of liberal company laws in countries in western Europe, particularly in the U.K., with some of them not speaking enough English to understand that their activities may breach company laws, Burwell told the Irish Times.
He claimed that nobody in the business had expected the volume of corrupt or illegal activities involving customers from Russia and Ukraine over the past 10 years.
Ireland & Overseas Acquisitions and Milltown Corporate Services were the original members of hundreds of companies. Dozens of them switched control to the same parties at roughly the same time, suggesting they are still controlled by the same people who remain anonymous.
For Colberg Projects LLP, the owners of Chorne More, for example, Ireland & Overseas Acquisitions and Milltown Corporate Services were in 2011 replaced as partnership members by Intrahold A.G. and Monohold A.G., two Seychelles companies.
Prosecutors in Ukraine named all four companies – Ireland & Overseas Acquisitions, Milltown, Intrahold and Monohold – in relation to various government corruption schemes involving associates of former Ukraine President Viktor Yanukovych and his Party of Regions. The various alleged schemes all involved U.K. companies controlled by some of the four entities.
Another U.K. company controlled by Monohold and Intrahold transferred $850,000 to Black Sea View Limited, the Cyprus company that was supposed to hold Pericles’ Chorne More (Black Sea) cable TV investment under the initial plans presented to Surf Horizon.
The purpose of the payment is not known and although it appears in Black Sea View’s annual return filed in Cyprus, none of the financial records filed by the company with the U.K. company register reflect the payment.
Pericles liquidators represented to a U.S. court that TechCorp – the direct owner of Chorne More LLC – retained ownership of that company through early 2010, “well after the supposed consummation of the transaction in 2008.”
In mid-2010, a BVI entity called CardMan ImpEx Corp. became a joint shareholder of Chorne More LLC, and TechCorp was dissolved. CardMan is owned by Panamanian entity Cascado AG, another business that spawned hundreds of other companies. The director for Cascado, according to filings with the U.K. corporate registry, was once again the infamous Erik Vanagels.
In 2014, the Seychelles regulator announced it would investigate Intrahold A.G. and Monohold A.G. after media reports about the two companies being involved in government corruption and money laundering in Ukraine reached the archipelago in the Indian Ocean. Subsequently, most companies controlled by the two Seychelles holding companies switched ownership to other holding companies around the world.
Some of the U.K. LLPs named Tallberg Ltd and Uniwell Inc. on the island of Nevis in the Eastern Caribbean as new directors.
A cursory search of the U.K. company register reveals more than a dozen companies that changed control to the same two companies at about the same time.
Records at U.K. Companies House show that a certain Ali Moulaye signed documents filed with the company register on behalf of Ireland & Overseas Acquisition, Milltown, Intrahold, Monohold, Tallberg and Uniwell.
Deutsche Bank mirror trading
The same control companies have been named in connection with other laundering schemes in Eastern Europe.
Earlier this year Deutsche Bank settled investigations into a mirror trading scheme used to launder $10 billion out of Russia by paying fines of $425 million New York’s Department of Financial Services, a banking regulator, and $204 million to the U.K. Financial Conduct Authority.
Between 2011 and 2015 related companies in Moscow and London bought and sold quantities of the same stock in transactions that are not inherently illegal. By buying a stock in Russian rubles in Moscow and subsequently selling the same quantity of stock through a related offshore company in London for euro, U.S. dollars or pound sterling through Deutsche’s equity desk, a client effectively sold the stock to himself but was also able to expatriate Russian rubles, which are under exchange controls.
The fact that the clients lost money in each of the trades, in the form Deutsche Bank’s commission and the difference between the purchase and sales price, should have been a red flag for the bank especially because many of the mirror transactions were instructed by the same broker.
In 2011, the Federal Financial Markets Service in Russia barred two mirror-trade companies, Westminster and Financial Bridge, for employing stock market transactions to transfer money overseas, but Deutsche Bank continued to execute the trades.
In a 2016 analysis of the mirror trades scandal, U.S. magazine The New Yorker named a number of companies involved in the scheme, including two U.K. LLPs Chadbourg Trade LLP and Ergoinvest LLP.
The New Yorker article speculated that the companies were middlemen who made it their business to facilitate sending funds offshore. Those interested in expatriating funds from Russia would invest in ruble into a Russian fund which would use the money to execute mirror trades with an offshore fund which in turn would transfer the money to the client’s offshore account in U.S. dollars.
A search of the U.K. Companies House shows that Chadbourg Trade and Ergoinvest were set up by two companies – Kenmark Inc. and Ostberg Ltd – registered on the Caribbean island of Dominica. Corporate filings for Chadbourg Trade and Ergoinvest were signed by Ali Moulaye.
The fees for such a transaction, which evaded anti-money laundering controls, tax officials and currency regulators, were as high as 5 percent when Russian authorities tightened currency controls, the article stated.
The Moldovan Laundromat
Earlier this year, the Organized Crime and Corruption Reporting Project (OCCRP), a network of investigative journalists in Eastern Europe, uncovered a massive money laundering scheme in Moldova, which channeled at least $20 billion (and possibly as much as $80 billion) out of Russia using fake debt agreements.
The scheme typically involved two companies controlled by Russian money launderers. One of the companies would become a creditor of the other by signing a promissory note but no money changes hands. The transaction was guaranteed by a Russian company fronted by a Moldovan citizen.
The lender in the transaction then claims the borrowing company has defaulted on the loan and demands that the Russian company as guarantor pays the money. Because the guarantee involved a Moldovan citizen, the case went to court in Moldova, where a corrupt judge who was part of the scheme ordered the Russian company to pay the fictitious debt under the supervision of the court.
The funds are then sent from Russia and passed through several shell companies, including U.K.-based partnerships and other EU-based companies.
For instance, one of the companies named in the Moldovan Laundromat by the OCCRP, is Tronlux Ventures, LLP, which like Chadbourg Trade in the Russian mirror trading scheme lists Kenmark, Inc., and Ostberg, Ltd. as directors.
From this year, Companies House requires U.K. companies to file persons of significant control for each company on the register. The aim is to identify the natural persons that are the ultimate owners of registered entities.
The information is public and available free of charge but for most of the LLPs used in the various schemes this does not mean that new light is shed on the real owners behind the companies.
While it is still possible in the self-reporting system advocated by the U.K. government to report another Erik Vanagels as a “nominal” control person, i.e., a “fake” beneficial owner, many LLPs have taken a different route.
They simply introduced another company or LLP as a member and nominated this entity as the person of significant control.
This entity then avoids naming a PSC, or beneficial owner, itself by exploiting a loophole that requires only shareholders of 25 percent to be reported.
The company can do so by dividing its shares among five shareholders who each own less than 25 percent. These shareholders are often companies and partnerships in far flung places likes Dominica, the Marshall Islands, Canada or South Africa.
Trying to determine the owners of the shareholders will often end in a circle leading to the same member companies that control the U.K.-registered entity in the first place.
Although the U.K. is the only country that has introduced publicly available register of true beneficial owners of companies, the system remains poorly policed because Companies House has insufficient resources to verify the submitted information, Transparency International said in its report.
“Financially these scandals could amount to 80 billion pounds or more in illicit wealth, with some of them threatening the financial stability of whole economies. The human damage inflicted on the victims of these crimes is still being counted,” the organization said.