Crime Goes Offshore

East European criminals and corrupt politicians have found in offshore havens a tool so perfect that it has permanently changed how business is done in the region. By using offshore laws that stress secrecy over everything else including crime prevention, they have been able to set up networks of offshore companies where they can hide their assets from police, launder their money and evade taxes all at the same time.

They have learned the arcane business art of forming offshore companies – firms registered in another county by a non-resident – then hiding behind proxies and complicated nested business structures that stretch across continents.

Criminals in the Balkans have used offshore companies as fronts for drug trafficking, money laundering, weapon smuggling, monopolizing industries, privatization fraud and corrupting politicians and government officials. Worldwide, they are used by Mexican drug lords to launder money, terrorism groups to wage war, Iran and North Korea to evade sanctions and run guns and a host of other criminal acts yet undiscovered.

According to the Tax Justice Network, more than $250 billion is lost each year in tax revenues from wealthy individuals and criminals who hide their money in offshore accounts. That is money that by rights should be going toward better education, health care and infrastructure. On top of that, around $1 trillion – often money that corrupt leaders have stolen – flows out of developing countries into offshore accounts and wealthy banking centers.

“Whether it was logging, or diamonds, or oil, we realized it was a missing link – in every single dirty deal we ever looked at, there was a bank and a front company in a secrecy jurisdiction, or more than one,” said Anthea Lawson, head of the Kleptocracy Team at London-based watchdog Global Witness.

Law enforcement does not do well in catching and charging those who use offshore havens to commit crime. Their hands, they say, are tied by business-friendly laws in offshore havens that guarantee secrecy and are seemingly designed to evade taxes.

The Criminal Services Industry

“I don’t know a single big business in Ukraine, which is owned transparently, without using non-resident companies,” said Yaroslav Lomakin, who started Honest & Bright a Moscow consulting firm. Lomakin himself has been in the business of registering offshore companies.

According to the Ukraine’s State Tax Administration, trade with offshore locations grew 54 percent to $1.6 billion in the first half of 2010. Three quarters of that trade was with the British Virgin Islands which accounted for almost 5 percent of all Ukraine’s exports.

Ukraine is typical of countries in Eastern Europe and the Balkans where a team of six reporters from the Organized Crime and Corruption Project (OCCRP) found hundreds of large companies registered in offshore locations. Each country has a robust industry that sells offshore services to businesses and individuals. (See Sides Story on Ukraine Offshore Sales Meeting). It is a mundane industry filled with accountants, company formation agents and lawyers who spend their time devising complex schemes for hiding the real ownership of companies or assets.

The real product of this industry is a sinister secrecy. The workers of this offshore registry business arrange for the proxies or the bearer shares used to hide the real owners. (See Story on How to Hide Assets). They care little who they are working for and are careful not to ask.

Law enforcement experts call it the Criminal Services Industry.

“A company is basically an alternative identity. If you form a company for one or two thousand dollars, … it can’t be linked back to anything or anyone,” said Professor Jason Sharman, an expert on offshore havens for the Center for Governance and Public Policy at Griffith University in Australia. “It’s very handy to launder money, evade tax, take a big bribe, or even finance a terrorist organization.”

Industry insiders defend what they do, saying there are legitimate business reasons for the services they provide and that just a few bad apples among the many honest people they serve have tainted their reputation.

That is not what OCCRP found during a six-month investigation of offshore registries in Eastern Europe. Posing undercover as businessmen, the reporters received in repeated consultations, sales meetings and online applications detailed advice about how to cheat on taxes and not get caught. One reporter was even asked for a cut of his probably illegal profits. (See story of an Undercover meeting).

Laszlo Kiss, the agent who asked for a cut, operates one of the region’s largest offshore registry agents called Lamark Tax Planning Consult SRL in Bucharest. Kiss was arrested by Romanian police weeks after he met with an OCCRP reporter working undercover for crimes related to his offshore business including tax evasion and money laundering..

OCCRP found not a few bad apples, but an entire industry willing to help organized crime launder illegal earnings, avoid taxes and hide from law enforcement. That regional industry is part of a network of off-shore agents who working worldwide providing services to people engaged in transnational crimes that include weapons’ smuggling between North Korea and Iran.

The Business Model

Offshore registry firms are one-stop shops that for a fee will do everything from filing tax and annual reports to acting as the director of a client’s company. They often work with a registration firm in the offshore country with connections to local government officials. They may provide proxies to serve as directors. They will help a client issue shares and can find proxy shareholders. They might set up bank accounts. If law enforcement or journalists come sniffing around, the trail often ends with them.

They will also help set up companies in other countries that will own, be owned by or work with the client’s company. In this way they set up a network of companies that are seemingly independent – but owned by the same person. This confusing arrangement more thoroughly hides ownership and thwarts accountability. They usually do this over the Internet and within a matter of hours or days and without a question. If they ask for identification, they will almost never verify the information they are given.

Offshore or Next Door

While tax dodges are probably as old as taxes themselves, modern offshore tax havens date from the 1920s and 30s when Bermuda and Liechtenstein passed laws for offshore companies and trusts. After World War 1, many European countries raised taxes to rebuild their shattered countries and money soon flowed into low-tax countries like Switzerland which had suffered no war damage. Many countries eventually found the advantages of low taxes in attracting money or businesses to their banks. Secrecy laws also helped especially in small countries which found that the fees for such services could prop up their economies.

Today, England, the US and some European countries are replacing the more exotic Caribbean or Indian Ocean Islands as the tax havens of choice. On the Tax Secrecy index, the US state of Delaware is listed as the No. 1 offender by the Tax Justice Network. Delaware earns $700 million per year in company registration fees, a significant part of its budget.

“The situation (in the US) isn’t as awful as it was three years ago, but it’s still pretty bad – even worse that the places you see in thriller movies like the Cayman Islands or the Bahamas. The US has been pretty robust in making sure that other countries live up to these standards, but they have been lax about applying the same degree of rigor to themselves,” said Professor Sharman. (See Story on Delaware as the Onshore Offshore).

Nobody knows how many offshore companies there are worldwide and because of differences in definitions of what a haven is exactly, more than a third of countries worldwide have been used for offshore purposes. The Internet gives any mom and pop store anywhere in the world the capability to set up offshore banking and holding companies.

Law Enforcement Troubles

Criminals simply do not fear a legal crackdown. Hampered by offshore secrecy law enforcement especially in Eastern Europe has no talent working across international boundaries figuring out the real owners of companies cloaked in proxies.

Governments scrutinize the offshore industry and blame it for aiding criminals, but do little about fixing the problem. Organized crime has found common cause with business organizations to squash any efforts to radically change offshore laws. Some countries only pay lip service to efforts to provide greater transparency. Some keep on promising important actions and nothing else.

Defending the Business

The offshore industry has said it is primarily used by legitimate businesses. As Fidelity Services, an offshore registry agent in the Seychelles says: “Many high-taxing, high-spending governments would like everyone to believe that offshore companies are only used by fraudsters, terrorists and crooks. That`s completely unjustified. While there is always a rotten apple in any box, 99 percent of all business transacted through offshore companies is completely legitimate.”

Seychelles based Fidelity Corporate Services allows you to easily set up companies with proxy directors and shareholders online for about $1600.

In meetings, registry agents said their wealthy clients need to shelter their assets from extortionists, crooked businessmen and corrupt governments.

Some registry agents freely admit they don’t care who uses them. “We are only selling the instruments to the clients. Whether they would play correctly, or use them for illegal purpose, is their own business. We don’t see and we don’t want to see this,” said Ivanna Pylypiuk, managing partner with International Consulting Group (ICG), a company that promotes offshore accounts for “tax minimalization”.

Sharman partially agrees: “It’s a good-faith effort to make it as easy as possible for small businesses to register companies with a minimum of paperwork, a minimum of hassle, and a minimum of expense,” the professor said. While he understands the desire for deregulation, “making it as easy as possible for businesses also makes it easy for criminals.”

Nobody knows how much of the offshore trade is legitimate and how much is criminal but part of that depends on what people consider legitimate.

“I really don’t know any legitimate reason (for offshores). The companies will tell you that a legitimate reason is reducing their taxes and that’s legitimate. I think that cheating on your taxes is not legitimate,” said Lucy Komisar, a writer who specializes in financial crime, offshores and organized crime.

Komisar also takes issue with the argument that wealthy individuals need to hide their money offshore to avoid being kidnapped or extorted. “The account being available to law enforcement is not the same thing as being open and available for public inspection. … Or the other example they use is the opposition person in the repressive country, who doesn’t want the government to take his money. In a repressive country, the ones who have money tend to be the ones in government.”

To stop the use of offshore havens by criminals requires giving up loopholes, something business organizations have worked hard to prevent.

“The same mechanisms allow tax evasion, tax avoidance, corruption, and organized crime money to flow – it’s all the same. While we’ve left these loopholes open because it’s beneficial to multinationals and to the rich, to be able to structure their money to minimize tax, we let a hell of a lot more go on under this,” said Lawson of the Kleptocracy Team.

The following journalists contributed to this project.

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