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Editor’s Note: Stefan D. Cassella is the former deputy chief of the Justice Department’s Asset Forfeiture and Money Laundering Section and the author of “Asset Forfeiture Law in the United States.” Michael Zeldin, a CNN legal analyst, has served as a federal prosecutor in the Criminal Division of the Department of Justice and was a special counsel to then-Assistant Attorney General Robert Mueller. The opinions expressed in this commentary are theirs.

Story highlights

Authors: The use of shell companies by money launderers, tax evaders, and corrupt foreign officials is well documented

They say US officials are imposing new rules, but more needs to be done

CNN  — 

News reports and judicial rulings – many of them focusing on the flow of Russian money into real estate in New York – have highlighted the role that shell companies play in laundering the proceeds of international crime.

Michael Zeldin
Author Stefan Cassella

Shell corporations – often formed in offshore jurisdictions, but equally available in the United States – are used because they conceal the identity of the true or real owners (in legal terms, “beneficial” owners) of the companies and the source and control of their assets.

The use of shell companies by money launderers, tax evaders, and corrupt foreign officials has been well documented by US law enforcement, Congressional oversight committees, and multiple international bodies, such as the Financial Action Task Force, or FATF – the leading intergovernmental standard-setting body to combat money laundering, terrorist financing, and related threats to the integrity of the financial system.

For that reason alone, it would not be surprising if the use of shell corporations were part of the focus of the investigation into possible collusion between Russians and Trump campaign officials being conducted by Congress and Special Counsel Robert Mueller. But, there are more specific reasons why that might be the case.

First, it has been alleged that Paul Manafort bought luxury apartments in New York City using shell corporations that obscured the source and origin of the funds in a manner that might implicate federal and state money laundering laws. (Manafort has denied wrongdoing in the purchases, saying in a statement to WNYC, “My personal investments in real estate are all ordinary business transactions. It is common practice in New York City and elsewhere to use an LLC to purchase real estate. These transactions were executed in a transparent fashion and my identity was disclosed.”)

Second, the so-called “eighth man” present at the June 9, 2016, meeting in Trump Tower between Donald Trump Jr., Trump campaign officials and individuals they thought represented the Russian government was recently identified as Ike Kaveladze. Previously, Kaveladze had been reported to have opened 236 bank accounts in the United States for shell corporations formed in Delaware on behalf of mostly Russian brokers.

Indeed, in a 2000 report commissioned by the Senate Permanent Subcommittee on Investigations into the methods Russians and other foreign nationals used to launder large amounts of money through US financial institutions, the Government Accountability Office traced the movement of $1.4 billion in wire-transfer transactions into these 236 accounts. (Kaveladze was not mentioned by name in the report. In an interview at the time of the GAO report, he said he had engaged in no wrongdoing; he was not charged with any crimes. He described the GAO investigation as a “witch hunt.”)

Third is the presence of Natalia Veselnitskaya at the June 9 Trump Tower meeting. Veselnitskaya is a Russian lawyer who represented Cyprus-based Prevezon Holdings, a defendant in a civil forfeiture action involving the alleged laundering of the proceeds of a $230 million Russian fraud scheme through myriad shell corporations in Eastern Europe – money that ultimately was invested, in part, in real estate in New York.

The Prevezon case

The Prevezon case – a civil asset forfeiture action filed by the United States Attorney for the Southern District of New York against a number of apartments allegedly purchased with the laundered money – illustrates the problem.

The case earned notoriety following the death while in Russian custody of Sergei Magnitsky, the attorney retained by Hermitage Capital Management (one of the companies whose identity was believed to have been taken over by Russian organized crime) to investigate the alleged fraud scheme.

The Magnitsky Act was signed into law by President Obama in December, 2012 in response to the human rights abuses alleged to have been suffered by Magnitsky. Initially, the law blocked 18 Russian officials and businessmen from entering the United States and froze assets held by US banks. It has since been expanded. In retaliation, Russian President Vladimir Putin signed a bill that blocked the adoption of Russian children by parents in the United States.

According to the civil forfeiture complaint filed in New York, the alleged money laundering operation worked like this: A Russian criminal organization stole the identities of legitimate Russian companies and used them to obtain undeserved tax refunds totaling $230 million from the Russian Treasury.

The fraudulently obtained tax refunds were paid by the Russian Treasury into the bank accounts of the three stolen companies at two Russian banks. Then, using what the judge in the civil forfeiture case described as “a Byzantine web of conduit accounts,” the criminal organization moved the fraud proceeds through the accounts of no fewer than 14 shell companies at nine different Russian banks, deposited them in the correspondent account of yet another Russian bank for the benefit of four more shell companies, and ultimately placed the money in the accounts of two Moldovan shell corporations with accounts at a Moldovan bank – all within 60 days.

Finally, the criminals transferred part of the money, commingled with other funds, from the Moldovan companies to three entities, including shell companies registered in New Zealand and the British Virgin Islands. They in turn transferred $1.9 million to the Swiss bank account of Prevezon Holdings, which used a portion of it to acquire the parcels of property in Manhattan. Ultimately, the case was settled with Prevezon paying $5.9 million to the United States, but with no admission of wrongdoing.

While the Prevezon case is an example of a high-profile scheme allegedly involving international money laundering through shell corporations, it is hardly atypical. Other examples abound.

‘The Russian laundromat’

One is the “Russian Laundromat” case, the term given by the media to a scheme that flourished from 2010 to 2014. According to the Organized Crime and Corruption Reporting Project, known as OCCRP, a consortium of international investigative journalists that specializes in reporting on organized crime and corruption and that received the transactional records, $20.8 billion in suspicious funds were transferred out of 19 Russian banks from 2010 to 2014.

The sources of the money, OCCRP reported, included contract fraud (such as inflated payments on contracts with the Russian state), tax evasion and tax fraud, embezzlement from Russian banks and other corporations, drug trafficking, and human trafficking.

According to OCCRP, the documents reveal that the proceeds of these crimes were laundered through shell corporations across Europe. All told, the “laundromat” utilized accounts for 5,140 companies at 732 banks in 96 countries.

North Korea

More recently, in June and August of this year, the United States Attorney’s Office for the District of Columbia filed three separate civil forfeiture actions in Washington to recover millions of dollars that were alleged to have been laundered through shell companies and used to finance North Korea’s development of weapons of mass destruction and its ballistic missile program in violation of international and US sanctions.

The scheme, as one of the complaints alleged, included a pattern of transactions employing shell companies formed in Hong Kong, Anguilla, and the British Virgin Islands by a Chinese national that enabled North Korea to finance its sanctioned operations behind a curtain of seemingly innocuous payments for ordinary commodities.

The common denominator alleged in all these cases is the use of shell companies that have no legitimate business purpose, no physical presence in any country, no presence on the Internet, and no employees engaging in any visible activity.

Yet, these companies hold enormous assets derived from unknown sources and owned by persons who seek to remain anonymous. Indeed, there is a very lucrative international shell company-formation industry that has flourished in jurisdictions like Panama, the British Virgin Islands, the Isle of Man, and in the United States in states such as Delaware, Nevada and Wyoming.

Progress and a proposed solution

In the past two years, the US Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, has taken important steps to address the issues of shell companies and beneficial ownership.

On May 11, 2016, FinCEN published the final Customer Due Diligence Rule, which imposes a new requirement on banks and certain other financial institutions to obtain and verify the identity of the beneficial owners of new legal entity customers. The rule takes effect in May 2018.

And, on August 22, 2017, FinCEN issued revised and expanded Geographic Targeting Orders, or GTOs, requiring US title insurance companies to identify the people behind shell companies used to pay for high-end residential real estate – particularly when conducted with cash or no financing – in select metropolitan areas (Bexar County in Texas; Miami-Dade, Broward, and Palm Beach Counties in Florida; the Boroughs of Manhattan, Brooklyn, Queens, Bronx, and Staten Island in New York; the California counties of San Diego, Los Angeles, San Francisco, San Mateo, and Santa Clara; and the city and county of Honolulu in Hawaii) because of money laundering concerns.

Specifically, the GTOs require US title insurance companies to collect and report certain identifying information about the true owners of residential real estate when the purchase is made without a bank loan or other similar forms of financing. (At the same time, FinCEN issued an advisory, FIN-2017-A003, to provide information to financial institutions and real estate firms and professionals about the money laundering risks associated with all-cash purchases of luxury real estate properties by shell companies.)

Recently, Sens. Ron Wyden, D-Oregon, and Marco Rubio, R-Florida, introduced the Corporate Transparency Act of 2017, S.1717, to prevent individuals from using anonymous shell corporations to engage in illicit activities like money laundering, human trafficking, fraud, and terrorist financing. (A companion bill was introduced in the House of Representatives by Carolyn Maloney, D-New York, and Peter King, R-New York, earlier this summer.)

Under the incorporation laws of many states, the ultimate owners of a limited liability company – or shell corporation – are not required to be disclosed. (Secretaries of state generally have resisted changing these incorporation laws because of the fees they generate.) The Wyden-Rubio legislation is intended to eliminate this practice and to require the disclosure of the identities of the beneficial owners of US-based shell corporations.

More needs to be done

The GTOs and the Customer Due Diligence Rule, in combination with the proposed transparency legislation, make for a good start. The bottom line, however, is this: Until information regarding the legal and beneficial owners of shell companies, the sources of their assets, and the nature of their activities is legally mandated and made readily available to law enforcement authorities, domestic and transnational criminal organizations will continue to use shell corporations to move criminal proceeds through US financial institutions and to invest their profits in the United States.

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    The problem is not new. Whether recent events (especially the well-documented use of shell corporations by North Korea to evade sanctions) will prompt policymakers to address this issue head on and in a meaningful way remains to be seen. One can only hope.