UK, leading to the UK Government announcing plans to create a register of benecial
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 specic 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 specically 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 beneciary
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. Latvian-type correspondent banking and “nancial logistics”
“Latvian-type banking” refers to a specic 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