Curtailing the Criminal Use of Shell Companies in Liberia
This article delves into the criminal use of shell companies (or corporations) in Liberia. It is a sequel to my article of July 13, 2018: “Factoring Elements Undermining Liberia’s Economic Growth and Performance” 1 . That article focused on “major criminal elements that continue to undermine Liberia’s economic growth and performance thus crowding out needed revenue from the national coffers”.
Alexander Cuffy, alanbernardint.com, Contributing Writer
The criminal use of shell companies is one of the major criminal elements that continue to undermine Liberia’s economic growth and performance. This article is inspired by the article of May 19, 2020: “NCA recovers $8 million linked to international organized crime” 2 . The article reveals the pervasive use of shell companies for tax evasion, bribery, and corruption.
The article explains how the National Crime Agency (NCA) recovered a laundered amount of US$8 million after an intense investigation of dubious Liberia business accounts being held in shell companies. This article is also inspired by the two follow-up stories in the FrontPage Africa newspaper: UK’s National Crime Agency Forfeits US$8 million Deposited During Tubman, Tolbert Era 3, and Why Liberia May Not Recover Seized Stolen Assets Forfeited in the UK 4.
It is estimated that annually, illicit financial flows total some $2 trillion globally, and more than US$300 billion. The pervasive use of shell companies, front companies, nominees, or other means to conceal the true beneficial owners of assets are contributors to illicit financing activities. In Liberia, tax evasion, fraud, and bribery and corruption are three of the prevalent predict offenses for money laundering. Through these criminal activities, millions of dollars in tax revenues, budget financing, and development funds are crowded out of the national coffers, thereby undermining Liberia’s economic growth and performance.
A shell company exists only on paper and does not have an office or employees. It may have a bank account and holds inactive investments or maybe the registered owner of intellectual properties, ships, and other assets. A shell company may have its registered address at the office of an accounting firm, law firm, or other companies that help to set them up or other firms that provides such services setting up shell companies. The firm or company may act as the agent for the receipt of correspondences and other items and may serve as a conduit for business transactions.
Essentially, a shell company is an incorporated company that possesses no significant assets and does not perform any significant operations. A shell company may be used for legal or illegal purposes.
The legal use of a shell company includes, but not limited to, acting as trustee for a trust; creating limited liability for partnerships, and other business ventures; protecting one part of a business from the risks of another part, transferring assets from one company into a new one, while leaving the liabilities in the former company.
A foreign company may also set up a shell company in a Tax Haven such as Panama, Switzerland, Hong Kong, etc. to lower its tax bills in its home country. A Tax Haven is a country or region where certain tax rates, such as income tax or corporate tax, are extremely low or nonexistent. While a shell company is used for legal purposes, it is sometimes used for illegal purposes.
A shell company may be used to finance the activities of terrorists or terrorism (terrorist financing), concealing the source of money obtained illegally (money laundering), shielding money from taxation (tax evasion), channeling money obtain from arms or drugs trade (illegal businesses), and hiding money from a spouse in case of a divorce (fraud).
A shell may be used for disguising business ownership from law enforcement or the public and shielding the identity of its true purpose. A shell company is often set up to disguise the identity of those who put their assets within it, making it difficult to find out who owns the assets inside the shell company. To launder money, a shell company purports to perform services that require customers to pay with cash.
While shell companies are used for legal purposes, there has been a pervasive use of shell companies for criminal activities in Liberia for an exceptionally long time, as the NCA’s May 19, 2020 article reveals. Over the last several years foreigners, residents, and high-ranking government officials have been indulging in the criminal use of shell companies.
Some of the criminal uses of shell companies in Liberia include, but not limited to, the following: 1) Foreigners residing outside of Liberia set up shell companies in Liberia to channel millions of dollars through Liberia to finance terrorist activities in other countries. 2) Foreigners residing outside of Liberia set up shell companies in Liberia to channel millions of dollars of illegally acquired funds through Liberia to other destinations. 3) Foreigners residing and purporting to be doing business in Liberia use those businesses to channel to other destinations millions of dollars acquired from fraudulent activities in other countries.
4) Business owners use shell companies to conceal millions of dollars of legitimate business income from tax payments. 5) High ranking government officials conspire with business owners to use their businesses to transfer monies acquired from bribery, corruption, and fraudulent dealings to other destinations. 6) High ranking government officials use shell and other companies to siphon government funds intended for budget support, development and other projects/programs for political or personal purposes.
Measures that could reduce and deter the criminal use of shell companies in Liberia include, but not limited to the following: a) Comprehensive investigation over the use of shell companies. Empower financial crime analysis and investigation institutions, in collaboration with, the Liberia Business Registry, and the Ministry of Commerce and Industry to conduct a comprehensive investigation, strengthen laws and regulations, and enhance enforcement over the use of shell companies.
For example, 80 Broad Street, Monrovia, Liberia as the registered address of several shell companies used for illicit activities as previously reported by the International Consortium of Investigative Journalists (ICIJ) and others.
b) Stringent measures over business registration. Fully implement and enforce recommendations contained in GIABA’s Mutual Evaluation Report of Liberia 5 that the Liberia Business Registry (LBR) should: “i) put in place mechanism to verify the identity of owners of legal persons (“individuals, companies, or other entities which have legal rights and are subject to obligations”), b) ensure that beneficial ownership (“natural person or persons who ultimately own or control a legal entity or arrangement, such as a company, trust or foundation”) information is made available to law enforcement authorities promptly, and c) recruit qualified investigators to undertake investigations and conduct on-site visits to verify information provided by corporate bodies”.
c) Stringent measures over the transfer of business income. Review the Letters of Credit regime to curtail the use of business establishments from transferring millions of United States dollars outside Liberia under the disguise of doing business.
For example, strengthening the laws and regulations to set a threshold requiring companies transferring funds above a certain amount to use Letters of Credit. Also, implement and enforce to the fullest the “Regulation Dealing with Cross-Border Transportation of Currency and Bearer Negotiable Instruments”
d) Stronger information communication system at financial analysis and investigation institutions.
While financial crime analysis and investigation institutions have very qualified personnel, their information communications systems need massive improvement. For example, the computer, network, and internet equipment at some of these institutions are outdated and need to be replaced periodically with up-to-date ones.
A central database system that should include birth and death registry, land and property registry, company registry, tax information (where the law permits), etc. should be established. The database system should also store case information on investigations, prosecutions; records of assets seized, frozen, confiscated and forfeited; records of mutual legal assistance and extradition; and other related matters. The central database should be available to all the relevant institutions, including law enforcement, financial crime analysis and investigation, and national security institutions.
e) Effective responses by the banking system to information requests from financial analysis and investigation institutions. The banks, especially the Central Bank of Liberia (CBL), must respond in a timely fashion to requests for information from financial analysis and investigation institutions. For example, many requests emanating from financial crimes analysis and investigation involving high government officials’ conspiring with business owners and using shell and other companies as mentioned in 5) and 6) above, are made to the CBL without responses, prolonged delays in responding, and/or willfully blinded responses.
According to the FrontPage Africa newspaper, the Government of Liberia is trying to recover the
US$8 million seized by the National Crime Agency in the United Kingdom, but may find it difficult to recover said amount. However, the government must accelerate actions at curbing the criminal use of shell companies and illicit financial flows in general.
It is important to note that during a September 26, 2019 Dialogue on Development Financing 6 , the Deputy Secretary-General of the United Nations, pointed out that low-income economies lost more to illicit financial flows than they receive in aid. The Dialogue highlighted that of the total revenue lost to illicit financial flows, low-income economies account for more than US$200 billion each year. This amount is higher than the approximately US$150 billion low-income economies receive each year in foreign development assistance. The Dialogue urges Governments to do more to prevent illicit financial flows, assist in repatriating such funds, and prosecute perpetrators.
Alexander Cuffy ([email protected]) is a financial crimes specialist and senior
Business Development Consultant at Alan Bernard International (alanbernardint.com). He previously headed the development, administration and monitoring of the Anti-Money Laundering (AML) program in Liberia as head of the Financial Intelligence Unit (FIU).