24th Oct 2016

World Bank shames EU on money laundering

EU member states Cyprus and the UK have been named by the World Bank as two of the world's leading destinations for money launderers.

The Washington-based body in a new report noted that out of 150 high-level corruption cases exposed in recent years, the UK and UK overseas territories Bermuda, the British Virgin Islands, the Cayman Islands, the Isle of Man and Jersey hosted 172 companies used in criminal schemes.

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  • The British Virgin Islands is classified as a UK and EU 'overseas territory' (Photo: JaguarJulie)

Tiny Cyprus hosted 11. Non-EU countries in Europe - Liechtenstein (28) and Switzerland (7) - also played a big role. Atop this, the UK and Jersey were home to 30 dirty bank accounts. Cyprus hosted 15, Switzerland 76 and Liechtenstein 10.

"Corruption is estimated to be at least a $40 billion dollar a year business. Every day, funds destined for schools, healthcare, and infrastructure in the world's most fragile economies are siphoned off and stashed away in the world's financial centers and tax havens," the author of the study, Ngozi Okonjo-Iweala, a Nigerian minister, said.

The report highlighted the problem of trust or company service providers (TCSPs).

TCSPs can be tiny operations of one man with a website or large firms with offices and dozens of staff. They are often hired by corrupt officials to set up shell companies in offshore centres in order to funnel dirty money.

The TCSPs hide the real ownership of the firms by, for example, acting as "nominee directors" - in effect "renting" their names to third parties. In many cases the TCSPs do not even know who they are working for. Out of 102 TCSPs contacted by the World Bank, 41 required only the completion of an online form, similar to buying a plane ticket.

It costs just $1,950 to set up a company in the British Virgin Islands, which has a population of 25,000 people but is home to 500,000 international business firms, a number growing by 70,000 each year.

The World Bank also raised the alarm over "trusts" and "foundations" - non-profit financial entities which can also used to make dodgy bank transfers.

Trusts can be impenetrable due to confidentiality laws protecting the identity of the owner. They also cause problems for asset recovery because once a trust has been formed, its assets do not legally belong to the person who gave the money. Trusts came up in just five percent of cases, but the survey noted with concern that Liechtenstein alone has more than 40,000.

The UK, the Netherlands Antilles and Liechtenstein were in the spotlight for still tolerating "bearer shares."

Explaining the problem, the World bank said: "The person in legal possession of the physical shares is deemed to be their owner and thus the owner of the company. The problem is knowing who owns the shares at any given point in time ... No legitimate rationale exists for perpetuating bearer shares and similar bearer instruments. We recommend that all countries immobilize or abolish them."

Two case studies show the complexity of money laundering structures.

In the mid-1990s, former Zambian leader Frederick Chiluba had Zambian intelligence chief Xavier Chungu make his childhood friend Faustin Kabwe set up a company in the British Virgin Islands. Kabwe owned the firm, Harptree Holdings, via bearer shares. Harptree Holdings owned the Luxembourg-based company Jarban, which in turn owned Belgian firm Belsquare Residence which "converted misappropriated [Zambian] funds into European real estate purchases."

In 2006, the US jailed former Ukrainian prime minister Pavel Lazarenko for extortion and money laundering

Apart from buying property in California, Lazarenko "allegedly" held bank accounts in Credit Suisse in Guernsey, Credit Suisse and Banque SCS Alliance in Geneva and in Vilniaus Bankas in Lithuania. He is also said to have stashed money in the name of four foundations in Liechtenstein (Orilles Stiftung, Gruztam Stiftung, Lesja Stiftung and NRKTO 7541) and held accounts in Liechtenstein banks in the names of three other shell companies (Beranco Engineering Establishment, Ylorex Establishment and Tanas).

Five years on, the US is still trying to recover $250 million lost in Lazarenko's labyrinth.

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