Washington, D.C. – Opaque shell companies, foundations and trusts are the modus operandi of corrupt organisations looking to hide significant sums of money, often just by using existing loopholes in the current financial system, experts say.
“The Puppet Masters”, a report released Monday by the Stolen Asset Recovery Initiative (StAR) at the World Bank, examines how legal structures are exploited by some corrupt organisations to hide stolen assets.
StAR, a partnership between the World Bank Group and with the United Nations Office on Drugs and Crime (UNODC), gathered information from 150 grand corruption cases involving senior public officials over the past 30 years, estimating 50 billion dollars in stolen assets, bribes, and other criminal activities in the sample analysed in the report.
The report, taken in conjunction with the database of stolen asset recovery information via the StAR Initiative at the World Bank, looks to provide a comprehensive view of how what is known as “beneficial ownership” takes place, said Emile van der Does de Willebois, senior financial sector specialist with StAR and author of the report.
“What we found, in almost every big case, there will be a company legal structure involved as a way to conceal the identity of the corrupt official to separate his identity from the proceeds of corruption,” van der Does told IPS.
Such was the case in Kenya in 2002, when the government, tasked with replacing its passport printing system, rejected a six million euro bid from a French firm in favour of a contract worth 31.89 million euro with a company called Anglo-Leasing and Finance Ltd. Anglo- Leasing, a shell company in the United Kingdom, proposed using the French company to subcontract the actual work, leaving millions in profits.
The report makes recommendations for how to defend against this type of ruse, mostly through increased transparency and accountability for policymakers.
“Transparency has been an issue for a very long time already,” van der Does told IPS. “What we're proposing here it's nothing new, we will take putting it up on the agenda every time we get the opportunity, because the baddies don't give up that easily.”
Robin Hodess, the group director for research and knowledge at Transparency International, a global civil society advocacy organisation, says that illicit funds in the developing world amount to an estimated one trillion dollars per year, having an enormous impact on the resources and future financial plans for these countries.
Often, Hodess said, those looking to combat corporate corruption face an uphill climb.
“On the investigator side, usually government agencies are under- resourced,” she told IPS. “This is particularly the case in developing countries, but also for any struggling economically.”
StAR's report calls for such efforts as requiring a minimum standard of information on registered entities, such as shareholders, members and directors, and allowing easy accessibility of this information online.
Civil society organisations have called for increasing the social responsibility of corporations in this fight, mostly by increasing the role of the actors involved.
“Looking at the financial services sector, we can be looking at the role that not just banks, service providers, but that lawyers, accountants, the people that make up this corporate structure,” Hodess told IPS. “Quite a lot can be done to make them part of the solution, to contribute to transparency.”
But, van der Does said, accountability is a two-way street – and not just about increasing the responsibility for those in the corporate world, but those doing the investigating, increasing expertise and capacity as to how to find information on potentially corrupt corporations.
“The other side of the equation is that investigators need to be made more aware to those sources of information,” he told IPS. “Many times, when it hasn't been made readily available, you look for what you know already.”
There is already significant international legislation on the books to combat corporate corruption practices, such as the United Nations Convention Against Corruption (UNCAC), ratified by 100 countries since its adoption in 2003, and recommendations by the Financial Action Task Force (FATF), an inter-governmental body whose mission is to create a global financial policy framework.
While the efforts to create legislation have been significant achievements, van der Does said, they were simply the first step, as the difficulty often lies in the enforcement of regulations.
“There is certainly a discrepancy between how you write it down and what you do in your supervisory and regulatory regime,” van der Does told IPS.
“It's always a matter of how these laws are implemented,” Hodess said. “These kinds of problems, of shell companies, and illicit financial flows, this is happening in large part because the rules are not being enforced.”
StAR's report calls for special attention to be paid to the different jurisdictions within a country's financial system, be they banks or other entities, before legislation is enacted, van der Does said, by conducting a assessment analysing the areas of risk within the country.
“The challenges for each jurisdiction are going to be different,” van der Does told IPS. “Determine what the specific situation is in their countries, what entities are being abused, where we should focus our drive for transparency.
“Any policy decision costs money, and investment, and somebody willing to convince company registries, the corporate service providers and everyone else,” he said.
Although there are significant challenges ahead, the strides that have been made in the past 20 years, such as the increased role of banks in providing company registry information, are positive indicators for the future.
“Culture changes don't happen overnight,” van der Does told IPS. “But, given the fact that we can already see some examples of this happening over time, I'm cautiously optimistic.”