Is it money laundering or just good business? Part 1: Follow the money.

15 December, 2022
Join us as we delve deep into how compliance teams should approach the heady world of High Net Worth Individuals (HNWI) and anti-money laundering (AML).

Part 1: Follow the money.

If the Pandora Papers (and the Panama and Paradise papers) did nothing else, it shone a light on the extent to which the rich and famous go to, to shield their wealth, and how long it’s been going on. Luxury goods, cross-border money movements, estate and inheritance planning, hard-to-trace assets and complex financial engineering tactics. All enabled by their lawyers, accountants and money managers who specialise in discretely taking good care of their rich clients. 

These professionals “create shell companies, trusts, foundations and other entities in countries that have little or no taxes and are lenient when it comes to asking questions about the flow of money. They make it hard for regulators, the press and the public to scrutinise their fortunes. The international well-to-do have shell companies registered in lightly regulated jurisdictions, such as the British Virgin Islands, Seychelles, Hong Kong, Belize and Panama” as so eloquently described by Forbes

So how do they do it and what should you and your compliance team look for? 

Multi-tiered, multi-jurisdictional structures 

For maximum tax efficiency, HNWIs create complex or opaque structures with multiple layers of ownership and shareholdings. 

And oftentimes they will create these structures in tax efficient or tax haven countries, for example, Monaco, Liechtenstein, Switzerland, British Virgin Isles, and Caymans but also unexpected locations such as Rarotonga, Tonga and Samoa. In each of these countries, there's no public company register so it takes a lot of expertise and skill to understand how the document is structured, and how organisations are structured and it makes it incredibly difficult to identify the beneficial ownership chain for AML purposes.

At First AML, the most complex entity we have in our ecosystem is 52 beneficial ownership layers deep and spans 35 countries. Let that sink in.

At First AML, the most complex entity we have in our ecosystem is 52 beneficial ownership layers deep and spans 35 countries. Let that sink in.

There are 5 key areas to consider in order to untangle this opaque web of information. And all of it must be considered in regards to context, relevance, timeliness and format.

  • Suspicious naming conventions
  • No publicly available documentation
  • Shared address for filing purposes
  • Densely / opaquely written documents
  • Unusual job titles
1. Suspicious naming conventions

Be on the lookout for typical naming conventions for companies in those tax haven regions. A good example is the Isle of Man. Obvious names there include Topco, Midco and Holdco. There are less obvious ones but any time you see four or five essentially empty companies, colloquially known as shell companies, that are linking the companies to each other, then they are most likely trying to do something for tax purposes. This doesn't mean they’re laundering money, but it is a red flag that indicates you should dig deeper. 

2. No publicly available documentation

Another tell-tale sign of possibly nefarious activity is when the local companies register only shows a company number. This indicates that the relevant documentation is hidden from the public.

This is not illegal. In tax efficient or tax haven countries, companies are allowed to hide these documents via a trust provider or similar. Here’s an example of how it works. In Fiji, many HNWIs buy and sell resorts or properties using a legitimate company that has a company number held by the Fiji companies register and a registered local address. But this registered address is actually not where the registered company resides, instead, it’s the address of a contracted trust provider. This number and address are all the information that’s required in the public domain. This leads to point three, a shared address. 

3. Shared address for filing purposes

In tax haven countries, a lot of companies have the same address which is a company service provider. In the Cayman Islands, for example, Ugland House is a small, five-storey building but is simultaneously the official address of 18,857 corporate entities. So as a compliance expert, if you see these shared addresses it’s time to start digging for documentation immediately.

4. Densely / opaquely written documents

The fourth red flag is when you see documents that are very dense and hard to digest due to their legalese or reference to various corporation acts. 

Take Delaware for example. One document might talk about the register of directors and officers. But if you want shareholders, you have to go look for another type of document for the register of members. Then you need an incorporation certificate to prove that the company was actually incorporated. And that's just the basics. So you could be getting more and more documents.

Another example is the Netherlands; often times a foundation or ‘Stichting’ is set up to hold assets. These entities are mired in various corporate documents, there's a Dutch Business Register Extract for the board, a document for the annual accounts and articles of association for the beneficial ownership and control structure. 

5. Unusual job titles

The final red flag is suspicious job titles of beneficial owners, for example, “student” or “housewife” which may indicate hidden wealth or underhand tactics. If their job title is unusual and the source of wealth/source of funds doesn’t make sense, then it’s time to go hunting for more information.

If it seems too difficult, dig deeper.

The intent of these opaque multi-tiered, multi-jurisdictional structures is to wear down the enquirer (be that a compliance person, journalist or law enforcement officer) so that they give up. In compliance, it often forces untrained staff to take a risk-based approach rather than follow guidelines. It’s easier to say “Netherlands or Fiji looks okay, I'll give it a low risk or I'll just stop because I can't get any more info”. Or, “I'll take the end users or your client’s word for it, I'll give an exception. Let's move on.”  But this is the exact time you should be asking for the underlying documents, digging deeper and questioning more.

Want to read more? Check out the other parts of the series here!

Part 2: Time poor and anxious

Part 3: Family ties and alibis

Part 4: Crypto, NFTs, gems

About First AML

First AML simplifies the entire anti-money laundering onboarding and compliance process. Its SaaS platform, Source, stands out as a leading solution for organisations with complex or international onboarding needs. It provides streamlined collaboration and ensures uniformity in all AML practices.

First AML transforms an otherwise complex and manual process into one that is simple, cost-effective, and compliant for businesses. By delivering efficiency and time savings, it protects reputations and enables companies to stay on the right side of history in the face of global threats.

Keen to find out more? Book a demo today! No time for a long demo? No problem. See what Source by First AML can do for your business in 2 minutes – watch the short demo here.