Barely a month goes by without another news story breaking about the myriad of ways the world’s wealthiest utilize legal and tax loopholes to keep their activities secret. Whether it is celebrities securing super-injunctions to keep their extra-marital affairs off the front pages or oligarchs using offshore tax regimes to hide their reportedly ill-gotten gains.
The latest scheme to worry transparency campaigners has been paper-companies from shadowy jurisdictions using courts of more transparent countries to stymy competitors or slow justice, all while disguising ownership of companies and hiding potential conflicts of interests. At least super-injunctions, one of the more interesting celebrity crazes of the past couple of decades, require an appeal to the English High Court detailing the case and a ruling from a judge. Post-box corporate entities by contrast are being utilised to mislead everyone in the legal system from the Judge down to the courtroom reporter.
Opaque post-box companies controlled by mystery owners are of course nothing new and have sprung up across the world in a host of different guises. In some situations, they have been established for legitimate reasons.
Similarly, shell companies – corporate entities without active business operations or significant assets – for example can play a valid role obtaining different forms of financing or acting as a limited liability trustee for a trust. They also feature prominently in many scandals where they are utilised by companies and private individuals for tax evasion and money laundering purposes, with the scale of this practice demonstrated by the leak of the Panama Papers in 2016, as highlighted by MEPs.
Over the past couple of decades shell companies have been increasingly used for laundering money from one jurisdiction to another, often with the assistance of compromised judges. The ‘Russian Laundromat’, a well-publicized money-laundering scheme that operated between 2010 to 2014, involved the creation of 21 core shell companies based in the UK, Cyprus and New Zealand.
The companies were created with ease and without any transparency to demonstrate the controlling minds and financial interests which stood to gain from misusing them. The hidden owners of these companies would then use them to launder money by creating fake debt between Russian and western shell companies and then bribing a corrupt Moldovan judge to order the company to “pay” that debt to a court-controlled account, which the hidden owner could then withdraw the, now cleaned, funds from. Some 19 Russian banks participated in the scheme which helped to move between $20 billion and €80bn out of Russia through a network of foreign banks, most of them in Latvia, to shell companies incorporated in the West.
While the laundromat was eventually shut down, those behind it had years to clean and move tens of billions in ill-gotten or otherwise compromised fortunes into the western banking system. Moldovan businessman and former MP, Veaceslav Platon was named the architect of the Russian Laundromat by the Moldovan court. He remains the only convicted person to date as a result of criminal investigations into the scheme across several jurisdictions. The lynchpins for the entire scheme were western justice systems which, though operating in good faith, did not require sufficient transparency about who stood behind the companies that were accessing these courts.
While the laundromat has been shut down, murky sham companies have found a new way to exploit western justice systems by using litigation in respectable legal jurisdictions. In 2020 it was reported that Russian oligarchs were using fake companies to launder money via English courts. The report claimed that oligarchs would bring cases against themselves in English courts using a sham company, located in an opaque tax jurisdiction, that they were the sole beneficiary of and then would deliberately “lose” the case and be ordered to transfer the funds to the company. Using this approach, money from dubious sources could be laundered by way of a court order and enter the western banking system as clean cash with an apparently legitimate origin.
A further worrying development is the recent evidence that credible arbitration systems being used as a tool to advance corrupt practices. One such case was brought in London by Process and Industrial Developments (P&ID), a British Virgin Islands company, against the Government of Nigeria over the collapse of a 20-year contract to generate power. P&ID accused the west African state of a breach of contract and in 2017 an arbitration panel ruled in the company’s favour awarding them almost $10bn. It was only when the matter was referred to the High Court that it was reported that cash “gifts” in brown envelopes had been allegedly paid to Ministry of Petroleum Resources officials.
P&ID, co-founded by Irish entrepreneurs Mick Quinn and Brendan Cahill, has strenuously denied the allegations or of any wrongdoing. While the arbitration is far from over, the case has, it has been argued, demonstrated just how easily dispute settlement processes might be manipulated.
Another ongoing case in Ireland has further revealed the degree to which shell companies can allegedly manipulate Western courts. The Irish High Court has become the latest arbiter of a decade long Russian corporate dispute concerning ToAZ, one of the world’s largest ammonia manufacturers, in a case which has seen around 200 affidavits filed in Ireland alone. At its heart the case is a battle over ownership of the company between convicted father and son Vladimir and Sergei Makhlai, and Dmitry Mazepin a rival Russian businessman who holds a minority stake in the business. In 2019 a Russian court found the father and son team guilty of conducting fraud by reportedly selling the ammonia ToAZ produced at a price well below market rates to a linked company which ten sold it on at a higher market rate allowing the Makhlais to pocket the difference at the expense of ToAZ shareholders.
Having fled Russia before they could be jailed, the Makhlais are now believed to be using four shell companies in the Caribbean to hold their majority stake in ToAZ. These four companies have now reportedly used the existence of another Irish post-box company to file a $2bn claim for damages against Mazepin in Ireland’s courts, allegedly without having to revel who their shareholders are, who controls the companies or how they came to be in possession of shareholdings in a Russian ammonia company.
While this may seem like all in a day’s work for your standard legal dispute between Russian oligarchs and hardly a matter of concerns for the general public, it points to the worrying rise in dummy companies being used as fronts in legal cases. Generally, it seems a mockery of the notion of open justice for Caribbean shell-companies to have access to reputable common law courts to have their cases heard, use procedural chicanery to slow proceedings and prevent enforcement elsewhere all while being able to hide their owners and controlling minds from the public and the courts. While current examples relate to very wealthy individuals allegedly using these tactics against other rich folk, there is no principle or precedent which would stop unscrupulous interests using shell-companies to hide their involvement as they launch proceedings against ordinary citizens, NGOs or journalists.
A Brussels based financial expert said: “For Western justice systems to pay more than just lip-service to the principle of open justice basic transparency standards must be applied to party seeking to access the court. As a long overdue first step privately held foreign companies should be the first target of new standards in litigation transparency. A clear view on the controlling minds and commercial beneficiaries of litigants is in the interests of the public and, more importantly, the interests of justice.”