EUropa.S. 2019
April 19th – 22nd| University of Piraeus
Organized by: Institute of Research & Training on European Affairs
EUropa.S. 2019 Council of the European Union
Study Guide Topic: Countering Shell Corporations; Money Laundering and Terrorist Financing
EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide
Table of Contents
Table of Contents _____________________________________________________ 2 Greeting of the Board __________________________________________________ 3 Introduction to Council of the European Union ______________________________ 4 Introduction of the Topic _______________________________________________ 5 Legal Framework ______________________________________________________ 6 Shell Companies ______________________________________________________ 6 Anonymous Shell Corporations __________________________________________ 8 How do Shell Companies work? ________________________________________ 8 The problem with shell companies ______________________________________ 9 Money Laundering Schemes ____________________________________________ 10 What is it? ________________________________________________________ 10 How does money laundering works? ___________________________________ 10 Vectors and Strategies ______________________________________________ 12 Electronic Money Laundering _________________________________________ 13 Panama Papers ______________________________________________________ 14 Tax havens ________________________________________________________ 14 Terrorism___________________________________________________________ 15 Conclusions _________________________________________________________ 17 Questions Raised_____________________________________________________ 18 Bibliography ________________________________________________________ 18 Useful Links _________________________________________________________ 20
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EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide
Greeting of the Board Dear Ministers, We would like to welcome you to EUropa.S. 2019 and specifically to the Economic and Financial Affairs Council (ECOFIN). EUropa.S. is the most prestigious European Simulation in Greece, and we are confident that this year’s edition will be the most successful until now. The document you are about to read is a product of thorough research from our part, thus we hope you will use it as a helpful study guide upon which you will base you further research. This year’s topicis a very intriguing one, as it consists of two interesting pillars. The topic consists of two main aspects, shell corporations and money laundering. Both of them are “up to speed” with today’s white-collar crimes and terrorism funding, which is one of the most important dangers, taking into consideration the various terrorist groups, which are active all around the globe. Thereafter, the matter under discussion is more than demanding, consequently, we hope that you will all be well prepared, full of break-through ideas and concrete proposals. To this view, we believe that the document at hand shall be a great starting point, which will assist you to understand both the function of shell corporations and money laundering as well as how they can be used in order to fund terrorist groups. We would like to thank you for choosing ECOFIN and we hope to contribute as much as possible in order to make this experience a memorable one for all of you. Diplomatic courtesy and respect shall be the most important assets both during and prior to the conference. As a last remark, should you have any queries, do not hesitate to contact us; we remain at your disposal at any time during the days leading up to the conference. We are looking forward to meeting you! Kind regards, The Board of ECOFIN
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EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide
Introduction to Council of the European Union The Council of the European Union- also known as EU Council or Counsilium, is one of the principal institutions of the European Union, as listed in the Treaty on the EU. Among its responsibilities, one may find negotiation and adoption of the European Union’s law and budget, the coordination among member states in terms of fiscal, economical, educational, cultural and employment policies as well as the conduction of international agreements over the aforementioned areas. The headquarters of the Council are located in Brussels, where Ministers or State Secretaries of each one of the 28 Member States attend the Council’s meetings1. As mentioned in Article 16§ of the Treaty onthe EU2“The Council shall meet in different configurations”, meaning that although legally the Council is a single entity, it is divided and meets in ten different “configurations” depending on the different functional area under discussion. The Council has a rotating presidency, which means that every six months the presidency rotates among the 28 Member States. During EUropa.S., we will be simulating one of the ten above mentioned configurations of the Council of the European Union, the Economic and Financial Affairs Council (ECOFIN), which is comprised of the 28 economics and finance Ministers of the European Union’s Member-States. At this point, it is essential to dissociate the ECOFIN from the Eurogroup. The latter is an informal body, under the auspices of which the ministers from the euro area Member-States discuss matters relating to their countries’ common responsibilities as far as the euro is concerned3.
1
European Union. 2018. Council of the European Union - European Union - European Commission. [Online] Available at: https://europa.eu/european-union/about-eu/institutions-bodies/council-eu_en [Accessed 29 Nov. 2018]. 2 Lisbon-treaty.org. 2018. Article 16. [Online] Available at: http://www.lisbon-treaty.org/wcm/thelisbon-treaty/treaty-on-european-union-and-comments/title-3-provisions-on-the-institutions/87article-16.html [Accessed 29 Nov. 2018]. 3 Consilium.europa.eu. 2018. The presidency of the Council of the EU - Consilium. [Online] Available at: https://www.consilium.europa.eu/en/council-eu/presidency-council-eu/ [Accessed 29 Nov. 2018]. EUropa.S. 2019, April19th-22nd, Athens, Greece europas.irtea@gmail.com | www.europas.irtea.gr Page 4
EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide
Introduction of the Topic The term “money laundering” is often used to describe the activity that seeks to hide the origin and ownership of assets. The most important application of money laundering is the concealment of illegal profit and its reintroduction to the economy. The purpose of these tactics is to disguise those profits’ source and reinvest them. Mainly, money laundering takes place through the establishment of shell corporations, companies that lack real economic activity. Actually, those companies have commonly no employees, no (or little) production and no physical presence. As it can be easily understood, there are no reliable data concerning shell companies, making their transactions in many cases untraceable. The three main types of shell companies are the anonymous shell company, the “letterbox” company and the special purpose entity4. A typical money laundering scheme is, basically, a three-step process. The Placement stage, when income, that has its origin to an illegal act, starts being part of the financial system. The Layering stage, during which the origin and the owner of the assets remain hidden and the Integration stage, which signals the re-introduction of the “laundered” assets back into the economy. Furthermore, bearing in mind the impact that computers have on our lives the last decades, the binary code has conquered economic transactions. A never seen before speed in money transferring has made money laundering easier, increasing the vulnerability of the system and thus making it less transparent5. Terrorist financing is another severe aspect of money laundering. Undoubtedly, terrorist networks need funds in order to function and the EU has taken measures to tackle both money laundering and the financing of terror. Nowadays, terrorists have developed in international “influencers”, posing a serious threat in the whole world.
4
Chong, A. and Lopez de Silanez, F.March. 2015. Money Laundering and its regulation. Economics and Politics, Vol. 27 (1), pp. 78-123 5 Barone, R. and Masciandro, D. 2011, Organized Crime, money laundering and legal economy: Theory and Simulations, European Journal of Law and Economics, vol. 32 (1), pp. 115-142 EUropa.S. 2019, April19th-22nd, Athens, Greece europas.irtea@gmail.com | www.europas.irtea.gr Page 5
EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide
Legal Framework Inefficient detection systems and their exploitation by criminals gave birth to the severe issue of money laundering in Europe. Despite the lack of an adequate framework the last decades, the European Union has adopted a series of policy developments that reflect its commitment to tackle the problem. The most important ones are the 5th Anti-Money Laundering Directive, the EU list of tax havens, the Cash Control Regulation, the Regulation (2015/847) on Information Accompanying Transfers of Funds and the Commission’s Supranational Risk Assessment Report and Delegated Regulation 1675/2016, which identified identifying third countries presenting strategic deficiencies in their regime on antimoney laundering and countering terrorist financing6. All of the aforementioned documents are essential for EU’s fight against money laundering and terrorist financing and their importance is going to be analyzed in the following chapters.
Shell Companies Shell companies are not necessarily illegal. On the contrary, the use of shell corporations can have legitimate purposes. For instance, those companies are used to hold personal or family assets in order to make inheritance easier. Also, large companies and brands often establish a shell company aiming to hide their identity when purchasing land or property to avoid high price exploitation by the owner. Lastly, shell companies, in general, facilitate businesses; especially when it comes to Foreign Direct Investment, mergers and acquisitions, joint ventures or estate planning. Despite all the aforementioned legitimate purposes, shell companies are often created to act as a vehicle for tax evasion (not paying taxes), tax avoidance (use of legal methods to modify an individual's financial situation in order to lower the amount of income tax owed), money laundering and other financial crimes. To make long story short, shell corporations do not pose a risk just because of what they are or only by their existence. However, the combination of shell companies with other elements, such as poor transparency during transactions or tax agreements, may lead to the concealment of the origin of assets and their re-introduction back into
6
EC-Europa.eu, Anti-money laundering and counter terrorist financing [Online], Available at: https://ec.europa.eu/info/policies/justice-and-fundamental-rights/criminal-justice/anti-moneylaundering-and-counter-terrorist-financing_en, [Accessed 11 December 2018]. EUropa.S. 2019, April19th-22nd, Athens, Greece europas.irtea@gmail.com | www.europas.irtea.gr Page 6
EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide the economy (Integration). Those violations have not only economic, but also political and social impact, thus they create a serious threat for the Union 7. There are three identified by the EU risks that surround shell companies. The first and most important risk that makes shell corporations so popular is the anonymity. This element provides security to the owner and, at the same time, control over the shell company and its assets. Thus, the identity of the owner remains hidden from the law enforcement and the public. These owners are known as “beneficial owners”. Furthermore, the second category of identified risks is associated with treaty abuse. Illegal shell companies are used to abuse international tax and investment treaties. Simply, those shell companies are established in countries with favorable tax treaties, which leads to the exploitation of tax rules and tax avoidance. Lastly, risks associated with the circumvention of the Posting of Workers Directive are also vital, since many shell companies are used to exploit undeclared social work and avoid security contributions8. The use of shell companies alongside those risks can lead to corruption and tax evasion9.
7
Ivana Kiendl Krišto and Elodie Thirion. 2018. An overview of shell companies in the European Union, European Parliamentary Research Service [Online], Available at: http://www.europarl.europa.eu/cmsdata/155724/EPRS_STUD_627129, [Accessed 27 November 2018] 8 EUR-Lex, DIRECTIVE 96/71/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 December 1996 concerning the posting of workers in the framework of the provision of services [Online], Available at: https://eur-lex.europa.eu/legal-content/en/ALL/?uri=CELEX%3A31996L0071, [Accessed 25 November 2018]. 9 Ivana Kiendl Krišto and Elodie Thirion. 2018. An overview of shell companies in the European Union, European Parliamentary Research Service [Online], Available at: http://www.europarl.europa.eu/cmsdata/155724/EPRS_STUD_627129, [Accessed 27 November 2018] EUropa.S. 2019, April19th-22nd, Athens, Greece europas.irtea@gmail.com | www.europas.irtea.gr Page 7
EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide
European Parliamentary Research Service, 2018. An overview of shell companies in the European Union.
Anonymous Shell Corporations An anonymous shell corporation is an entity that disguises its ownership in order to operate without any monitoring by any public or law enforcement agency. They enable their powerful network of connections in order to disguise themselves from tax authorities or other interested parties and they often hide in plain sight inside larger business complexes incorporated in a variety of jurisdictions. These companies have the ability to open bank accounts and wire money like every single company, making them an excellent tool for illegal activities by i.e. money launderers10.
How do Shell Companies work? In contrast to a common company, which lists the names and phone numbers ofits executives, board of directors and members of the staff in official documents or on the company’s website, an anonymous shell company tries to hide and mislead the public from finding out that is running and operating the company. These companies do not create websites and they are trying to create the least possible paper trail. The necessary documentation that is filled during the creation of this company is usually the only public evidence that the company actually exists and the provided 10
Council on Foreign Relations. 2018. How Anonymous Shell Companies Finance Insurgents, Criminals, and Dictators. [Online] Available at: https://www.cfr.org/report/how-anonymous-shell-companiesfinance-insurgents-criminals-and-dictators [Accessed 29 Nov. 2018]. EUropa.S. 2019, April19th-22nd, Athens, Greece europas.irtea@gmail.com | www.europas.irtea.gr Page 8
EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide information is not sufficient to trace back the individuals who control the newly created company. However, in the case that the information is sufficient, is misleading and any research done will lead to a “dead end”. Anonymous shell companies can present “nominee” shareholders or board members with no actual relation to the real owner. That could be a distant relative, a law firm, a lawyer, or even individuals whose job is to allow such companies to fill forms with their names. In order to create more chaos and mislead, these companies can list other anonymous shell companies or trust funds in order to make it even more difficult for the authorities to find the actual owner. The names of the true owners and the people who control the company are usually unknown for anyone outside the company except a law firm and possibly an advisor. Once the creation of the anonymous shell company is completed, the company conducts little to no actual business. It exists and functions just on paper, and the only activity of the company is opening bank accounts and owning assets without providing information about who is benefited by those activities. Beneficial owner is the term that defined the actual individuals or entities who own or control a company, even if in between the company and the actual owners, many other layers of individuals and companies are listed. Anonymous shell companies are easily created almost anywhere in the world and the misconception of such a company created only in tax heaven countries is far from the reality.
The problem with shell companies Anonymous shell companies are enabling the creation and facilitation of criminal networks by assisting them to launder money through the international financial system. There are numerous examples such as the blacklisting of thirty-three companies and individuals by the US Government after the publication of the Panama Papers11.
11
Global Financial Integrity. 2018. Anonymous Companies « Global Financial Integrity. [Online] Available at: https://www.gfintegrity.org/issue/anonymous-companies/ [Accessed 29 Nov. 2018]. EUropa.S. 2019, April19th-22nd, Athens, Greece europas.irtea@gmail.com | www.europas.irtea.gr Page 9
EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide
Money Laundering Schemes What is it? "Money laundering is the process of creating the appearance that large amounts of money obtained from criminal activity, such as drug trafficking or terrorist activity, originated from a legitimate source. The money from the illicit activity is considered dirty, and the process "launders" the money to make it look clean"12.
How does money laundering works? Money laundering is crucial for any criminal organization that is willing to use illegally obtained money in an effective and efficient way. Making transactions of large amounts of illegal cash is both inefficient and dangerous. The criminal organizations need a way to deposit the money in financial institutions. However, the only way for this to be achieved is by finding a way to make the money appear legal and coming from a legitimate source. The process of money laundering is a three-step procedure. The laundered money is considered clean after the completion of the whole process. 1. Placement The first step of the process is to place the illegal money into the financial system. The risk of detection is great during this part of the process due to the strict reporting requirements considering large deposits of money and due to the questions that may arise from the monitoring authorities when large amounts of money appear from no legitimate source. Furthermore, the risk becomes even higher taking into consideration that banks are obligedto keep records or issue reports when there is a suspicion of illegal activity, such as unusually large cash deposits. Taking the above into consideration, the only way to complete this step effectively is to deposit illegal money through a lot of small bank deposits over time, usually in a variety of different accounts. This technique is called “smurfing”13. 2. Layering Once the money is effectively deposited, the money is layered and shifted through a large amount of transactions with the purpose of confusing and complicating the paper trail and therefore, to harden the potential research conducted by the 12
Staff, I. 2018. Money Laundering. [Online] Investopedia. Available https://www.investopedia.com/terms/m/moneylaundering.asp [Accessed 29 Nov. 2018]. 13 Ibid
at:
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EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide authorities. Layering involves a variety of complex financial maneuvers in order to divide the initial placement. The most common layering tactics are: a.
Wire transfers between bank accounts, with different account holders, from different banks and different countries
b.
Transactions with shell companies
c.
Large purchases of securities and commodities
d.
Real estate purchases
The larger the amount of the money from the placement phase, the more complex and varied the financial maneuvers will be. 3. Integration During the last phase, integration, the laundered money become legally available. Since the transactions are mostly legal, this step is characterized as low-risk. Integration can be achieved through: a.
Sales or transfer of expensive items with laundered money
b.
Sales or transfer of real estate with laundered money
c.
Purchases of financial instruments in the launderer’s name
d.
Legal transactions with legal entities by the launderer and his network of associates14
Example:
14
Promotions, B., Accounts, F., Cards, C., Cards, C., Cards, L., Cards, T., Cards, H., Cards, G., Cards, S., Cards, B., Cards, S., Us, A. and Us, W. 2018. What Is Money Laundering (Explained) - Examples, Schemes & Regulations. [Online] Moneycrashers.com. Available at: https://www.moneycrashers.com/money-laundering-examples-schemes-regulations/ [Accessed 29 Nov. 2018]. EUropa.S. 2019, April19th-22nd, Athens, Greece europas.irtea@gmail.com | www.europas.irtea.gr Page 11
EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide
Vectors and Strategies 1. Casinos The use of gambling venues such as casinos is one of the easiest ways to clean illicit money. The launderer walks into the venue and converts the funds into chips. Then the only thing he has to do is to hold on those chips for a small period of days, when he may or may not actually gamble and after this period elapses, he cashes out the chips and returns the money clean and ready to use to the owner. In more complex operations, the same procedure may undergo simultaneously in different casinos of the same or different countries. 2. Cash smuggling The oldest way to move money and use them is the traditional suitcase. In recent years this old way was vastly supported due to the success of anti-laundering measures adopted by the banks. This way of moving money is the simplest because the money is transferred physically with no use of the banking network. However, the laundering becomes difficult because there is no mechanism to legalize it and use it for large purchases. 3. Life insurance policies Life insurance policies are one of the most lightly regulated financial instruments, making it ideal for criminal organizations to launder money. In a typical situation of money laundering via life insurance policies, the launderer purchases the most expensive life insurance signed to his name or to the name of one of his associates as the one to be benefited by it. The launderer holds the life insurance policy for a period of time and then he decides to cash out the value of the policy, receiving the money back clean. 4. Securities The most common security-based money laundering scheme is to buy and sell a stock option simultaneously. The value of these transactions will be equal and in this way the money launderer drops into the financial system illicit funds and receives the same amount back to use as suited.
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EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide 5. Real Estate The real estate industry is another sector with little surveillance, making it suitable for money launderers to conduct their activities. A shell corporation, anonymous or not, holds corporate entities and assets, and conceals the source of the funds. Due to the high value of assets involved, the launderers are able to purify large amounts faster leaving no visual trail behind them. 6. Currency Exchange Bureaus Currency Exchange Bureaus are also slightly regulated, making it ideal for money launderers. Large amounts of cash are cashed in and out and combined with the different currencies and values, these bureaus are haven for the launderers. However, the exchange fees are often high, reaching 8%, making it a downside for money laundering. That makes this way of laundering less than ideal but it is at the same time a small price to pay, taking into consideration the relative low risk of the transactions15.
Electronic Money Laundering Although the traditional methods to launder money are still in use, the use of technology has made a huge leap including this sector. The use of the internet has put a new spin in the old-fashioned crime. Nowadays money launderers can, with great ease, avoid detection simply by using an electronic device with internet connection. The huge widespread of online platforms supported by the banking institutions, anonymous online payment services, peer-to-peer transfers and virtual currencies have resulted into an environment where money laundering is even more difficult to be detected by the authorities. By the use of proxy servers and anonymizing software, the IP address of the user is nearly impossible to detect. The main way of electronic money laundering is paved by the use of cryptocurrencies. While they are not offering complete anonymity, these kinds of currencies are used for a wide variety of crimes, money laundering included, because they leave the least possible trail to detect.
15
Promotions, B., Accounts,F., Cards, C., Cards, C., Cards, L., Cards, T., Cards, H., Cards, G., Cards, S., Cards, B., Cards, S., Us, A. and Us, W. 2018. What Is Money Laundering (Explained) - Examples, Schemes & Regulations. [Online] Moneycrashers.com. Available at: https://www.moneycrashers.com/money-laundering-examples-schemes-regulations/ [Accessed 29 Nov. 2018]. EUropa.S. 2019, April19th-22nd, Athens, Greece europas.irtea@gmail.com | www.europas.irtea.gr Page 13
EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide Illegal money can also be laundered through online sales and auctions, virtual gaming and online gamble sites, where the illegal money is converted into the currency of the site and then cashed out to clean usable money16.
Panama Papers In 2015, 11.5 million documents were leaked that included financial and attorneyclient information concerning more than 214,488 offshore companies. Some documents were dating back in the 1970s. They were retrieved by an anonymous source from Mossack Fonseca, a law firm based in Panama, which also provided corporate services. The source contacted Süddeutsche Zeitung, a German newspaper, which published the documents that contained personal financial information for wealthy individuals and politicians. Massack Fonseca is the world’s fourth biggest offshore law firm and the Panama papers are the biggest leak in history. The importance of the documents lies in the fact that they reveal the ease of the rich to exploit offshore tax regimes. Mossack Fonseca’s services included incorporating companies in offshore tax havens for a yearly fee, alongside wealth management. It has acted for more than 300,000 companies as well as for many wealthy individuals. The leaked documents contained data for twelve national leaders amongst 143 politicians and their families. More specifically, Vladimir Putin has been linked with a 2 billion dollars scheme, while Pakistan’s Prime Minister, Nawaz Sharif, former vicepresident of Iraq, Ayad Allawi, Ukraine’s President, Petro Poroshenko and Iceland’s Prime Minister, Sigmundur Gunnlaugsson have all been found with offshore wealth17.
Tax havens As it has been made clear, tax havens are usually exploited during money laundering schemes. A country is considered as a tax haven when it offers minimum tax liability on foreign individuals or businesses. Tax havens have been widely used since the 1930s, providing opportunities for tax avoidance. On December 5 th 2017, EU Member-States agreed on the first non-cooperative tax jurisdictions. Such a common list in the EU is essential because it reflects the risk that a third party country presents in relation to money laundering. 16
Staff, I. 2018. Money Laundering. [Online] Investopedia. Available at: https://www.investopedia.com/terms/m/moneylaundering.asp [Accessed 29 Nov. 2018]. 17 Luke Harding, What are the Panama Papers? A guide to history’s biggest leak, The Guardian [Online] Available at: https://www.theguardian.com/news/2016/apr/03/what-you-need-to-know-about-thepanama-papers [Accessed 28 November 2018] EUropa.S. 2019, April19th-22nd, Athens, Greece europas.irtea@gmail.com | www.europas.irtea.gr Page 14
EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide Tax avoidance a priori is not illegal, but tax havens alsoprovide opportunities for other illegal and criminal activities, such as money laundering. The criteria that were set are related to the three main aspects for tax: a. Transparency as far as information sharing is concerned, through compliance with the international standards on automatic exchange of information (AEOI) and exchange of information on request (EOIR); b. Fair tax competition, based on the Code of Conduct principles or the OECD's Forum on Harmful Tax Practices; c. Implementation of the Base Erosion and Profit Shifting (BEPS) action plan, which refers to tax avoidance practices through exploitation of gaps and mismatches in tax rules, aiming to transfer profits to low or even no-tax locations. At the moment, third countries that refused to engage with the EU and are part of the EU list of non-cooperative tax jurisdictions are American Samoa, Guam, Samoa, Trinidad and Tobago and US Virgin Islands. The listing follows a three +1 steps process, according to the criteria that were agreed upon by the Member States at the November 2016 ECOFIN meeting. Firstly, the Commission reviews third countries’ risk level (Selecting stage), which is followed by the assessment of their tax systems by the Member States, through dialogue (Screening). The result leads to the third step (Listing), which indicates third countries that do not commit to address the identified problems. Lastly, there is a continuous review of all jurisdictions with at least one update of the list per year (Monitoring)18.
Terrorism Since 2015, Europe has been a target for terrorist attacks multiple times. Only in 2017, the number of failed or completed terrorist attacks reached 205, with 1219 people arrested for terrorist offences. Those attacks underlined the need for further actions to mitigate terrorist financing and money laundering. During 2015, both the Council of the EU and the European Council (EC) highlighted the importance of strengthening the existing EU rules. A few months later, the European Commission came up with a proposal to amend the fifth Anti-Money Laundering Directive and at the end of 2017 the Council and the Parliament agreed on the content of the 18
Cecile Remeur, 2018, Listing of tax havens by the EU, European Parliament [Online], Available at: http://www.europarl.europa.eu/cmsdata/147404/7%20-%2001%20EPRS-Briefing-621872-Listing-taxhavens-by-the-EU-FINAL.PDF [Accessed 28 November 2018]
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EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide proposal. The objective of the new rules is, firstly, to eliminate the use of the Union’s financial system for the funding of criminal activities and, secondly, to enhance transparency to prevent the large-scale concealment of funds. A terrorist organization needs funds in order to operate needs funds. Thus, a major component of the EU’s policy in the fight against terrorism is countering its financing. Through examination of transactions, investigators can not only locate the identity of terrorists and their location before a terrorist act, but also reveal their financial bonds. This gives the opportunity to trackdown and disrupt entire terrorist networks19. As mentioned above, the EU has adopted a wide range of measures in order to prevent terrorist financing. Alongside the amendment of the anti-money laundering Directive20, the Cash Control Regulation requires the disclosure of cash that exceed 10.000€ eitherwhen they enter or when they leave the EU. In addition, in order to achieve transparency when it comes to transferring funds, the Regulation (2015/847) on Information Accompanying Transfers of Funds21 was adopted in 2015, offering a helping hand to the authorities to track criminals and terrorists, according to the 2012 Recommendations of the Financial Action Task Force (FATF). Furthermore, on June 2017, the Supranational Risk Assessment Report was published by the Commission, examining the vulnerability of financial products and services to risks of money laundering and terrorist financing on all relevant areas within the EU. Also, the Commission identified third countries with clear strategic deficiencies concerning money laundering and terrorist financing. The regimes that were listed are Afghanistan, Bosnia and Herzegovina, Guyana, Iraq, Lao PDR, Syria, Uganda, Vanuatu, Yemen, Iran, and Democratic People's Republic of Korea, with following amendments adding Ethiopia, Sri Lanka, Trinidad and Tobago, Tunisia and Pakistan. The Commission is a member of FATF having an important role,
19
Consilium-Europa.eu, EU Fight against terrorism [Online], Available at: https://www.consilium.europa.eu/policies/fight-against-terrorism.aspx/?lang=en [Accessed 27 November 2018]. 20 EUR-Lex, DIRECTIVE (EU) 2018/843 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU [Online], Available at: https://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX%3A32018L0843,[ Accessed 28 November 2018] 21 EUR-Lex, Regulation on information accompanying transfers of funds and repealing Regulation [Online], Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32015R0847, [Accessed 28 November 2018] EUropa.S. 2019, April19th-22nd, Athens, Greece europas.irtea@gmail.com | www.europas.irtea.gr Page 16
EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide contributing to its work and ensuring the enforcement of its Recommendations within the EU. 22 In general, terrorism, besides causing life losses, injuries and fear, has a tremendous economic effect. Economic growth in Europe has been heavily affected by terrorism. Member States have lost more than 180€ billion in GDP terms between 2004 and 2016. The UK, France, Spain and Germany were the countries that suffered the most, losing 43.7€, 43€, 40.8€ and 19.2€ billions respectively. 23
Conclusions Money laundering thrives through shell corporations. In fact, the rise of technology has made money laundering a crucial issue for the European Union that needs to be tackled immediately. As it is being easily understood, typical money laundering schemes are difficult to be detected. At the same time, illegal profits are reintroduced in the economy of the EU, with their origin hidden, or they end up at the hands of terrorists, drug cartels and other criminal organizations. “On the bright side”, shell companies may just be used as a vehicle for tax evasion and tax avoidance, through the exploitation of tax havens and international tax agreements. Worldwide there is a continuous effort that is taking place, which started because of the Panama Papers, to combat the issue, with many initiatives and Directives already in effect.
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Council of the European Union-Consilium, 2018, Fight against money laundering and terrorist financing [Online], Available at: https://www.consilium.europa.eu/en/policies/fight-againstterrorism/fight-against-terrorist-financing [Accessed 28 November 2018] 23 Rand Europe, 2018, The cost of terrorism in Europe [Online], Available at: https://www.rand.org/randeurope/research/projects/the-cost-of-terrorism-in-europe.html [Accessed 28 November 2018] EUropa.S. 2019, April19th-22nd, Athens, Greece europas.irtea@gmail.com | www.europas.irtea.gr Page 17
EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide
Questions Raised 1. What measures can be taken from the Member-States in order to minimize the creation of anonymous shell companies? 2. What further measures can the financial institutions take in collaboration with the Member-States in order to minimize money laundering through the financial sector? 3. How can Member-States minimize the funding of terrorist organizations through anonymous shell corporations and money laundering schemes? 4. How can governments track money laundering schemes? 5. Should shell companies be rendered completely illegal? 6. Since the Panama Papers revealed investment services offered by law firms, what type of control can be applied to them? What measures can the EU take in order to tackle those activities?
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EUropa.S. 2019 Council of the European Union, “Countering Shell Corporations; Money Laundering and Terrorist Financing“ Study Guide
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