Synergies between money laundering, corruption and shell companies

There are clear synergies between money laundering, corruption and offshore companies. 

The sheer extent of money laundering and corruption has always been known but hard to prove. In Australia, government and enforcement agencies need to work harder to shape laws and to understand what is required to investigate these cases effectively, and within acceptable time limits.

Australia's exposure to corruption

The New South Wales Independent Commission Against Corruption (ICAC) investigations into Australian Water Holdings Pty Ltd have been a recent reminder for Australia of just how far corruption can reach, in a case which led to the resignation of the state premier and several ministers at both state and federal level.

The Royal Commission into Trade Union Governance and Corruption has also exposed union officials and put senior politicians on the spot. The Australian Federal Police (AFP) continues to carry out investigations into Leighton Holdings and Securency regarding alleged foreign bribery offences, and the recent resignation of ASX's chairman regarding alleged payments to a foreign public official.

These exposures have revealed the extent of both domestic and international corruption and money laundering, and the seriousness of the implications for leading multi-national companies. They have also highlighted the inadequacy of Australia's laws, and to some extent the ability of regulators and police to act urgently and investigate effectively within reasonable time frames.

Synergies between money laundering, corruption and shell companies

The interrelationship between corruption and money laundering has long been recognised. Receiving corrupt payments relies on deception; laundering these proceeds relies on secrecy. The funds are then often placed into the banking system, or layered through intermediaries such as lawyers, accountants and fiduciaries. The integration process, whereby, for example, assets are purchased through hidden investments, stock exchanges, property assets and by opening accounts in countries which deflect official enquiries into a beneficial ownership, mean that those on the trail of laundered money frequently reach a dead end.

One of the best-known examples was the case of Ferdinand Marcos, former president of the Philippines, who was able to hide his corrupt payments of approximately $10 billion by acquiring property assets in offshore entities through a network of foreign corporate vehicles, trusts and private companies. Marcos was of course assisted in structuring these assets by professional gatekeepers including lawyers, accountants and trust and company service providers. These funds remain hidden despite years of investigations.

A more recent example of layering of funds from corrupt activities involved Unaoil and the allegations against the Ahsani family. It has been alleged that bankers in New York and London facilitated Unaoil’s proceeds of crime from corruption and laundered their money, enabling the Ahsanis to build a multi-million dollar property investment business in Central London. The Ahsani family has denied these allegations.

The recent Mossack Fonseca leaks have revealed the extent to which undeclared funds are moved around the world through shell company operations, thus avoiding the scrutiny of the regulators and facilitating an international network of criminal activity. Of the 800 Australian accounts discovered, 80 involve persons who are known to the Australian Crime Commission and more than half involve undeclared income. 
In addition, conventional shell company structures were used to avoid sanctions, with serious consequences for the lives of thousands of innocent Syrians. In February 2011, with the Syrian Civil War about to erupt, it has been alleged that Mossack Fonseca, in breach of U.S. sanctions, did business with Rami Makhlouf, the billionaire associate of Syrian dictator Bashar al-Assad, which was also allegedly facilitated by HSBC. Mossack Fonseca has denied any wrongdoing. The leaked documents have, however, shown many examples of accounts being opened for known criminal networks where due diligence and beneficial ownership issues appear to have been ignored. Enforcement agencies are now carrying out investigations, but these may take many years to complete. 

Why the implementation of AML is vulnerable to corruption

Corruption can hamper the efficacy of AML measures in a number of ways:
    • Corruption generates significant amounts of money which enters the international banking system as the proceeds of crime and is then laundered, often through shell intermediaries.
    • The connection between money laundering and corruption can prevent the adoption of effective measures against money laundering.
    • Corruption can also impede the effective implementation of AML measures by making it harder for institutions to perform their duties, corrupting relevant officials or thwarting internal investigations.
    • Institutions upon whose cooperation the prevailing AML systems rely can, if corrupted, sabotage the effective implementation of AML measures by falsifying or concealing information.
  • Variations between the levels of AML controls put in place by different countries can be exploited, helping to ensure that true beneficial ownership is never revealed.
The main ingredients for investigating corruption and AML

Investigating corporate crime can be complex. It requires legal and accounting skills, an understanding of corporate structures and the ability to act urgently to obtain the relevant evidence. Evidence from the United States has indicated that the average complex prosecution for corruption or corporate crime takes between five and seven years; this is unacceptably long. The situation is no better in Australia. The AFP investigation into Leighton and Securency, for example, has been running since 2012 with no outcome. 

As Australia engages in a discussion about the kind of anti-corruption legislation it needs to fight anti-money laundering and corruption, there are a number of points the government might consider:
    • Establishing clear and decisive laws that are not difficult for prosecutors and investigators to use. Australia might consider models such as those adopted by the UK and the United States.
    • Employing people with appropriate investigative skills in senior positions. They need to be able to act decisively with a prosecutorial attitude.
    • Protecting whistleblowers and establishing an avenue for people to report corruption without fear or favour. The government must not simply pay lip service to this but must show how people are being protected; surveys have shown that more than 80 percent of whistleblowers in Australia have lost their jobs or suffered detriment. This is totally unacceptable, and reflects upon Australia as a society.
    • Introducing disclosure obligations for individuals who act in an official capacity. They would need to sign a register each year detailing any payments or gifts they receive or any conflicts of interest they have. Providing false information or omitting information should itself become an offence.
    • Providing enforcement agencies with appropriate financial resources to fight corruption and money laundering. The UK Serious Fraud Office, for instance, has more than 500 staff
  • Showing that prosecutions are successful and that there will be consequences for those who break the law; this will require more effective prosecution teams. Australia's inability to put the anti-corruption law into practice against the banking industry or any large corruption cases may well have been where it has floundered to date.
Sending out a signal

Governments cannot legislate to make people honest or to act with integrity, but what will have an impact on behaviour is the knowledge that if someone is involved in money laundering, corrupt activities or securities violations, there is a strong likelihood that they will be caught and prosecuted for their actions. Domestic laws must also be strong enough to pursue the illegal use of shell companies, and must send out the signal that there will be consequences, and that illegal funds will be found.
 Niall Coburn is the Asia-Pacific regulatory intelligence expert for Thomson Reuters. 

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