As the war on money-launderers’ vehicle of choice intensifies, ne’er-do-wells are increasingly looking for alternatives to clean “dirty” money and that includes cryptocurrencies.
Maria Gonzalez (not her real name) mops the floor in the sprawling 5,000 square foot apartment in the heart of Panama’s most ritzy neighborhood, Punta Pacifica. Although she really doesn’t need to because hers have been the only footsteps to ever walk the floors of the apartment.
The 53-year old looks across the sweeping views of the Pacific Ocean from the 30th-floor luxury penthouse and takes in the million-dollar view.
The Rosso Verona marble, a rich, red hue, quarried from a single block of marble from Italy and shipped over to Panama City is still shining from its recent installation and polish, but no feet, other than Gonzalez’s are likely to ever walk these floors.
In the professional kitchen, bigger than the average apartment in Panama City, brand new, shiny appliances from Miele and Gaggenau remain unused and will likely never ever see usage.
Because while Gonzalez may work in this luxury penthouse, she does not live in it, nor does she own it.
Like hundreds of other luxury apartments in Panama City that remain vacant, it remains an enduring symbol of how much the city has prospered thanks to its willingness to provide secrecy and discretion when handling money and incorporation.
Yet Gonzalez is no ordinary housekeeper either — she’s also a director of over three hundred different shell companies and corporations registered in Panama, for which she receives a fee that helps to put food on the table of the family of 11 that she needs to support.
From politicians siphoning off state wealth, to officials taking bungs, terrorists buying weapons to drug cartels, money laundering comes in all shapes and sizes and to cover a variety of illegal activities.
She Sells Shell Companies by the Seashore
And one of the most common and favored vehicles for money laundering is the use of shell companies, to hide the identities of those moving money that comes from less savory sources.
Such brass-plate entities, whose ownership and governance often ends up tracing to individuals such as Gonzalez, make it virtually impossible to determine who actually owns such companies.
It was these same shell corporations, many incorporated in some of the most beautiful, sun-kissed places on the planet, that was at the heart of the theft from Malaysian sovereign wealth fund 1MDB, as well as the Danske Bank scandal.
Often dubbed “getaway cars” for financial crime, the pressure is increasing to crack down on the use of shell companies to mask illicit money transfers.
NGOs such as Global Witness and Transparency International have for decades pointed an accusing finger at the pernicious role of shell corporations that facilitate global money laundering, a clarion call that has been heeded by government investigators, wearied by money trails going cold in some of the warmest places on earth.
And the persistence of such NGOs as well as government investigators has been making some progress.
Take for instance the United Kingdom, which in 2016 became the first G20 (a group of the 20 richest nations on earth) country to set up a public register of company owners, a move which the rest of the European Union is set to follow once a new money-laundering directive takes effect.
While the move by the United Kingdom (U.K.) may be welcome, it still leaves plenty of loopholes —including the United Kingdom’s offshore territories, which march to the beat of a different drum, but which are also moving in the direction of ditching secrecy.
Earlier this month, the U.K.’s three Crown Dependencies — Jersey, Guernsey and the Isle of Man — issued a surprise joint statement pledging to table legislation to introduce public registers for companies by 2023.
Despite long insisting that efforts by Westminster to force such a move would result in a constitutional crisis, the growing clout of the global transparency movement persuaded the three Crown Dependencies to act voluntarily, where they can still manage the technicalities than to have such measures rammed down their throats.
And if three of the largest offshore financial centers were to give up secrecy, it would make it harder for many other territories, particularly the U.K.’s Caribbean islands such as the British Virgin Islands and the Cayman Islands to continue to keep corporate ownership in the shadows.
And the proof of the Crown Dependencies managing their own version of transparency can be seen in the staged implementation of the legislation — first for law enforcement, then for financial firms conducting due diligence and only much later for everyone else.
Such a move gives company owners time to sort their affairs and find alternative solutions.
The Tide is Shifting The Shells
In the United States, moves to increase the transparency of company owners have been struck down for years, but things may be changing.
Shell companies in the United States, where incorporation is done at the state level, are among the world’s most secretive.
A recent study found that in all 50 states, more personal information was needed to get a library card that was needed to register a company.
In some states, such as Kentucky, company registration can be done without even giving out contract details.
Yet in every congressional session since the financial crisis, successive federal lawmakers who have proposed corporate-transparency legislation have only seen their bids to pass such a bill shot down.
Granted the complexion of Congress was different then, as the political climate shifts, there could also be a shift towards greater transparency.
With a presidential election looming and a Democrat-controlled House, there are signs that the light of government may start to shine into the shadows of shell company owners.
On June 12th, a corporate-transparency bill was approved by the powerful House Financial Services Committee (rising Democratic Representative Alexandria Ocasio-Cortez sits on this committee )— the first time such a law has reached that stage. A similar bill was introduced in the Senate.
And while the bill’s proponents are hopeful that a blended version will become law by the end of this year, given a Democrat-controlled Congress and a Republican-controlled Senate, even if the bill were to pass, it will likely be a much watered-down version than what transparency advocates would prefer.
But the genie is already out of the bottle.
And that may be the greatest fear of money launderers.
If the bill somehow manages to pass, the United States would not get a public register of corporate ownership, but companies would be required to disclose their beneficial owners to the Financial Crimes Enforcement Network, a federal agency tasked to keep company ownership up-to-date.
That in and of itself would certainly push criminals looking to launder money to other avenues to conduct their activities.
But not all the opposition to the proposed move is coming from would-be money launderers and other nefarious forces. Many small business associations in the United States have expressed their concern about increasing red tape.
Despite these concerns, however, Delaware, the biggest state for incorporation is onboard, as is, somewhat surprisingly, U.S. treasury secretary Steven Mnuchin. President Donald Trump’s businesses have sold many a property to anonymously-owned companies over the years — he has yet to tweet about the proposed legislation.
If the bill passes, it is more likely than not that anti-graft activists will push for a wider move to adopt a public register of company ownership and there are many Democratic presidential candidates who have demonstrated a willingness to pick up the gauntlet and push for such reform, including front runners Elizabeth Warren and Bernie Sanders.
But the U.K.’s experience has shown that adopting a public register alone is probably not enough — investigations by several NGOs suggests that the information provided to the public register has been somewhat of a mixed bag.
Against the decades-long laxity towards enforcement, many ne’er-do-wells have regularly lied about who owns a firm with little concern as to the consequences for doing so.
But ultimately, the writing’s on the wall.
Shell companies will increasingly come under greater scrutiny as law enforcement around the world clamp down on cross border financial crime.
Cryptocurrency’s Killer App
And much as it may be to the chagrin of those in the cryptocurrency community who would not want to see cryptocurrencies being used to facilitate criminal activities, already there has been a surge in both interest and application of the new technology from criminal and corrupt elements.
For starters, the rise of stablecoins such as USDT or Tether, USDC, and eventually Facebook’s Libra means that more and more point-of-sales (POS), as well as transaction nodes, will be geared to accept cryptocurrency.
And a POS or payment gateway configured to accept a stablecoin can just as easily be configured to accept any other cryptocurrency as well.
Because banks are an obvious weak link when it comes to money laundering, it makes sense for money launderers to seek out ways to circumvent banks and other financial intermediaries altogether.
Enter cryptocurrencies, in particular, Bitcoin and the host of stablecoins now rising in both popularity and acceptance.
To be sure, U.S. dollars in the form of cash has always been the defacto choice of criminal and corrupt forces across the globe.
The dollar’s global acceptance and anonymity have facilitated countless financial crimes.
But dollars come with their limitations.
For starters, the largest denomination is only US$100, making large scale transactions across borders cumbersome — carrying suitcases full of cash through airport security is not an option.
Then there’s the issue with opening a bank account and wire transfers.
Banks have acted, whether knowingly or unknowingly, as conduits for financial crimes for some time now. In recent times, public outrage has grown, after some of the biggest banks were discovered to have facilitated money laundering for drug cartels, terrorist organizations, and corrupt politicians, putting pressure on government agencies to do more to cut the criminals’ purse strings.
As a result, banks across the globe have had to beef up compliance departments and have collectively spent more on know-your-customer and anti-money-laundering measures then at any time before the financial crisis.
As banks and law enforcement have stepped up the pressure, the rise of cryptocurrencies became more an instrument of necessity rather than choice.
And when Dread Pirate Roberts (a.k.a. Ross Ulbricht) facilitated cross-border trade in weapons, illegal narcotics and banned pornography using Bitcoin, criminals really started to take notice of cryptocurrencies.
Ultimately, criminal elements will use whatever instruments are at their disposal to conduct their business.
Be it underground tunnels from Mexico to the United States to smuggle drugs, weapons and people or cryptocurrencies to facilitate global transactions, criminals have shown adaptability that ensures their continued survival.
Ultimately it’s not in the interest of criminals to store up mountains of cash in safehouses — the goal is to buy a new truck, a new house, to feed their families.
As stablecoins gain traction, what Bitcoin and earlier cryptocurrencies may not have been able to achieve — that is facilitating stable value transfer — stablecoins may be able to accomplish.
As more and more businesses go digital, digital currency, whether in the form of stablecoins or cryptocurrencies will enter mainstream circulation, making it that much easier for ne’er-do-wells to ply their trade.
And the lack of a concerted, global push to regulate cryptocurrency transactions means that cryptocurrencies can continue to be used by criminals with almost no consequence.
Even cryptocurrency exchanges regularly engage in regulatory arbitrage, moving their base of operations across borders at the first sign of trouble. These essentially digital entities are unlike physical setups and are therefore not anchored to any geographical location.
To be sure, the end goal of money laundering is not in the creation of taint-free cash, it is to employ that cash for whatever purposes one desires to achieve.
Whether it’s buying a superyacht or a supercar, a luxury home or even paying one’s employees, shell companies are only a means to an end.
And as regulatory pressure brings to bear on shell companies, money launderers will simply find other means to achieve their ends — cryptocurrencies are just another tool in their ever-growing toolkit.
Written by Patrick Tan for Medium for Altcoin Magazine
Patrick Tan is CEO of Novum Global Technologies, a cryptocurrency quantitative trading firm. Trading up to 100,000 times a day the way only an algorithm could.
