Shell companies, Latvian-type correspondent banking, money laundering and illicit financial flows from Russia and the former Soviet Union

Author:Graham Stack
Position:Business New Europe, Berlin, Germany
Pages:496-512
SUMMARY

Purpose - The paper aims to examine the role played by international shell companies in Latvian-type correspondent banking, who creates the shell companies according to what criteria and the resulting money laundering operations for financial flows from Russia and the former Soviet Union. Design/methodology/approach - This paper draws on journalist ... (see full summary)

 
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Shell companies, Latvian-type
correspondent banking, money
laundering and illicit nancial
ows from Russia and the
former Soviet Union
Graham Stack
Business New Europe, Berlin, Germany
Abstract
Purpose – The paper aims to examine the role played by international shell companies in Latvian-type
correspondent banking, who creates the shell companies according to what criteria and the resulting
money laundering operations for nancial ows from Russia and the former Soviet Union.
Design/methodology/approach This paper draws on journalist and non-governmental
organisations investigations, nancial intelligence unit reports, interviews with participants,
whistleblower reports and public domain databases to research nancial activities shrouded in secrecy
with connections to corruption and organised crime.
Findings – Latvian-type correspondent banking generates for its clients from the former Soviet Union
anonymous shell companies en masse across diverse onshore and offshore jurisdictions. The shell
companies are vehicles for moving white, grey and black funds from Russia, Ukraine and other former
Soviet countries through international correspondent banking relations to offshore savings accounts
and business suppliers. The creation and administration of the shell companies is handled by para-bank
“business introducer” structures that dilute customer documentation.
Research limitations/implications This paper does not address the specics of Latvia’s
domestic anti-money laundering (AML) legislation and enforcement thereof.
Practical implications Attempts to eradicate shell companies in individual jurisdictions, for
instance, by introducing registers of benecial ownership of companies, may merely displace the
phenomenon to other jurisdictions, and thus treat the symptom not the disease.
Originality/value – This is the rst scholarly study of mass use of international shell companies by
Latvian-type banking in connection with nancial ows from Russia, Ukraine and the former Soviet
Union.
Keywords Russia, Ukraine, Money laundering, Latvia, Shell companies, Correspondent banking
Paper type Research paper
Recently, considerable public attention has been directed to the use of shell companies in
connection with laundering revenues from corruption, crime and tax evasion, with a
spate of enquiries in international media, combined with non-governmental
organisations (NGO) campaigning on the issue. (Karr and Grow, 2011;Brooks and
Bousfeld, 2013;BBC Panorama, 2012;Global Witness, 2012a;Campbell and Shaw, 2013;
Ungoed-Thomas et al., 2013). Awareness of the problem has grown to the extent that it
became one of the main points of discussion at the June 2013 G8 summit chaired by the
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1368-5201.htm
JMLC
18,4
496
Journalof Money Laundering
Control
Vol.18 No. 4, 2015
pp.496-512
©Emerald Group Publishing Limited
1368-5201
DOI 10.1108/JMLC-06-2014-0020
UK, leading to the UK Government announcing plans to create a register of benecial
ownership to eliminate “anonymous” shell rms, a proposal incorporated in the June
2014 Queen’s Speech to parliament.
This paper looks at the problem of onshore and offshore shell companies in
connection with illicit ows out of the countries of the former Soviet Union (FSU). It
understands shell companies as “non-publicly traded corporations, limited liability
companies, and trusts that typically have no physical presence other than a mailing
address and generate little or no independent economic value” (Fincen, 2005a). The
paper argues that the current public interest in the issue of shell companies understates
the problem by viewing it as a question of opportunism – shell companies assist
individual wrongdoers to make crime pay – instead of as a mass phenomenon
comprising part of a specic banking model.
By the same token, this recent attention mistakes a symptom of systematic money
laundering for its cause: mass use of shell companies from diverse jurisdictions for
money laundering needs to be grasped in the context of illicit ows, in particular, from
the FSU as processed by specialised banks in countries on its fringes, such as Latvia.
Mining a jurisdiction’s potential for creating shell companies is just one part of the
business model for laundering funds from the FSU, which also includes trade
misinvoicing, intensive use of international correspondent banking relations and use of
“business introducer” structures that arrange shell companies for bank customers while
compiling due diligence paperwork.
The paper thus looks at the connection between shell companies and money
laundering through the prism of Latvian-type banking and vice versa. It does not
address specically Latvian bank sector regulation and anti-money laundering (AML)
enforcement, but it examines the relationship between shell companies, the Latvian-type
banking model and laundering of grey (tax evasion) and black (crime and corruption)
funds moving out of the FSU. It examines rst Latvian-type banking, which moves
funds out of FSU countries through the international nancial system to beneciary
accounts and trade partners. Second, it argues that these operations depend on mass
creation of shell companies with high risk of money laundering. Third, it argues that
shell company incorporation for bank customers is handled by para-bank business
introducer structures that also dilute customer due diligence[1].
1. Latvian-type correspondent banking and “nancial logistics”
“Latvian-type banking” refers to a specic business model developed in Latvia following the
collapse of the Soviet Union and operating to this day in Latvia and other countries: clients
from the FSU, predominantly incorporated as shell companies in offshore or onshore
jurisdictions, set up accounts in banks specialised in handling this business, which have
extensive networks of correspondent accounts for dollar clearing and which offer
multi-currency accounts. The shell companies’ owners move hard currency funds to these
accounts from their FSU-based businesses through a variety of means and then use the
banks’ correspondent accounts to wire the funds onwards to either savings accounts or
business suppliers. FSU customers, thus, use Latvian-type banking to facilitate movement of
funds out of the FSU into the international nancial system.
Latvian regulators acknowledge this business model, describing it as the provision of
“nancial logistics services” to the non-resident FSU customers (incorporated as shell
rms):
497
Russia and
the former
Soviet Union

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