The corporate scams that aid terrorist money launderers

By Prem Sikka (THE GUARDIAN, 23/02/06)

An important part of the fight against terrorism, we have been told ever since September 11, is closing off its sources of finance. Just last week Gordon Brown borrowed imagery from the second world war against fascism by calling for a modern-day Bletchley Park to unravel terrorist finance networks and "ensure that there is no hiding place for those who finance terrorism"

While initiatives such as Brown's are laudable, they are too often undermined from within. The underground networks of terrorists and their supporters are dwarfed by the everyday culture of secrecy and profit-seeking global "fiddle factories" provided by banks, trusts and corporations, and fronted by accountants, lawyers and financiers.

With the advance of electronic money transfers, easy formation of companies and deregulation, money laundering has escalated to an estimated $2,500bn each year. The laissez-faire US washes about half of this laundry and Britain probably accounts for over $300bn. Secrecy is the key ingredient for this trade.

Banks have technologies to trace suspicious transactions, but profits always come first. Following a US Senate inquiry, it was alleged that General Augusto Pinochet, the former Chilean dictator, used British banks to launder money. There is silence from the British authorities. Of the billions stolen by General Sani Abacha, the former Nigerian dictator, at least $1.3bn turned up in 42 accounts at 23 UK banks. The British government has refused to name these banks and warn the public about their standards. Unlike Switzerland, it has failed to return any of the loot to Nigeria.

Almost every money-laundering scam reveals the use of shell companies: firms that have virtually no assets, employees, physical presence or trade, though large sums of money pass through their bank accounts. These can be formed for a few pounds and are fronted by banks, accountants and lawyers to disguise true ownership. As with other corporate vehicles, they can be owned by foreign and domestic trusts with post-office-box addresses. A recent US treasury report noted that trusts are key vehicles for disguising illicit funds. Yet there is no regulation, registration or public accountability of trusts in the UK and it is impossible to know their beneficiaries.

Anyone deterred by the light UK regulation is welcomed to 70 or so tax havens that promise ultimate secrecy to the highest bidder. Over 30 of these "fiddle factories" are British crown dependencies and overseas territories and have close links with the City of London. Britain is legally and morally responsible for their good governance but does little to check their trade.

Places like Gibraltar, the Cayman Islands, the British Virgin Islands, Bermuda and Jersey are eager for business. Companies can be formed online by agents with minimum fuss and are up and running within a few days. The companies don't need to conduct any business on the islands or have any physical presence. There is no requirement to disclose the identity of the beneficial owner of a nonresident company and secrecy is guaranteed by legislation. Company records can be kept somewhere else in the world. Local residents, agents, accountants, lawyers and banks make good money by fronting companies as directors. Information filed with the authorities is often rudimentary, giving little more than the name and address of the company. The secrecy and lax regulation act as magnets for undesirable elements and hot money.

Major corporations have led the way in developing elaborate "transfer pricing" schemes, which enable companies to allocate costs and profits to various parts of their multinational operations, to dodge taxes. Company auditors keep quiet. Western tax authorities rarely challenge this practice for importing dirty money. Developing countries are routinely fleeced of much-needed capital for local development.

Transfer pricing is now used to launder money. Companies enter into bogus trade to provide an excuse for transferring money for illicit purposes. The paper trail can be routed through companies in offshore tax havens by deliberate mispricing imports and exports. The surplus can easily be accumulated offshore in a bank account in Liechtenstein and withdrawn by an anonymous drug dealer or arms supplier in London or New York. This is possible because banks issue "stored value" or "prepaid cards", not that different from prepaid telephone cards. There is virtually no control and funds can be prepaid by one person, with someone else in another country accessing the cash via an ATM.

The companies bill now going through parliament could begin the process of shining a light into the murky world of money laundering. But it does not. Secretive trusts can own and control companies. Companies are not required to list all their trusts, subsidiaries and joint ventures together with their income, profits and taxes; they are not asked to publish their transfer pricing policies or make directors personally liable for the hot money that flows through corporate vehicles. Without addressing the secrecy facilitated by corporate structures, trusts, tax havens and business advisers, no government will ever succeed in controlling the flow of funds to terrorists.

Prem Sikka is professor of accounting at the University of Essex.