THE SHELL GAME: AN EASY HIDE-AND-GO-SEEK GAME FOR CRIMINALS AROUND THE WORLD.

Author:Martinez, Idelys
 
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  1. INTRODUCTION

    On April 3, 2016, the largest document leak in history became the headline of all major newspapers and media outlets. (1) The 11.5 million leaked documents from the Panamanian law firm, Mossack Fonseca, which became known as the "Panama Papers," shed some light on how country leaders, politicians, celebrities, and relatives of powerful figures hid their wealth behind anonymous shell corporations. (2) Among the clients named in the Panama Papers were King Salman of Saudi Arabia, (3) Prime Minister Sigmundur David Gunnlaugson of Iceland, (4) close associates (5) of President Vladimir V. Putin (6) of Russia, soccer star Lionel Messi, (7) and other soccer players (8) and FIFA officials. (9) Interestingly enough, very few United States citizens were named in the Panama Papers, mainly because creating anonymous shell corporations (10) in the United States poses little to no challenges. (11) Accessible means to establish anonymous shell corporations has enticed drug lords, arm dealers, terrorists, human traffickers, and money launderers to take advantage of the lenient laws of incorporation in the United States. (12) Although shell corporations have legitimate uses, (13) they are often the number one vehicles for laundering money from illicit activities and criminal proceeds. (14)

    This Comment explores how the laws (15) of the United States facilitate the formation of anonymous shell corporations, how criminals take advantage of these laws, and how the United States is in dire need of a change. (16) Part I of this Comment discussed the legitimate and illicit uses of shell corporations by weighing the interests of corporate owners and their need for shell corporations and the potential risks that shell corporations pose to the United States. (17) Part II of this Comment outlines the legislative efforts to regulate anonymity and discusses why the current laws and proposed legislation are ineffective. (18) Part III of this Comment identifies the problems caused by the ineffectiveness of the current incorporation laws by giving key examples of criminality linked to shell corporations and discussing how these laws have facilitated the purported crimes. Part III of this Comment also identifies the loopholes in the proposed legislation. (19) Part IV of this Comment presents a solution to these problems by proposing an amendment to the proposed legislation to include a high-security database for storing beneficial ownership information at the time of incorporation (available only to law enforcement agencies and financial institutions), which would eliminate the current loopholes. (20) Finally, Part V of this Comment concludes with a summary of the main points discussed herein. (21)

  2. BACKGROUND

    1. THE LAWS THAT GOVERN MONEY LAUNDERING AND FINANCIAL CRIMES LINKED TO SHELL COMPANIES

      The United States has laws that, in theory, are meant to deter criminals from laundering money, and ensure that financial institutions are taking all necessary action and precautions to prevent and discover illegal activity. (22) As a response to criminal trends and terrorist attacks, lawmakers have adapted to the laws that govern money laundering (23) and other financial crimes, which have prompted terrorist attacks and other major enacted the Bank Secrecy Act (24) in 1970, also known as the Currency and Foreign Transactions Reporting Act. (25) The Bank Secrecy Act is comprised of two parts, Title I and Title II, (26) which were amended by Title III of the USA Patriot Act (27) in 2001 to incorporate a customer identification program. (28)

      The Bank Secrecy Act co-exists with regulations that enforce compliance with its provisions. (29) These regulations require that every national bank and savings association provide written and board approved programs, which are expected to be reasonably constructed in guaranteeing and probing compliance with the Bank Secrecy Act. (30) In addition to regulations that ensure compliance with the Bank Secrecy Act, there are also regulations that require financial institutions to report suspicious activity by means of a Suspicious Activity Report ("SAR"). (31)

      Notwithstanding the laws that govern financial institutions with the purpose of fighting money laundering and other financial crimes, (32) Congress has failed to pass legislation that mirrors the same transparency

      for the beneficial owners (33) of companies. (34) Since 2008, the Incorporation Transparency and Law Enforcement Assistance Act ("ITLEAA") (35) has been re-introduced in congressional sessions every year for the purpose of resolving the various problems caused by incorporation anonymity. (36) More recently, the Panama Papers incident has sparked senators and congressmen and congresswomen to take action in attempting to get the ITLEAA passed. (37) The ITLEAA introduces requirements of detailed disclosure of a corporation's beneficial ownership information, the repercussions that one faces if these requirements are not met, (38) and the exceptions (39) to these requirements. The ITLEAA also gives states the option of maintaining beneficial ownership information private or making beneficial ownership information a matter of public record. (40)

      According to a report by the Government Accountability Office ("GAO"), (41) none of the fifty states require a new corporation to disclose the identity of its beneficial owner, and only a few states (42) require a limited liability company (43) to disclose the identity of its beneficial owner. (44)

      Additionally, none of the states screen information against criminal watch lists or verify the identity of company officials. (45) In fact, the Federal Bureau of Investigations ("FBI") (46) has open investigations that have not been resolved because the beneficial owners of the companies that are the subject of the investigations are practically untraceable. (47)

    2. THE SHELL GAME--THE PROCESS OF ESTABLISHING SHELL

      CORPORATIONS

      In essence, shell companies are business entities that are hollow and are intended to carry out operations in the shadows. (48) However, shell companies have the power of transferring large sums of money globally. (49) Shell companies are attractive vehicles for both beneficial owners who seek privacy for legitimate reasons and beneficial owners who seek to mask their identity for illegitimate uses of the company. (50)

      Opening a shell corporation is no arduous process; it can be done in as little time as it takes to open up an e-mail account and with less information than it takes to sign-up for a library card. (51) It can cost anywhere from $49 to $200, (52) and it can be done online in under fifteen minutes or over the phone. (53) There are also law firms and financial advisors available to walk a person through the process of setting up an anonymous shell corporation if they are unsure about how to proceed. (54)

      If meeting face-to-face with an attorney is not an attractive option for a prospective company owner, there are hundreds of shell incorporators on the Internet and around the world at his or her disposal. (55) A person looking to incorporate a shell corporation may choose to create a network of shell corporations to increase the layers of secrecy; the more layers in a network, the more difficult it will be for law enforcement to track down the true beneficial owner. (56) To optimize concealment, the beneficial owner will usually elect to hire a nominee (57) as a company director who does not necessarily need to have a link to the true beneficial owner. (58)

      While there are various tax havens (59) around the world, (60) the United States has been found to be the second easiest country in the world for criminals to incorporate anonymous shell companies. (61) Although it is easy to conclude that commonly known areas known for establishing shell corporations contain the most lenient laws and regulations, studies have shown otherwise. (62) The United States has become an easily accessible vehicle for criminals to conduct their operations by and through the use of secret shell corporations. (63)

  3. DISCUSSION

    1. THE MOST DANGEROUS CRIMINALS ARE THE KEY PLAYERS OF CORPORATE HIDE-AND-GO-SEEK

      Not only does the system of secret shell corporations promote tax evasion and cost the United States economy and the Department of Treasury about $70 billion every year, but it is also enticing the most dangerous criminals in the world to incorporate in the United States. (64) Viktor Bout, a Russian businessman considered to be the world's largest arms trafficker, (65) used twelve United States shell corporations formed in Delaware, Texas, and Florida to finance his illegal activities, which threatened Americans and supported terrorist entities. (66) To make matters worse, and shell transactions even more inconspicuous, criminals are not afraid to get creative with their money laundering schemes. (67) Mexican drug cartel, Los Zetas, (68) used a horse ranch and a number of shell companies in the United States to conceal over $22 million in drug proceeds. (69)

      Another small glimpse of how criminals use shell corporations to conceal their crimes is illustrated in a $7 million, three-state prostitution and money laundering ring involving human trafficking victims and over nineteen responsible parties. (70) Somad Enterprises, Inc., created several shell corporations to disguise operational activities. (71) At the conclusion of a sixteen-month criminal investigation, Somad Enterprises, Inc., and the nineteen people found to be involved in the corporate scheme, were charged with enterprise corruption, money laundering, falsifying business records, narcotics sales, and prostitution. (72)

    2. ENABLING THE GAME OF HIDE-AND-GO-SEEK

      The current laws (73) in effect are evidently insufficient to deter criminals from abusing the privileges of shell corporations. (74) After setting up a shell corporation under one of the many secretive options available, (75) the owners of these companies will...

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