There is a ghost hanging over Europe… the ghost of Panama papers. Of course, Panama papers was only the tip of the iceberg and probably the most known and featured incident of disclosure of the actual range of use of shell companies around the world. There were other cases before or after the Mossack – Fonseca incident such as the Paradise Papers case, which was a set of over 13.4 million confidential electronic documents relating to offshore investments that were leaked to the German reporters from the newspaper Süddeutsche Zeitung, the Luxemburg Leaks to name a few. Many of these leaks were gathered in a single database from the famous ICIJ or International Consortium of Investigative Journalists and are nowadays offered for investigation and downloading. But this is now, how it all started?
The concept of a shell company is directly connected to other concepts such as offshore company, IBCs, tax heavens e.tc. Not all definitions mean the same thing but everything is connected as means to an end and the end game is to hide assets and avoid taxation. The taxation avoidance is not a new thing, it existed from the early stages of the formation of States either nation-states of the last centuries or empires of the distant past. The only thing that actually changes is the mean to avoid and the means of the State to collect. But in order to understand the vehicles we have to explore a little the historical facts and especially the tax heavens.
Firstly, we need the definition. What is a tax heaven? There is no unified definition around the world so we will go with the most official one, that of OECD or Economic Co-operation and Development which identifies a tax heaven jurisdiction from four distinct features: no or low taxes, lack of effective exchange of information, lack of transparency, and no requirement of substantial activity. These four features make a country or jurisdiction attractive for various purposes such as traditional tax avoidance, asset hiding or illicit use of legal entities. But the feature that makes tax heavens attractive for the exploitation of shell companies is the secrecy or the lack of transparency laws and exchange of information (more contemporary issue, will elaborate further). This means that a person or several persons can hide effectively behind a legal vehicle incorporated in such a country, transact, move money and assets, without ever being detected by authorities or other stakeholders. Offshore Company official definition: Term usually applied to a company registered in a country (often a tax haven) other than the country or countries in which it carries on its business activities. An offshore (or non-resident owned) company is commonly used for captive insurance, marketing abroad, international shipping and tax shelter schemes. What is a shell company or corporation? The most official and inclusive definition, derives again from OECD: The term shell is used to refer to a company that is formally registered, incorporated, or otherwise legally organized in an economy but which does not conduct any operations in that economy other than in a pass-through capacity. Shells tend to be conduits or holding companies.
Now, it is time of a little bit of history. Tax heavens as a concept of a jurisdiction can be located even in antiquity. Of course, the concept is more or less connected to a preferential tax regime, established in a region in order for instance to attract population or trade. In Ancient Athens for example, in order to avoid a custom duty in value of 2% applied by the city on imports and exports of goods, merchants were using nearby islands for storing their goods. Also, legally, Greek Islands such as Delos were given a special tax regime in order to operate as a treasury for the Athenian alliance. Much later, in the colonial times, the great European empires were giving special tax incentives in their colonies in order to be considered attractive for population to migrate and enhance the local trade and economic activity. Most notably British Crown dependencies held the lion’s share to these regimes and probably still today are considered as tax heavens such as the Cayman Islands, Bermuda, British Virgin Islands, Turks and Caicos, Gibraltar and others. But apart from the incentives of the colonial times, the contemporary regime as we know it, started shaping in 1800s and early 1900s. One of the first accounts of a jurisdiction enabling favorable taxation and secrecy laws is the of New Jersey in 1880 which in order to avoid financial difficulties established a more liberal regime for legal entities incorporation. The same route was also taken by the State of Delaware in 1898 and still today is considered one of the more business friendly environments. In the early 1900s, Ronen Palan in his study of 2009, the History of Tax Heavens traces the earlier modern practice of tax heaven law in 1929 during the case of Egyptian Delta Land and Investment Co. Ltd. V. Todd. In this court ruling the writer admits that: It was demonstrated that although the company was registered in London it did not have any activities in the UK and hence was not subject to British taxation. This case created, argues Picciotto, "a loophole which, in a sense, made Britain a tax haven". Companies could now incorporate in Britain but avoid paying British tax. In 1934 it was the turn of Switzerland to act as the Banking Act of 1934, in article 47, strengthened the principle of bank secrecy by placing it under the protection of criminal law. The new Swiss law demanded 'absolute silence in respect to a professional secret', that is, absolute silence in respect to any accounts held in Swiss banks.
Around the same time Luxembourg introduces the concept of the holding company which became exempt from income taxes. Similar law liberation happened in Bermuda, Bahamas and Panama in the interwar years. These actions were also very much influenced from the consequences of the Great Depression that hit the world in 1929 and created the need for jurisdictions with limited resources to attract capital and economic activity.
The second World War, winded down the actual economic activity which enacted in the 1950s with greater force. Actually, the modern tax heavens were created in the 50s and 60s along with the resident companies. A new pole that merged in the equation of tax heaven was that of location. For example, the Bahamas were selected for such activities from the American economic system for their proximity to the USA, Cuba as well, until the revolution and overturn of the Batista regime in 1959. Especially in Cuba, the USA have been using the country as a colony in every way, as Earl E.T. Smith states, former U.S. Ambassador to Cuba, in the U.S. Senate in 1960 that, "Until Castro, the U.S. was so overwhelmingly influential in Cuba that the American ambassador was the second most important man, sometimes even more important than the Cuban president. But the more extensive use of tax heaven started in 1960s where the extended economic development of the post war eras and the “liberization” of society created a new large wave of wealthy individuals, legal or not, who discovered the need to hide their assets especially from their wives in case of an expensive divorce. Asset hiding from spouses gave rise to the first mass wave of tax heavens and offshore companies, especially in the US. The jurisdictions preferred were the ones close to the USA, such as the Caribbean islands. For example, In 1966 the Cayman Islands enacted a set of laws, including the Banks and Trust Companies Regulation Law, the Trusts Law, and the Exchange Control Regulations Law, and also its 1960 Companies Law, adopting in all these cases the classical tax havens model. The accumulation of assets and funds in these islands also attracted the Banks. By 1964, Citibank, Chase Manhattan, and the Bank of America all had presence in the Caribbean and the Crown Dependencies. Around this time other territories joined this financial movement such as Singapore in late 1960s, Vanuatu in 1970, Nauru in 1972, Cook Islands and Tonga until early 1980s.
All these havens introduced familiar legislation modeled on the successful havens, including provision for zero or near-zero taxation for exempt companies and non-residential companies, Swiss-style bank secrecy laws, trust companies’ laws, offshore insurance laws, flags of convenience for shipping fleets and aircraft leasing and recently establishing advantageous laws aimed at facilitating e-commerce and online gambling. Whatever the market needs, the tax heavens establish it. Soon other countries joined the game, especially in the middle east, such as Dubai in mid 1970s and Bahrain, Cyprus in 1980s and in 1990s the game extended to jurisdictions in Indian Ocean, Africa and post-soviet republics which emerged from the Soviet Union in dire financial situation and in desperate need of funds and financial activity. Other countries, with traditionally stricter regulations, pressured by the existence of tax heavens tried to compete with providing advantages for certain industries.
Most notorious example is Ireland for tech companies in 1987 with its favorable tax regime. The major problem emerged after the 1990s were EU acknowledged the phenomenon of harmful tax competition between EU members which pressured ECOFIN to establish a code of conduct for business taxation on the 1st of December 1997. The Code of Conduct requires Member States to refrain from introducing any new harmful tax measures ("standstill") and amend any laws or practices that are deemed to be harmful in respect of the principles of the Code ("rollback"). The code covers tax measures (legislative, regulatory and administrative) which have, or may have, a significant impact on the location of business in the Union. The criteria for identifying potentially harmful measures include: an effective level of taxation which is significantly lower than the general level of taxation in the country concerned, tax benefits reserved for non-residents, tax incentives for activities which are isolated from the domestic economy and therefore have no impact on the national tax base, granting of tax advantages even in the absence of any real economic activity, the basis of profit determination for companies in a multinational group departs from internationally accepted rules, in particular those approved by the OECD, lack of transparency. More or less the criteria that characterize tax heaven jurisdictions. ECOFIN identified 66 tax measures with harmful features (40 in EU Member States, 3 in Gibraltar and 23 in dependent or associated territories) which benefits had to lapse no later than 31/12/2005. Since then, many of these practices have been abolished but others either remain or members states are battling in EU courts for the legitimacy, such as Irish regimes, Luxemburg and Dutch tax incentives. Around 1998 OECD joined this crusade to end harmful tax practices in Member States, tax heavens and non-OECD economies. Since then OECD has been producing also the official list of tax heaven jurisdictions (ended publication in 2009), has introduced the Model Tax Agreement on Exchange of Information in Tax Matters, also known as CRS (DAC2 in EU from the Directive of Administrative Cooperation) ¸which establishes a framework for all jurisdictions to exchange tax information. In the CRS system many former tax heavens participated and deemed as co-operative and lately introduced the famous BEPS action (Base Erosion and Profit Shifting) where “139 countries and jurisdictions are collaborating to put an end to tax avoidance strategies that exploit gaps and mismatches in tax rules to avoid paying tax”. As it is stated in the OECD website: BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity or to erode tax bases through deductible payments such as interest or royalties. Although some of the schemes used are illegal, most are not. This undermines the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level. BEPS introduces 15 actions to be undertaken by its members which mainly try to tackle harmful tax practices and transfer pricing, which is the most modern way for tax avoidance, especially for large corporations.
The latest obligations that derived from BEPS were transferred in EU and other legislations in the international reports of Country-by-Country reporting (CBCR) or DAC6 (EU 6th Directive of Administrative Cooperation) with which member countries are sharing tax details in company group basis and mandatory disclosure rules, which is the latest and obliges taxpayers and advisors to disclose aggressive tax planning arrangements.
Now that we have established the historical parts of the problems, we need to focus on the actual participants or players involved, which are no other than those of the legal entities either characterized as offshore companies or shell companies. The characterization only depends on the use of the company and actually offers little to definition as shell companies can also operate outside the traditional offshore or tax heaven jurisdiction. It is the usage of the vehicle that matters the most. The common denominator in shell corporations is definitely the existence of a certain level of anonymity and lack of transparency. Thus, shell corporations are more likely to be incorporated in countries that favor at least a little such lack of transparency. But why someone would need or prefer anonymity in business. There are many legitimate reasons to do so, such as competition, industry secrets, discretion, even avoidance of criminal activities but all these possible legitimate reasons do not surpass the actual reasons which are to be involved in a certain type of illegal act in a way not to get caught. The problem of the activity of shell companies was identified many years now and its strong g correlation with anonymity and lack of transparency. One of the most important reports was the conclusions of the US Permanent Subcommittee on Investigations which examined the issue of states routinely incorporating hundreds of thousands of new, non-publicly traded companies in the United States each year without obtaining the identity of the corporate owners, thereby impeding law enforcement investigations into persons misusing U.S. shell corporations for money laundering, tax evasion, terrorist financing, or other crimes. The subcommittee came to the conclusion (among others) that the use of shell companies in the United States that enable individuals to conceal their identities and conduct criminal activity and have encountered difficulties in investigating these shell companies because they cannot determine the owners of the companies. This is a non-brainer of course but it needed an official disclosure especially in the USA where different states provide different levels of corporate transparency. But moreover, that the lack of transparency directly correlates to financial crime was firstly pinpointed in 2001 in the Hearings before the PERMANENT SUBCOMMITTEE ON INVESTIGATIONS where John M. Mathewson, a convicted felon and former chairman of Guardian Bank & Trust on Grand Cayman testified that most of his bank customers were involved in some type of tax evasion! All these are the earliest proofs that anonymity offered by certain corporations in certain jurisdictions directly correlates with financial crime but it is extremely difficult to estimate the extent of the problem at hand in terms of numbers. This correlation was roughly proven by John Walker in 1995 while trying to provide a model for estimating money laundering proceeds, he determined index of attractiveness' to money launderers for jurisdictions which was determined as
Attractiveness to Money Launderers = [GNP per capita] * [3*Bank Secrecy+Gov Attitude + SWIFT member – 3 * Conflict–Corruption +15] .
The index rated countries as below:
Which was a most definitive indication that in these states which have favorable taxation and transparency regimes will find the most activity of money laundering and subsequently misuse of corporate vehicles. It took another ten years for the US government to come to similar conclusions. If someone just looks at the first countries on the above-mentioned table it can clearly remember famous cases from the recent bibliography after 1995, in which major money laundering scandals have occurred.
Nevertheless, we need to focus on the various methods used in conjunction with shell corporations in terms of owner hiding, financial activity and of course an interested party needs to assess how possible is a corporation established in a jurisdiction to be involved in these activities. It is widely known that some jurisdictions are more attractive than the others when it comes to setting up corporate vehicles and anonymity. One major criterion is the speed of an incorporation, and when we mean speed, this is the combination of minimum paperwork and capital required and maximum efficiency. There are many criterions in order to decide where to incorporate and are based also on what you want to do with the company… For example, in the new digital age and digital entrepreneurship, the online activity plus the digitization of the structures of a country is a strong criterion, also the law of establishing certain businesses that may be dubious such as gambling, cannabis trading or other modern industries can also be a criterion. Banking secrecy and especially an advanced and mature banking system can play a role in the decision as well as other factors as financial and political stability and also location and culture, meaning the geographical proximity or the cultural proximity of the jurisdiction which may solve arising problems.
There are many lists online about this issue that may have prejudices as most are offering in parallel incorporation services as well so, one should make a serious attempt to find overlaps over these lists and identify the “top risk” among them. So, we did that for you… we took all lists and created find the most intersections. We comprised an excel of some internet sources and located the times a jurisdiction is appearing. WE focused only on the times a jurisdiction appears more than once and we finally constructed the following table. The second right ranking on the table presents the jurisdictions by terms of financial secrecy. All data are derived from mostly contemporary inquiries in 2020 or 2021.
There are some overlapping between the two ranks but bear in mind that a high financial secrecy does not always equals attractive jurisdiction for other types of businesses. Now let’s combine the two tables above with the Walker table:
Even if the Walker data are extremely old (1996) we can see the tendencies that were about to catch up in the next years. Meaning the general preference in incorporation in certain friendly jurisdictions. For instance, the United Kingdom regime was, is and will be an extremely friendly environment for businesses, even if in the latest years the government has elevated the transparency issue by establishing a type of beneficial owner’s registry named PSC or People with significant control. Singapore was and is a very trendy jurisdiction, as well as of course the traditional USA, depending also from state to state, with leading state the Delaware jurisdiction. In the years that followed Walker’s findings, more states came into play in direct competition with Delaware, such as Nevada and others. Traditional offshore jurisdictions such as Nevis, British Virgin Islands, Belize, Bermuda, Bahamas, Panama and Cyprus are also in use until today with great incorporation facilities, developed banking systems (in most cases), political stability and secrecy even if they sometimes exist inside the EU legislation. This secrecy can be also achieved by the use of fiduciaries in many of these cases.
According to the official definition, a fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients' interest ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other's best interests. What this means is that during incorporation a fiduciary will act as if he is the owner or the beneficial owner of a company and will assume legal responsibilities even for the sake of ownership to protect the actual customer, of course with the proper monetary gain. Such services increase the cost of maintain a corporation in such jurisdictions but facilitate anyone that need to hide the ownership of the company under a legal coverage. What we also see from the tables and from actual experience is that in the latest years two major type of jurisdictions are becoming more popular, the former Soviet democracies and Oceania. For instance, Georgia is getting much attention in the latter years, Estonia and its digitized environment and digital citizenship (which gives no extra rights but is a very nice marketing stunt to increase Estonia’s popularity) and most definitely New Zealand which, as a former subject to the Crown, has inherited the UK structures and expanded its business-friendly environment. WE will meet again with New Zealand later in the text.
Nevertheless, we need to focus our very rough risk assessment in former and present UK Jurisdictions, offshore financial centers and former Soviet Democracies. This can be our top shell company risk in terms of geography. But speaking of geography we need to take into account one more element… the flow of money and the origin of assets. We will go back to Walker for a cute formula once more.
Proportion of outgoing ML from country X to country Y
Attractiveness Score for Y
(Distance between country X and country Y)2
This formula that Walker used managed to calculate where are the origins of assets to be laundered and where geographically were laundered. We have isolated some nice examples from the calculations.
These examples show that a great deal of money that were to be laundered in the 90s were from the USA and Russia. United states, according to proximity was laundering the money either inside the States or using the Caribbean islands. Russia on the other hand internalized the function at that time. Today that the former Soviet democracies have developed their banking industries and their political stability can be a heaven for Russian assets because they are near! The United Kingdom still prefers its own abilities and what is near them as Jersey and other similar jurisdictions, while Europe also internalizes the procedure or uses states such as Luxembourg, Lichtenstein, Vatican City or Cyprus, dedicated for these kinds of operations.
So, now we have established a theoretical framework on the origins and destinations of money and how to choose, we have established the most attractive destinations for incorporation of a company and we have a load of cash at hand to launder. What will we choose to do? Let’s do this as a type of real-life example. We come from i.e., Russia and hold a large sum of cash that was produced from various illicit activities and needs to be inserted in the financial system in order to be used. First, we need a company to add as a vehicle, a shell, for our operations and we need our identities to have limited or no exposure at all. What will we use? We may pick a Caribbean country but offshore jurisdictions are already over saturated and most Banks and organizations will suspect them enough. It is better to go to an EU jurisdiction that will raise less flags but will facilitate also our identity concealment. We could use a fiduciary system in Cyprus or a business in United Kingdom or similar jurisdiction. Cyprus is already under extreme scrutiny over various scandals (i.e. visa scandal ) and we should let it cool-off or use it as an alternative. It is safer to go to the UK and trust the friendly business environment. We are incorporated in the UK with a company that has an EU status. Now we need to a banking system that will have access to EU and will be near us in order to transport our cash with ease. Thus, we should look the surrounding environment for developed banking systems and neighbor countries… Under these criterions, we may use Lithuania, Estonia, Latvia or Georgia. Latvia can be a nice candidate as its banking system is mostly developed from the Scandinavian banking intrusion. We have our shell UK company; we have opened accounts in a Latvian Bank and now we need to start operations. Latvia is also an EU country and abides to EU directives so we need a stunt convincing enough to introduce the funds into the system. How on earth are we going to do that? We may go to court to settle a fictitious debt for this company… meaning we own this company an X amount of money, the judge in Latvia will verify the debt and we will deposit the amount in cash accompanied by a judicial order to do so and so nobody will ask anything (we may bribe a judge or two if needed). The funds are now deposited as debt to our UK company. We have to issue some payment means for our company such a s cards and try either to forward the funds further in EU or we may be able to perform payments to support our standard of living. Where will we go? Let’s go for vacations or real estate hunting in Southern Europe. Cyprus is nice and sunny. We open a new account with our UK company there, transfer the funds between own account and start using them. No one will ask, as it is a straight forward transaction. We may also start paying for living expenses from this company, our electricity bills, our car rental and expensive items such a s jewelry….
And life goes on. To everybody the above-mentioned story may seem far fetched but, roughly this was something that happened a few years ago in an extremely large scale and it was called Russian laundromat! This system or scheme was used from 2011 up to 2015 and was exposed in 2017 by the OCCRP or Organized Crime and Corruption Reporting Project (OCCRP is an investigative reporting organization that specializes in organized crime and corruption. It publishes its stories through local media and in English and Russian through its website. In 2017, NGO Advisor ranked it 69th in the world in their annual list of the 500 best non-governmental organizations - source). In this scheme 20.8 billion of USD, was laundered in 96 countries. According to money laundering experts, the money was moved initially to a network of 21 shell companies in the UK, Cyprus, and New Zealand. You may be surprised but New Zealand has come into play as we promised. 740 million had been processed by British banks as part of the scheme mainly HSBC, the Royal Bank of Scotland, NatWest, Lloyds, Barclays and Coutts. Also, Moldova was involved in the scheme of the judges and many Cypriot companies. Evidently the original scheme consisted of 21 leading companies, where the funds originated, mostly established in UK and then expanded to other countries and jurisdictions, like UAE, making extremely difficult to follow the paths of the funds. Of course, in our paradigm, the facts did not happen exactly as in the Laundromat but it is enough for someone to get the point on how these companies were used. These were not doing any business at all, did not hold assets other than the funds they funneled in the scheme.
Suppose we have a nice European, S.A. company with real business let’s say in Greece. Our business is consisted of selling songs digitally and exploiting musical rights. In Greece and generally in EU our income will be subject to income tax from 20% up to 35% and we do not want to part these amounts! What can we do? First, we need a corporate vehicle, such as a company near us and in a friendly jurisdiction. The best place that comes to mind is Cyprus. Let’s incorporate there and make it a part of our little group of companies. Cyprus has a much lower income tax let’s say 12,5% and it is better to pay this tax and not the one in Greece. What is our situation? We have an X amount of money earned from sales and it is our profit and a bunch of intellectual right connected to these sales. Let’s try to transfer the intellectual right to the Cypriot company in order to have some assets. Then in order to legitimize the sales we need to pay services for the intellectual assets which are now transferred to another company. But in order to gain from this we cannot plainly buy the rights from our Cypriot company, we need to buy at a price that is convenient. We need to buy high and sell low…
You find it counter intuitive? Perhaps but, buying from our own group company high and selling low, we will be diminishing in taxation terms all possible revenues and profits that could be liable for taxation in Greece and transfer a portion or the whole amount to be taxed in Cyprus where the taxation for this kind of transactions is significantly low… So the Cypriot company does only one function, acts as a medium to transfer profits from a jurisdiction to another where it is most profitable for us in terms of taxation and of pocketing more from our hard-earned gains. These transactions of course usually can be considered as part of the intragroup transactions and subject to reporting to the local tax offices and must also be accompanied by documents that are needed to prove that this transaction is legitimate and is not used for such transfer of a tax obligation. But that is the latest solution imposed to a problem that existed for decades now and shell companies actually used for it were incorporated all the time. Tax paradises usually cannot be used for this kind of scheme as most countries have imposed measure for companies registered in such jurisdictions and do not recognize such transactions as part of a company’s business cycle BUT other jurisdictions, even in EU, have a role to play. As there is tax competition between EU members, countries such as Cyprus, Estonia or Bulgaria often are used in such schemes legally. One may just surf around for i.e. the capital gains tax rates in Europe to understand what countries are or will be lucrative enough to transfer tax obligation with group shell companies or holding vehicles. It seems that the Czech Republic, Slovakia, Slovenia and even Turkey will gain momentum in the near future. Until recently Belgium was also a solution to taxation issues and traditionally Luxemburg. The most contemporary solution to these issues was introduced only recently from OECD with the BEPS initiative. Form this initiative the DAC6 directive was born which requires almost everybody and especially institutions and consultants to report to the local tax offices international transfers that may indicate an attempt to shift profits to another jurisdiction with better taxation rate.
More uses of the shell companies cannot be clearly analyzed as it depends on the concept… what someone wants to do. There are of course many legitimate uses for these vehicles as for instance the whole industry of non-performing loans is somehow based on securitization of debts using special purpose vehicles incorporated in countries like Ireland, which are actually part of the Banking system and the Bank that issues these securities but this is a very straight forward use. Usually, we come across shell companies when dealing with sanctions and actually in an attempt to avoid sanctions. The anonymity and the complexity of the structure is usually in play for this scenario. But let us first define the problem… What are economic sanctions? A simple definition in Wikipedia will be: Economic sanctions are commercial and financial penalties applied by one or more countries against a targeted self-governing state, group, or individual. Economic sanctions are not necessarily imposed because of economic circumstances—they may also be imposed for a variety of political, military, and social issues. Economic sanctions can be used for achieving domestic and international purposes. This means embargoes in plain terms and not only that. What it results into is that a state can impose these sanctions not only on another state but on individuals and entities of this state and other jurisdictions. The sanctions come in the form of trade barriers tariffs, restrictions and other measures which will make difficult for a state or company to transact. But for maximum useability it might not be enough for a state to impose them but it will be better if a consortium of states or a common instrument that is respected by all will be able to enforce these on all its members. The most practical tool used is the United Nations and the European Community. Both bodies have councils that impose economic sanctions which must be followed by all state members and of course by all companies established and citizens residing in these territories. The USA is also imposing sanction and by using the access to the dollar as a tool, manages to impose these sanctions in territories outside the US jurisdiction within certain limits. These sanctions are widely accepted and enforced today by everyone. Let’s describe an imaginary example.
Lest say that a person X is a trader in Iran is directly sanctioned by the US (is in Special Designated Nations and blocked person’s list) and someone in order to conduct business is trying to transact with this individual but is stopped from i.e. the Banks. What the individual can do to avoid sanctions? This person can establish a shell company most probably with a fiduciary in a jurisdiction such as for instance Bahamas. Our imaginary person wants also to avoid the OFAC 50% rule thus is trying to involve other “clean individuals” in the scheme in order to technically lower its ownership percentage in the company below 50% and if recognized can continue to transact. Actually, the person can also establish multiple companies for these reasons which all can combine in incorporating a bigger, real one which will undertake the trading business in a legitimate way. The final product of this scheme is somewhat eligible to transact avoiding any sanctions and actually our blocked person can also appear as a manager by controlling the company as the 50% rule applies for ownership not control! In this case the shell companies are used to avoid sanctions. This type of scheme is nowadays usually revealed by investigations from the relevant departments of the Banks and by registering the beneficial owners of each of the companies in the national registries, at least in EU. Nevertheless, it is hard work in order to come up with the real name of the beneficial owner for most Banks as the structures are getting more and more complex and time consuming. Shareholders must be analyzed and corporate frameworks must be taken in account jurisdiction by jurisdiction having also in mind that other individuals like fiduciary are usually taking the responsibility to appear as owners of a company while receiving handsome rewards for this act.
In such ways numerous sanctioned entities, states and individuals manage to participate in the free market and maintain their regimes while they usually appear isolated from the financial activity and thus on the brink of disaster. Cases of Sudanese officials in the civil conflict managed to avoid sanctions and continue funding the war and equip their army despite UN Council decisions, North Korea is maintaining its regime and is equipped with technology using such methods and of course Iran which is acquiring even nuclear material through networks of such companies. Being vigilante is not always going to be fruitful as schemes and methods will always be developed to hide the owners of a company in a seemingly legitimate way.
Most of what can be done was described in the cases above. International initiatives and rigid legislation is in place to provide the tools for participants to recognize if a company has legitimate use or is acting as a vehicle for tax avoidance, sanctions avoidance or other purposes. The final factor is the human investigative skills, the knowledge of the particular regimes and the method to identify the actual owners of an entity. This work must be conducted with due diligence in order to able to identify the ownership of an entity. Adding to that is the actual business conducted. In many cases the transactions or what the company is doing will provide the clues to dig further as all legislation is not a straight jacket for all cases. Sometimes all seem in order but the transactional methods will provide the indications that are needed for further scrutiny.
Nevertheless, Banks will always be at the center of the storm, either the storm is identified in the beginning or during the operations and the business relationship. Whatever the case, the only requirement is to do what is necessary to find the what information is required, to act upon it and if not uncovered to identify the loopholes and tricks in order to patch our systems in such a way that cannot be exploited the next time, we encounter a shell company or a similar structure. Errors cannot be avoided and usually people that need these structures for whatever reason pay large sums of money to be consulted by the best and stay ahead of the curve. Criminals will always be one step ahead of the abilities of the enforcement personnel and this cannot be avoided unfortunately.
 Mossack Fonseca & Co. https://en.wikipedia.org/wiki/Mossack_Fonseca
 OECD Benchmark Definition of Foreign Direct Investment (2008), Chapter 6, page 101 / https://www.oecd-ilibrary.org/docserver/9789264045743-8-en.pdf?expires=1626297800&id=id&accname=guest&checksum=9DA8B5D81BAA8E784A76C7B4C0AFA60A
 Determinants of tax havens / Eugenia Ramona Mara (2015)
 Ernesto "Che" Guevara (World Leaders Past & Present), by Douglas Kellner, 1989, Chelsea House Publishers
 History of tax havens – Ronen Palan 2009 - https://www.historyandpolicy.org/policy-papers/papers/history-of-tax-havens
 Davis, 2006
 The Walker Gravity Model - 1995 Developed a model of Money Laundering Flows in and through Australia, based on estimates of the proceeds of crime and the proportion laundered, “The Extent of Money Laundering in & through Australia”. Austrac
 Where GNP per capita is measured in US$, BankSecrecy is a scale from 0 (no secrecy laws) to 5 (bank secrecy laws enforced), GovAttitude is a scale from 0 (government anti-laundering) to 4 (tolerant of laundering), SWIFTmember is 0 for non-member countries and 1 for members of the SWIFT international fund transfer network, Conflict is a scale from 0 (no conflict situation) to 4 (conflict situation exists), Corruption is the modified Transparency International index (1=low, 5=high corruption), and the constant '15' is included to ensure that all scores are greater than zero.
 As provided in the Directive 2015/849 of EU, but was replaced in the UK after Brexit
 Base Erosion and Profit shifting
 What Is a Beneficial Owner? A beneficial owner is a person who enjoys the benefits of ownership even though the title to some form of property is in another name. It also means any individual or group of individuals who, either directly or indirectly, has the power to vote or influence the transaction decisions regarding a specific security, such as shares in a company. Source: https://www.investopedia.com/terms/b/beneficialowner.asp
The author of the lesson: Nikolaos Panagiotopoulos, Head of Compliance and M.L.R.O. at Ziraat Bankası, Greece