OC uses Paper Companies
Around the world, some 3 million companies are registered in places and ways intended to make it hard for snooping law enforcement investigators. These paper or shell companies are designed to shield the identity of owners, hide or launder profits or pay less taxes.
For more than a decade, politicians and organized crime figures have been using these paper companies. And while major financial markets in the United States and other Western countries and some offshore financial centers are cracking down on such operations, they are burgeoning in the emerging markets of Southeast Europe.
The criminals have moved to more favorable terrain. The Balkans are now following a pattern set in Russian and Eastern Europe, where organized crime groups have invested heavily in real estate and businesses. Few government officials are doing anything about shell companies buying breweries, mines, or other businesses, and don't even attempt to identify actual company owners. The well documented danger is that rich criminal organizations and politicians have used paper companies to take over old state-owned companies in privatization, outbidding legitimate buyers for firms in which public interest is high and potential jobs are numerous.
Balkan shell companies came into vogue after the UN smacked Serbia and Montenegro with economic sanctions. In the summer of 1992 alone, the number of Yugoslav-affiliated companies registered in Cyprus jumped from 1,000 to 7,000. A UN war crimes prosecutor’s office investigator reported that the island’s second-largest bank allowed a group of Yugoslav-controlled front companies to operate in defiance of UN sanctions. These companies supplied Slobodan Milosevic’s government with fuel, raw materials, spare parts and weapons to wage wars in Bosnia and in Kosovo in the 1990s. After Milosevic was deposed in 2000, Serbian finance officials reckoned that as much as $4 billion in foreign currency might have been transferred from Belgrade to Cyprus between 1992 and 1994.
Front companies have moved from dodging UN sanctions and war-mongering to simply hiding the ownership of companies bidding for privatizations.
“That anonymity is the underlying reason for opening and using shell companies,” said Dennis Lormel, the former chief of the FBI’s financial crimes section, now a senior vice president at Corporate Risk International. “If the people who are opening shell companies are really good, and they want to use the shell company as a front for criminal activity, they can hide their ownership. For an investigator to peel back the layers, it’s difficult, and you can’t identify who the true owner is.”
For example, in Bosnia in 1998, the board of directors at Elektrobosna, a large producer and exporter of an industrial metal, ferro-silicon, hailed the foreign investor New East Company as a savior and praised the London-based company’s long and positive experience. There was only one problem. It wasn’t true. According to company records, New East Company had been formed just six days before the deal was struck. What was more, the company itself was owned by New East Group Limited, based in St Vincent and the Grenadines – a place where company owners are not identified. And after promising to invest some 21 million Bosnian marks (€10.5 million) into the facility, the firm, according to local financial investigators, put in only 4 million marks. That money came from Elektrobosna’s existing revenues, not new money the company brought in. Elektrobosna has been driven into the ground -- and no one has been charged with any impropriety.
In December 2005, the majority of a brewery in the de facto Bosnian Serb capital of Banja Luka was reported to have been bought by a London-based company, Altima Partners LLP, for €11.5 million. But the Republika Srpska Chamber of Commerce found that, in fact, a company called Altima Global Special Situations Fund, registered at an address in Georgetown, the Cayman Islands, had bought the 53.81 percent stake in the company, representing Altima Partners. Calls to Altima were met with the comment, “We don’t talk to the press; it’s company policy.”
No levels of government in Bosnia-Herzegovina, or in the other countries of the region, have done anything to crack down on the shell companies’ ownership of former state assets. “They’re the government’s business partners – that’s the biggest reason,” said Srdjan Blagovcanin of Transparency International in Banja Luka. Or, shell companies in Bosnia-Herzegovina could be the same thing they have proven to be in other parts of Eastern Europe – a front for government members themselves to own former state assets. Prosecutors in the British Virgin Islands allege, for example, that Russian IT and telecommunications minister Leonid Reiman is behind a company registered there involved in a dispute over 25 percent of the mobile phone operator MegaFon.
Paper companies are not unique to Eastern Europe. Several U.S. states – Delaware, Nevada and Wyoming – have come under fire for their secrecy in company registration. A Government Accountability Office (GAO) report in 2006 found that as much as $36 billion has been laundered through US-registered companies from the former Soviet Union. In one example, a Nevada-based company received $81 million in more than 3,700 suspicious wire transfers over two years, but no one was prosecuted because officials could not find out who owned the company. Michigan Senator Carl Levin, who commissioned the report, co-wrote a bill with two other senators, called the Stop Tax Haven Abuse Act. It was submitted to the Senate in February 2007.
“Senator Levin’s probably the only one who’s taken any initiative in this area, and it’s really very difficult,” said Lormel, the former chief of the FBI’s financial crimes section. “There’s no uniformity among states, and in actuality the states are competing with each other for business. The shell companies generate revenue for those states. The states don’t want to recognize shell companies as a problem. Until Congress regulates legislation on shell companies, the States is really going to be hamstrung.”
While it should be up to the wealthy countries of the G7 to take the initiative on shell companies, one tax haven expert said there’s no need for smaller countries to wait on Western governments to move.
“What you could do is have a law that says, we cannot have ownership of one of our companies by an entity that does not have transparent ownership, or unless it’s an entity where we know, and we have the passport of the real owner,” said Lucy Komisar, co-chair of Tax Justice Network USA, a non-profit that advocates transparency in international financial dealings.
Or, Komisar suggests, local authorities could take a page from a Buenos Aires lawyer who was the city’s inspector general for justice in 2005, and ban these companies altogether. In late 2004, 200 people were killed and hundreds more injured in a fire at one of the city’s discos. When the authorities tried to charge the disco owner with manslaughter, they found that the owner was a shell company based in neighboring Uruguay – with a straw owner in the form of a broke 70-year-old retiree. The inspector general took the radical step of banning shell companies from doing business in the city.
“It shows that localities can really do something,” Komisar said. “That would be a very good thing for the countries in the Balkans to adopt."
For more than a decade, politicians and organized crime figures have been using these paper companies. And while major financial markets in the United States and other Western countries and some offshore financial centers are cracking down on such operations, they are burgeoning in the emerging markets of Southeast Europe.
The criminals have moved to more favorable terrain. The Balkans are now following a pattern set in Russian and Eastern Europe, where organized crime groups have invested heavily in real estate and businesses. Few government officials are doing anything about shell companies buying breweries, mines, or other businesses, and don't even attempt to identify actual company owners. The well documented danger is that rich criminal organizations and politicians have used paper companies to take over old state-owned companies in privatization, outbidding legitimate buyers for firms in which public interest is high and potential jobs are numerous.
Balkan shell companies came into vogue after the UN smacked Serbia and Montenegro with economic sanctions. In the summer of 1992 alone, the number of Yugoslav-affiliated companies registered in Cyprus jumped from 1,000 to 7,000. A UN war crimes prosecutor’s office investigator reported that the island’s second-largest bank allowed a group of Yugoslav-controlled front companies to operate in defiance of UN sanctions. These companies supplied Slobodan Milosevic’s government with fuel, raw materials, spare parts and weapons to wage wars in Bosnia and in Kosovo in the 1990s. After Milosevic was deposed in 2000, Serbian finance officials reckoned that as much as $4 billion in foreign currency might have been transferred from Belgrade to Cyprus between 1992 and 1994.
Front companies have moved from dodging UN sanctions and war-mongering to simply hiding the ownership of companies bidding for privatizations.
“That anonymity is the underlying reason for opening and using shell companies,” said Dennis Lormel, the former chief of the FBI’s financial crimes section, now a senior vice president at Corporate Risk International. “If the people who are opening shell companies are really good, and they want to use the shell company as a front for criminal activity, they can hide their ownership. For an investigator to peel back the layers, it’s difficult, and you can’t identify who the true owner is.”
For example, in Bosnia in 1998, the board of directors at Elektrobosna, a large producer and exporter of an industrial metal, ferro-silicon, hailed the foreign investor New East Company as a savior and praised the London-based company’s long and positive experience. There was only one problem. It wasn’t true. According to company records, New East Company had been formed just six days before the deal was struck. What was more, the company itself was owned by New East Group Limited, based in St Vincent and the Grenadines – a place where company owners are not identified. And after promising to invest some 21 million Bosnian marks (€10.5 million) into the facility, the firm, according to local financial investigators, put in only 4 million marks. That money came from Elektrobosna’s existing revenues, not new money the company brought in. Elektrobosna has been driven into the ground -- and no one has been charged with any impropriety.
In December 2005, the majority of a brewery in the de facto Bosnian Serb capital of Banja Luka was reported to have been bought by a London-based company, Altima Partners LLP, for €11.5 million. But the Republika Srpska Chamber of Commerce found that, in fact, a company called Altima Global Special Situations Fund, registered at an address in Georgetown, the Cayman Islands, had bought the 53.81 percent stake in the company, representing Altima Partners. Calls to Altima were met with the comment, “We don’t talk to the press; it’s company policy.”
No levels of government in Bosnia-Herzegovina, or in the other countries of the region, have done anything to crack down on the shell companies’ ownership of former state assets. “They’re the government’s business partners – that’s the biggest reason,” said Srdjan Blagovcanin of Transparency International in Banja Luka. Or, shell companies in Bosnia-Herzegovina could be the same thing they have proven to be in other parts of Eastern Europe – a front for government members themselves to own former state assets. Prosecutors in the British Virgin Islands allege, for example, that Russian IT and telecommunications minister Leonid Reiman is behind a company registered there involved in a dispute over 25 percent of the mobile phone operator MegaFon.
Paper companies are not unique to Eastern Europe. Several U.S. states – Delaware, Nevada and Wyoming – have come under fire for their secrecy in company registration. A Government Accountability Office (GAO) report in 2006 found that as much as $36 billion has been laundered through US-registered companies from the former Soviet Union. In one example, a Nevada-based company received $81 million in more than 3,700 suspicious wire transfers over two years, but no one was prosecuted because officials could not find out who owned the company. Michigan Senator Carl Levin, who commissioned the report, co-wrote a bill with two other senators, called the Stop Tax Haven Abuse Act. It was submitted to the Senate in February 2007.
“Senator Levin’s probably the only one who’s taken any initiative in this area, and it’s really very difficult,” said Lormel, the former chief of the FBI’s financial crimes section. “There’s no uniformity among states, and in actuality the states are competing with each other for business. The shell companies generate revenue for those states. The states don’t want to recognize shell companies as a problem. Until Congress regulates legislation on shell companies, the States is really going to be hamstrung.”
While it should be up to the wealthy countries of the G7 to take the initiative on shell companies, one tax haven expert said there’s no need for smaller countries to wait on Western governments to move.
“What you could do is have a law that says, we cannot have ownership of one of our companies by an entity that does not have transparent ownership, or unless it’s an entity where we know, and we have the passport of the real owner,” said Lucy Komisar, co-chair of Tax Justice Network USA, a non-profit that advocates transparency in international financial dealings.
Or, Komisar suggests, local authorities could take a page from a Buenos Aires lawyer who was the city’s inspector general for justice in 2005, and ban these companies altogether. In late 2004, 200 people were killed and hundreds more injured in a fire at one of the city’s discos. When the authorities tried to charge the disco owner with manslaughter, they found that the owner was a shell company based in neighboring Uruguay – with a straw owner in the form of a broke 70-year-old retiree. The inspector general took the radical step of banning shell companies from doing business in the city.
“It shows that localities can really do something,” Komisar said. “That would be a very good thing for the countries in the Balkans to adopt."
