The recent financial scandal called “Pandora Papers”, is the result of a journalistic investigation conducted by the International Consortium of Investigative Journalists . The research has allowed the world to learn about thousands of offshore companies linked to entrepreneurs, managers, politicians and criminals around the world, created to ensure anonymity. These legal entities are the so-called shell companies.
These companies do not have any operational activity and their assets consist exclusively of cash and/or cash equivalents (e.g., shareholdings). They often have no employees and no operational headquarters. Their sole purpose is to prevent the identification of the beneficial owner and the assets held in the company itself (essentially for the purposes of tax avoidance and money laundering).
Corporate decision-makers, internal auditors, compliance and anti-fraud professionals should pay particular attention to these legal entities, identifying them and then implementing controls to mitigate the risks arising from relationships with such counterparties.
Today we look at the complex relationship between shell companies and the beneficial owner, in the context of combating and preventing money laundering.
THE PANDORA PAPERS: WHAT ARE THEY?
The Pandora Papers were revealed on October 3 by an international journalistic investigation based on 11.9 million documents relating to assets registered offshore in territories where there are particularly lax regulations regarding taxation.
The Pandora Papers have involved 35 world leaders and hundreds of the richest and most powerful people on the planet as well as various government officials.
There are at least 90 countries involved in a period ranging from 1996 to 2020.
WHY HAVE THE PANDORA PAPERS BECOME AN INTERNATIONAL CASE?
Over 600 information professionals worked for two years to sift through 2.9 terabytes of data contained in thousands of documents, emails and spreadsheets, and as many as 14 financial services companies leaked the data behind the Pandora Papers, based in so-called tax havens (British Virgin Islands, Monaco, Panama, Singapore and Switzerland).
In these tax havens – “sunny places for shady people”- according to the definition of anti-money laundering experts, corporate taxes are low or non-existent and make it very easy to open shell companies created for the purpose of tax evasion or avoidance: tax evasion is one of the many “predicate offenses” of the crime of money laundering.
WHAT IS A SHELL COMPANY?
At the heart of the three big leaks – the Panama, Paradise and Pandora documents – as well as for many others , there is a single variable in common : the shell company – used by wealthy people and tax evaders to hide their activities from citizens, tax authorities and law enforcement.
Shell companies have a common characteristic considered a unique and appreciable virtue: they are anonymous.
THE THREE PURPOSES OF SHELL COMPANIES.
Shell companies is used for these three purposes:
1) to shield the real identity of the Ultimate Beneficial Owner, i.e., the beneficial owner, while ensuring their control over the company and its assets: anonymous shell companies.
2) circumvent the labour laws of the country where the main activity is carried out: letterbox companies.
3) to centralize the activity of financing or holding of the group, especially in the case in which it implements a very aggressive fiscal planning: Special Purpose Entity.
HOW SHELL COMPANIES ARE SET UP.
In order to maintain anonymity, the constitution of a shell company always takes place with the support of an advisor, who deals with both the constitution and often the subsequent management of the company.
There are several websites of companies that offers “offshore company” package; a service that makes setting up a shell company easy, fast and affordable.
The name of the legal representative, director, registrant or agent in a shell company’s corporate charter corresponds to the name of the advisor who has set up and/or is managing the company.
Often these advisory-companies set up a number of entities before a new customer knock on their door, to be able to provide a background to these so called “shelves-companies”
In this way, an experienced analyst should be able to locate the name of the advisor on any search engine and see if it can be traced back to a professional firm/consulting firm operating in that sector
A further analysis that could be carried out to acquire further useful elements to determine the type of company and to understand if the same refers to an advisor, is to search on the Internet for information regarding the telephone numbers and/or the e-mail domain, if reported in the company’s visas. Often what is declared as the headquarters or office will correspond to an address or address where the advisor company is also present.
Let us look at what other elements might be:
Vague or meaningless business names.
Generally, the name of a shell company is very vague or meaningless.
This type of choice could be the result either of a strategy of anonymization by the UBO (the Ultimate Beneficial Owner), in order to eliminate any traces of traceability or it could be the case of companies already pre-established by the advisor to which either progressive company names or very generic and vague company names have been given.
Legal headquarters in locations inconsistent with the stated business.
The address where the company is located is another important element in identifying the type of company.
It is fundamental, in order to discover the existence of a shell company, to investigate the address of the company in order to understand the type of property in which it has its registered office and/or exercises its activity.
Moreover, another very common element is represented by the presence of more companies registered at the same address.
To verify this possibility, it is possible to carry out a search by address on any search engine or on the various paid databases (and not) available on the market.
Absence on the web.
Generally, a shell company is not present on the web, both in terms of news, content and advertisements, and in terms of the website, as it does not carry out an operational activity and would not need to.
This aspect does not always correspond to the truth because, in some cases, a shell company may need to be present on the web to demonstrate an apparent operational activity.
THE GENESIS OF THE BENEFICIAL OWNERSHIP REGISTER.
One of the tools for combating the use of shell companies as a shield for hiding and laundering illicit proceeds is the Register of beneficial owners.
Let us analyze its regulatory genesis and its operation.
The establishment of the Register of Beneficial Owners was introduced by EU Directive 2015/849, which provided for a National Central Register for each Member State (interconnected with those of the other Member States) in which data on the beneficial owners of companies and other legal entities, trusts and related institutions are collected.
The transparency and the possibility to know of data concerning beneficial ownership was profoundly changed by EU Directive 2018/843, that changed the provisions on access to the Register.
As a result, firm regulation in favor of the Authorities and obligated parties:
a) Access to the data of companies and other legal entities was provided “in any case” in favor of the “public”;
b)Access to the data of trusts and related institutions has been provided for in favor of any natural or legal person requesting access, subject to the demonstration of a legitimate interest;
c) The possible exceptional exception on the grounds of serious risk to the beneficial owner is confirmed, extending it to access to information regarding trusts and related institutions.
THE REGULATION ON THE INTERCONNECTION OF DIGITAL REGISTERS.
On March 22, 2021 the Implementing Regulation no. 369/2021 of the Commission, concerning the interconnection between the national central registers of UBOs (Ultimate Beneficial Owner), in line with the IV and V Directive on AML, came into force for the member states of the European Union – and therefore also for Italy.
The Regulation has established a general register called with the English acronym “BORIS” (Business Registers Interconnection System) which, through the interconnection between national business registers, provides a single public access for all member states to information relating to beneficial ownership, in accordance with European anti-money laundering legislation.
THE SITUATION OF THE REGISTER OF BENEFICIAL OWNERS IN ITALY.
In Italy the adoption of the National Registry has suffered a setback, as a result of the Council of State’s censure of the MEF Decree that should have established it.
New initiatives from the Ministry will come in the months ahead.
The analysis of the statements made by the Client for the actual ownership of a legal entity is a key step in determining and managing AML risk.
Even if there are declarations from national beneficial ownership records, the entity subject to AML regulation is required to validate these declarations through a counter-audit.
With Cheope you can automate the screening for beneficial ownership, with documentation and analysis to demonstrate due diligence. Contact us to learn more about the service dedicated to the identification of the beneficial owner in Italy and abroad.
Each company can advantage from the right tools.
Cheope match strong ability in data providing, both official and investigative, with a focus to the Client’s need.
We can provide official evidences and investigative focus, linked together by a strong and clear reporting.
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