Hardly a month goes by without another story breaking out about the myriad ways the world’s richest are using legal and tax loopholes to keep their activities secret. Whether it’s celebrities getting super-injunctions to keep their extramarital affairs off the front pages or oligarchs using extraterritorial tax regimes to hide their allegedly ill-gotten gains.
The latest scheme that has concerned transparency activists has been paper companies from obscure jurisdictions that use courts from more transparent countries to compete with stimulus or slow down justice, all while concealing corporate ownership and concealing potential conflicts of interest. interests. At least the super-injunctions, one of the most interesting celebrity follies of the last two decades, require an appeal to the English Supreme Court detailing the case and a decision by a judge. Rather, corporate mailbox entities are used to mislead everyone in the legal system, from the judge to the courtroom stenographer.
Opaque mailbox companies controlled by mystery owners are, of course, nothing new and have sprung up around the world in a number of different forms. In some situations, they have been established for legitimate reasons.
Similarly, shell companies (corporate entities with no active business operations or significant assets), for example, can play a valid role by obtaining different forms of financing or by acting as limited liability trustees for a trust. They also feature prominently in many scandals in which companies and individuals use them 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 two decades, shell companies have been increasingly used to launder money from one jurisdiction to another, often with the help of compromised judges. The “Russian laundry”, a highly publicized money laundering scheme that operated between 2010 and 2014, involved the creation of 21 major shell companies based in the UK, Cyprus and New Zealand.
The companies were created easily and without transparency to demonstrate the controlling minds and financial interests that could benefit from their misuse. The hidden owners of these companies would use them to launder money by creating bogus debts between Russian and Western shell companies and then bribing a corrupt Moldovan judge to order the company to “pay” that debt to an account controlled by a court, which is concealed the owner could withdraw the funds, now clean, from. Some 19 Russian banks participated in the scheme that helped move $ 20-80 billion 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 up and move tens of billions in ill-gotten or otherwise compromised fortunes to the Western banking system. Veaceslav Platon, businessman and former Moldovan MP, was appointed architect of the Russian laundry by the Moldovan court. He remains the only person convicted to date as a result of the plan’s criminal investigations in various jurisdictions. The linchpins of the entire scheme were Western justice systems, which, although operating in good faith, did not require sufficient transparency about who supported the companies that accessed these courts.
While the laundromat has been shut down, shady bogus companies have found a new way to exploit Western justice systems by using litigation in reputable legal jurisdictions. In 2020 it was reported that Russian oligarchs were using bogus companies to launder money through the English courts. The report claimed that the oligarchs would bring cases against themselves in the English courts using a bogus company, located in an opaque tax jurisdiction, of which they were the sole beneficiary and then deliberately “lose” the case and be ordered to transfer the funds to the business. With this approach, money from dubious sources could be laundered by court order and entered the Western banking system as clean cash with an apparently legitimate origin.
Another worrying fact is the recent evidence that credible arbitration systems are being used as a tool to promote corrupt practices. Process and Industrial Developments (P&ID), a British Virgin Islands company, brought such a case in London against the Nigerian government for the collapse of a 20-year contract to generate power. P&ID accused the West African state of breach of contract and in 2017 an arbitration panel ruled in favor of the company, awarding them nearly $ 10 billion. Only when the matter was referred to the Superior Court was it reported that “gifts” in cash in brown envelopes had allegedly been paid to officials of the Ministry of Petroleum Resources.
P&ID, co-founded by Irish businessmen Mick Quinn and Brendan Cahill, has vigorously denied the allegations or any wrongdoing. While the arbitration is far from over, it has been argued that the case has demonstrated how easily dispute resolution processes can be manipulated.
Another ongoing case in Ireland has further revealed the extent to which shell companies can allegedly manipulate Western courts. The High Court of Ireland has become the latest arbitrator in a decade-long Russian corporate dispute involving ToAZ, one of the world’s largest ammonia manufacturers, in a case in which around 200 affidavits have been filed. only in Ireland. At its core, the case is a battle for ownership of the company between the convicted father and son Vladimir and Sergei Makhlai, and Dmitry Mazepin, a rival Russian businessman who has a minority stake in the business. In 2019, a Russian court found the father-son team guilty of committing fraud by allegedly selling the ToAZ ammonia produced at a price well below market rates to a related company that ten sold it 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 maintain their majority stake in ToAZ. These four companies have reportedly now used the existence of another Irish mailbox company to file a $ 2 billion claim for damages against Mazepin in Irish courts, allegedly without having to disclose who their shareholders are. , who controls the companies or how they came to be. in possession of stakes 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 concern to the general public, it points to the worrying rise of shell companies being used as fronts in legal cases. In general, it seems a mockery of the notion of open justice that Caribbean shell companies have access to reputable common law courts to have their cases heard, use procedural ruses to slow down procedures, and avoid enforcement elsewhere while they can hide their owners and control the minds of the public and the courts. While the current examples refer to very wealthy people allegedly using these tactics against other wealthy people, there is no principle or precedent to stop unscrupulous interests using shell companies to hide their involvement when they initiate proceedings against ordinary citizens, NGOs or journalists.
A Brussels-based financial expert said: “For Western justice systems to pay more attention to the principle of open justice, basic standards of transparency must apply to parties seeking access to court. As a long-overdue first step, privately owned foreign companies should be the first target of the new standards for transparency in litigation. A clear view of the controlling minds and business beneficiaries of litigants is in the public interest and, more importantly, in the interest of justice. “