Trail of Venezuela’s Stolen Billions Leads to Caribbean Luxury Properties
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About $1.6 trillion, or 3 percent of the world’s Gross Domestic Product was laundered in 2009, according to the United Nations Office on Drugs and Crime (UNODC).
Criminals and corrupt politicians hide bribes, embezzled government funds, and other illicitly earned cash in legal structures such as offshore shell companies, foundations and trusts and then launder most of that—70 percent—through commercial banks into the global financial system, according to the UN.
Though money can travel across borders in an instant, legislation allowing it to be tracked is mostly confined to traditional state borders. International organizations and sovereign states know about the problem but have not stopped it.
Experts say banks and regulators fuel the problem. “In large part, the regulators are completely asleep at the wheel. They are not doing their job properly,” says banking regulation expert Anthea Lawson of Global Witness. “Those few that do, don’t give meaningful sanctions.”
“Yes, we have many institutions in place, but the efficiency or the effectiveness is not there,” agrees Thomas Pietschmann, one of the authors of a recent UNODC report on global money laundering.
He says that authorities seize an “alarmingly” small proportion of laundered money. “Twenty to 25 percent of opiates which are being produced worldwide are being seized. When it comes to cocaine, that figure rises to approximately 40 percent. But when it comes to money laundering, we are talking about an order of magnitude of 0.2 percent.”
And, he cautions, money laundering channels are being used not only by corrupt politicians, but by organized criminals and terrorists.
The world’s largest banks launder money. The Organized Crime and Corruption Reporting Project (OCCRP) found in this investigation that money was laundered through major financial centers including the United Kingdom, United States, Russia and Latvia. Pietschmann says that banks in the European Union (EU) member countries that joined after 2004 struggle to identify laundered money. Once money has entered the EU system, it can travel freely and without the same procedures as money that originates outside the economic union.
“There’s still a lot of money out there that needs to be laundered, and you can’t launder that amount of money without engaging with big banks,” Martin Woods, managing director of Hermes Capital Solutions, a London-based financial crime consultancy firm told OCCRP in August.
Woods headed an anti-money laundering unit for Europe at Wachovia Bank, now part of Wells Fargo. For more than two years, he alerted his superiors with increasing alarm to suspicious transactions going to Latvian banks from Mexico. He was eventually fired in 2009, but not before he uncovered that Wachovia was laundering billions of dollars for the Sinaloa Drug Cartel and that the bank did not follow its legal obligations to investigate and prevent it.
Although Woods said bank employees noticed issues as early as 2001, Wachovia was finally sanctioned only last year for allowing $378.4 billion, equivalent to a third of Mexico’s gross national product, to pass through its coffers.
Woods says that often if a bank launders large amounts of money for one organized crime group, other groups are using it as well.
“When the launderers identify a big bank that gives them what they’re looking for, they will use that bank an awful lot. So it would appear that whilst Mexicans were using Wachovia, so were other major OC groups,” he said.
Wood agrees that these groups increasingly use offshore companies to add extra layers of secrecy and hide ownership. He told us that in his consultancy job he has seen “direct connections between Russian organized crime, Ukrainian organized crime, New Zealand, Latin America, and Wachovia through offshore shell companies.”
And the Russians, he added, “are some of the best launderers in the world.”
Ruslan Milchenko, a former officer with the Moscow Police’s Department of Tax Crimes of and current head of an anti-corruption organization, told OCCRP that last year 4 trillion rubles (US$130 billion), almost half of Russia’s 2011 budget, had been processed in the bank accounts of companies declared inactive.
He attributes this to two root causes: the proliferation of phantom companies, and banks that accept and launder their money.
“The only effective mean to fight corruption and organized crime is to fight against economical and financial instruments criminals use,” he maintains.
He says law enforcement officers all over the globe should refocus their energy from tracking individuals to overhauling the whole system, and that the most important thing to do is crack down on the shell companies (he estimates that 3 million out of 5 million Russian companies are phantom companies) and sanction the banks which make corruption possible.
“Law enforcement all over the world are tracking corrupted officials and organized crime groups case by case. They fight against individuals, but not the system. Practically all the cases show us that criminals from absolutely different parts of the world use the same technologies to wire money through banks, to launder it through dozens of phantom companies and then sent it offshore using front companies and nominal directors.”
The Stolen Asset Recovery Initiative (StAR), a joint project of the World Bank and the UNODC, recently analyzed 150 case studies of “grand-scale corruption” and found that almost all had employed “professional intermediaries” to obscure the origins and destinations of ill-gotten funds. It found that sanctions busters and terrorist funders also employ trusts, and shell companies to advance their purposes–and that the money then wound up in major banks.
Emile Van der Does de Willebois, who worked on the recent StAR report, said banks and regulators have a responsibility to look deeper into the chain of ownership to find the “beneficial owner,” or natural person ultimately exercising control on the entities and its assets, as opposed to knowing the name of a shell company.
“If you only look at the 25 percent or 20 percent shareholder, or natural person, you’re very likely to miss the real person in control in suspicious cases,” he told OCCRP.
“There is a reason why they dress up the particular corporate vehicle the way they do, and there is a difference between what the outside world sees and what is going on. It is particularly important that you go beyond that and say ‘These guys might be receiving instructions from elsewhere.’ Is there a chance that they are just nominal shareholders receiving a fee?”
Van der Does is referring to the use of proxies, the people listed as company owners who in reality have nothing to do with the firms and may have just been paid a one-time fee for use of their names.
He said that banks and regulators need to work harder to root out the so-called “gate-keepers.” “That is to say, “look at service providers other than only banks and financial institutions. We need to zero in on the trust and company service providers, look at lawyers, accountants, real estate. Look at that whole group, and try and bring them into the regulatory fold.”
“It is a major problem for many countries that you can put forward a person who doesn’t know hardly anything, making them on paper the head of a company, though they are de facto not involved at all,” agrees Pietschmann. “This is one of the big problems which is fantastic for people who want to hide money, but companies should have the obligation to make clear who is really behind them.”
He says banks and regulators can no longer point to the sheer volume of daily transactions as an obstacle, because software can single out potentially fraudulent transactions. But, he says it can be hard to identify these service providers because of a lack of jurisdiction.
The problem, he says, is that computer programs and databases, like one the UNODC developed, stop at your national border and do not extend to other countries. Countries must unify their financial tracking systems he says.
Lawson agrees that the laws regulating company registration must be improved, and says the legal regulatory framework needs to be strengthened –and actually implemented.
“We are requiring the banks to [know their customers], but we are blindfolding them, because we are permitting a system in which anyone can set up one of these structures,” she told OCCRP. “Now this is pretty strange because we’ve pretty much decided as a society that we don’t like fake identities. And effectively, a front company where the beneficial ownership is hidden by using a set of interlocking structures is a fake identity, and we are permitting them to do this.”
Woods acknowledges the problems with registration laws, but said that banks can still tell when a transaction is suspicious. He says that bankers have another reason for not speaking up: pride.
“If they find an issue, they have to identify their own prior failings because a mistake means that [laundering] has taken place under their watch.”
Lawson says banks frequently do the minimum to “tick the box,” or show that they have complied with regulations requiring them to “know their customer,” but that “they don’t want to look too far, because they might find something that will identify the fraudulent source of funds. And then they can’t take [the money].
Antonio Maria Costa, who led the UNODC during the 2008 economic crisis, said that at the time cash from illegal industries was “the only liquid investment capital” for banks on the cusp of collapse.
He said that some banks were rescued by Inter-bank loans funded by drug trade money. So banks were not only bailed out by taxpayers, but also by blood money from drug cartels and human trafficking.
Lawson says it is likely that this has persisted in the current financial crisis, which is why regulators should be all the more watchful. “This is pure speculation, but the incentive to really know where the money is coming from at a time when they want the money in is inevitably going to be reduced…” she says. “Of course, there is a regulatory interest in keeping our financial system propped up, but do we want to prop our financial system up on the proceeds of crime? What the hell are we thinking?
She says there should be stronger restrictions on the banks. “If the bank needed to have evidence that the money was clean, rather than evidence that it was not, you’d have a different situation.”
“So what we’re saying is that in order to fix this, you need a new international standard, which is that each jurisdiction collects the beneficial ownership information, that’s not just the shareholder information, but the complete ownership of who’s really behind it, at the point when the company is incorporated and put it on a public register,” says Lawson.
Lawson says that this opinion is gaining traction with EU policymakers: the Home Affairs Directorate General reported last year that collecting beneficial ownership information is a major step in tackling organized crime. “They have finally started to recognize that this not only a financial issue, but a security issue.”
She lauds a bill proposed earlier this month in the US House of Representatives that would require states to collect names, addresses and other beneficial ownership information of shell companies and limited liability partnerships for new companies. A similar bill was put forward in the US Senate in August.
The bill has its critics, however. Jason Sharman, an expert on offshore companies and money laundering at Griffith University in Australia says that the bill, which in his opinion is unlikely to pass, will not come close to approving the full range of FATF recommendations.
“[The bill] doesn’t really meet the minimum standards for the FATF, so the fact that you can’t get even this very innocuous legislation through makes me pessimistic about the chances of the US really cleaning up its act,” he told OCCRP.
He said FATF successfully pressured zones traditionally thought of as offshore tax havens like Jersey, Seychelles, and the British Virgin Islands, into coming into reporting compliance, but having trouble coercing their members to do the same.
When he posed as a businessman and registered companies in the US, UK, and Seychelles, the results were surprising.
“Surprisingly the so-called ‘tax havens’ did a better job than the OECD countries, and the US tended to be pretty much the worst offender,” he told OCCRP. “The people in Seychelles were actually pretty strict, the UK was not that strict, and the US was anything goes.”
Sharman says that as a result, jurisdictions like the US and the UK will increasingly become the places organized criminals turn to in order to launder money.
“Big rich countries will continue to do not very much, and as a result, there may be a shift that tax havens and other developing countries will be held to a high standard, rich powerful countries will exempt themselves from this standard, and criminals will be increasingly at a profit through using shell companies from onshore jurisdictions from large rich countries instead, even more than they are already.”