HSE University Anti-Corruption Portal
Topical Anti-Corruption Issues: Regulation of Enablers’ Activities
Natalia Gorbacheva

Given the growing attention to the oversight of the organisations that provide assistance in obtaining, concealing and enjoying illicit gains, we analyse the prospects of development of relevant regulations.

Who are the enablers?

The recent Pandora Papers investigation, among other things, drew the attention of the international community to the important role the enablers play in the movement of the flows of proceeds of corruption.

The publications in the English language call such “assistants” enablers. This term covers different natural and legal persons that provide assistance in transferring, enjoying or concealing assets, including ill-gotten gains*. The list of persons that can act as enablers is rather long. For instance, the Alliance for Securing Democracy identified the following categories of enablers in its recent report:

  • private equity and hedge funds, 
  • real estate title ensures (real estate title insurance means the protection from losing the ownership of real property),
  • art dealers,
  • lawyers,
  • trust and company service providers,
  • accountants,
  • covert PR and marketing firms,
  • real estate agents, escrow agents, and real estate lawyers,
  • luxury vehicle dealers,
  • crypto and other money services businesses.

The Pandora Papers investigation made particular stress on the wide use of such a category of enablers as trusts. The trust is a form of fiduciary management which implies that a person (founder) transfers his/her assets under the control of a fiduciary manager who administers them on his/her own behalf in line with the instructions of the founder in favour of the beneficiaries indicated by the latter.

The investigative journalists found out that in certain US states (primarily, in South Dakota, Delaware, Nevada and Wyoming) the regulation of trusts is so liberalized that it allows concealing billions of dollars, including ill-gotten gains, of the richest people from all over the world. In the United States, trusts constitute an especially attractive tool for concealing assets for a number of reasons, in particular: 1) a simplified establishment procedure does not require their registration as legal entities, which means that there are no open data about their activities and sometimes event about their existence; 2) the possibility for the founder to be simultaneously its beneficiary and even its fiduciary manager; 3) here, trusts are covered by the charging order which is one of the strongest legal remedies protecting from the claims of former spouses, business partners, creditors, contentious clients and almost any other categories of “outsiders”.

Moreover, the Pandora Papers unmasked the use of major legal firms such as Baker McKenzie as enablers that provide assistance to their clients in moving their assets to the offshore zones also by establishing shell companies.

These examples show that enablers are not only invisible small firms from third-world countries, but also companies, including big ones, in developed countries with such cases being rather frequent. This is proven by research findings: for example, the authors of the Financial Secrecy Index which we have already written about stressed that contrary to a common misconception illicit assets are more often hidden in the biggest and richest countries (including the United States, the United Kingdom, Switzerland and others) with the assistance of their financial systems rather than in small paradise islands.

How are the enablers’ activities regulated?

The need to regulate the enablers’ activities is not totally new to the international community: this topic is covered by a number of analytical materials published by international organisations (see, for instance, the 2011 Stolen Asset Recovery (StAR) publication or the 2018 FATF report), the mechanisms for overseeing these actors are being introduced all over the world.

Generally, such regulatory measures are implemented to counter money laundering. Originally, they implied control only over financial institutions, but gradually covered also other organisations.

At present, the requirements applied to the enablers in the anti-money laundering area are based primarily on the FATF Recommendations that provide for the following: 

  1. The need to disclose corporate beneficial ownership information (Recommendations 24 and 25),
  2. The obligation of financial institutions and certain categories of non-financial businesses and professions (casinos, real estate agents, dealers in precious metals and stones, lawyers, notaries, other independent legal professionals and accountants, trust and company service providers) to conduct customer due diligence (Recommendations 10 and 22 respectively),
  3. The obligation to report suspicious transactions to the financial intelligence unit (Recommendation 23).

The High Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda (FACTI Panel) also points to the need for introducing regulatory measures with respect to a wide range of enablers. In its final report summarizing the findings of the work conducted in 2020 the FACTI Panel recommended, in particular, that global standards/guidelines for financial, legal, accounting and other relevant professionals are developed and adapted into appropriate national regulation (Recommendation 6).

The first wave of laws on the registration of beneficial owners started in the EU countries, where the EU member States were obliged to establish beneficial ownership registries for legal persons registered in the EU and the trusts managed in the EU and having tax implications in line with the fourth Directive on preventing abuse of the financial system for money laundering and terrorism purposes. According to the FACTI Panel, by April 2020 the number of countries that had built relevant legal frameworks had jumped to more than 80. By now, their number had further increased: in early 2021 the Corporate Transparency Act (CTA) was adopted by the United States.

As for customer due diligence and reporting of suspicious transactions, the relevant provisions applicable to a wide range of enablers are already incorporated in the legislation of a number of countries.

For example, the Republic of Lithuania Law on the Prevention of Money Laundering and Terrorist Financing stipulates that financial institutions and “other obliged entities” must conduct customer due diligence and report suspicious transactions to the Financial Crime Investigation Service. These institutions and entities are: 

  • auditors engaged in audit activities in a self-employed capacity or audit firms,
  • judicial officers and judicial officer’s agents,
  • undertakings providing accounting or tax advisory services and persons providing such services in a self-employed capacity,
  • notaries, notary’s agents and persons entitled to perform notarial actions, as well as advocates and advocates’ assistants, whether by acting on behalf of and for their client or by assisting in the planning or execution of transactions for their client concerning the purchase or sale of immovable property or undertakings, management of client money, securities or other assets, opening or management of bank or securities accounts, organisation of contributions necessary for the establishment, operation or management of legal persons and other organisations, emergence or creation and operation or management of trust or company incorporation and administration service providers and/or related transactions,
  • other providers of trust or company incorporation or administration services,
  • persons engaged in economic and commercial activities involving trade in precious stones, precious metals, movable cultural goods, antiques or any other property the value whereof is equal to or exceeds EUR 10,000, or an equivalent amount in foreign currency, irrespective of whether the transaction is carried out in a single operation or in several operations which are linked, provided that payments are made in cash,
  • gaming companies and lottery companies,
  • closed-ended investment companies,
  • estate agents/brokers, whether by acting on behalf of and for their client or by assisting in the execution of transactions for their client concerning the purchase or sale of immovable property and/or related transactions.

The Law on the Fight against Money Laundering and Terrorist Financing of Cambodia updated in 2020 now also provides for the need to conduct customer due diligence and report suspicious transactions by a wide range of persons and organisations, including financial institutions, banks, insurance companies, brokerage firms, credit cooperatives, exchange offices, microfinance institutions, leasing companies, real estate agents, mutual funds and companies managing assets, money transfer providers, jewelry dealers, post offices conducting transactions, notaries, lawyers, accountants, auditors, investment consultants, casinos etc.

However, some experts stress that not all countries have fully implemented the relevant FATF recommendations (for example, such important categories of enablers as lawyers in Denmark, and real estate agents in Singapore are not covered by the relevant legislation), whereas some countries (the United States, Australia, Canada, China) refused from the very beginning to comply with the recommendation.

Today, after the United States had been exposed as a major safe haven for assets gained also from illicit activities, the stance of the country on the need for taking into account the FATF recommendations appears to have changed. In particular, the Establishing New Authorities for Business Laundering and Enabling Risks to Security (Enablers) Act has been proposed. The draft provides for the extension of the requirements for financial institutions to conduct customer due diligence and report suspicious transactions to FinCEN under the Bank Secrecy Act (BSA) to other categories of persons and organisations, in particular, to:

  • a person engaged in the business of providing investment advice,
  • a person engaged in the trade in works of art and antiques,
  • an attorney, law firm, or notary involved in financial activity or related administrative activity on behalf of another person,
  • a trust or company service provider or a person involved in providing a registered office or address,
  • a certified accountant,
  • a person engaged in the business of public relations,
  • a person engaged in the business of providing third-party payment services, including payment processing, check consolidation, cash vault services.

However, despite the development of the regulations on enablers and their gradual expansion on a growing range of organisations, it should be highlighted that the relevant legal requirements constitute a mere formality. This is true even for the financial institutions in spite of the fact that anti-money laundering was initiated with the control over the activities of their clients. As a result, the measures that are being adopted are insufficient as regards the fight against illicit financial flows, including proceeds of corruption.

These are the conclusions made, in particular, by a research team led by Jason Sharman in their Global Shell Games series publications (with “shell” meaning shell companies here). Introducing themselves as potential clients that would like to establish a (use an existing) anonymous company, the authors contacted almost 4,000 enablers in over 180 countries with the aim to find out how easy it was to create an organisation, whose real beneficial owners would be difficult to trace, and how carefully the relevant enablers conducted their customers’ due diligence. The study showed that in reality the persons providing support in establishing shell companies barely followed the existing rules providing for the obligation to collect documents that allow identifying their clients and unveiling their potential dishonesty. Almost a half of all responses (48%) did not contain all the necessary requirements that would have allowed verifying the identity of the person wishing to set up an anonymous company, while 22% of enablers did not ask any identity documents at all.

* At the same time, in our opinion the notion of enablers can be interpreted in a broader manner and encompass not only the natural and legal persons that help move, enjoy and conceal illicit assets, but also the companies that allow implementing initial criminal schemes in the course of which the indicated assets are gained. For instance, one of the enablers that gained international notoriety by providing assistance in paying illegal remuneration to public officials was Unaoil which we have already written about: although it described itself as a “consultancy company specialising in the energy sector in the Middle East, Central Asia and Africa” all its activities actually consisted in facilitating bribery of officials in the abovementioned regions on behalf of the organisations that wanted to win them over or conclude lucrative public contracts.

Illicit enrichment

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