Reference no: EM133173394
Question - Mr. X deposited money earned from drug activities into Company A's account at offshore Bank L. Mr. X set up Company A in order to disguise his identity and to place his criminal funds under false pretenses.
Mr. X also held bearer shares issued by Company A., Mr. X. also established Company B in another offshore jurisdiction under the same circumstances.
Mr. X was shareholder of Company A and B but was not registered as such in the public registers. Mr. X made use of a local trust in each location and gave them power-of-attorney to act as his legal representative (through a trust and company service provider: TCSP).
The local trusts opened accounts at Bank L and at Bank DA on behalf of Company A and Company B respectively. The trusts explained to the banks that the companies that they represented were part of an international structure and that they wanted to benefit from favourable tax arrangements by means of intercompany loans. This was the reason given for frequent debits and credits of the accounts for incoming and outgoing foreign funds transfers.
Mr. X set up Company C in the European country where he is living. Mr. X is the owner of Company C; however, he uses a front man, Mr. Y, who is the owner and manager according to the public register at the Chamber of Commerce and the shareholder registered for Company C. Company C conducted legal counselling activities. This way Mr. X was able to monitor and control the activities in Company C without becoming known to the authorities. Mr. Y opened accounts on behalf of Company C with Bank EUR.
Mr. X used Companies A, B and C to set up a loan-back scheme in order to transfer, layer and integrate his criminal money. The criminal funds, initially placed in the account of Company A in a bank in an offshore jurisdiction, were ultimately invested into real estate in Europe. The real estate was used to expand his legal counselling activities in Company C. The setup of the international loan-back structure, involving Company A, B and C, complicated the audit trail, legitimated the international funds transfers between the various bank accounts of the companies that Mr. X controlled. Also, Mr. X co-mingled the criminal funds, disguised as a loan, with the funds originating from the legal activities of Company C, which made the criminal funds difficult to detect and to trace, thus involving a company with legitimate activities in the money laundering scheme, i.e., the integration phase (and avoiding attracting the attention of the authorities).
Mr. X arranged for Mr. Y to buy real estate. To finance the transaction, Mr. X arranged for a loan agreement to be drawn up between Companies B and C. The parties in the contract were the trust of Company B and Mr. Y of Company C.
To execute the cash disbursement under the loan, Mr. X ordered the trust of Company A to transfer funds from the account in Bank L to the account of Company B in Bank DA. Next, he ordered the trust of Company B to transfer funds from the account in Bank DA to the account of Company C in Bank EUR. The description given to Bank DA and Bank EUR referred to the loan agreement between Company B and C. Both banks did not know about the relationship between Companies B and C. The funds deposited in the account of Company C in Bank EUR were then transferred to the seller of the real estate.
Periodically Company C made payments of the principal and interest to Company B from the earnings of the counselling activities. Company B transferred the money to Company A which was used by Mr. X to finance his criminal activities. The interest costs were deducted from the taxable result and declared in the tax return.
Required - Answer the following questions
1. What are the red flags in this case?
2. How could the financial institutions involved in this case have done their due diligence better to determine there was an issue sooner?
3. How do the inter-company loans help legitimize the source of funds for the real estate purchases?
4. Is tax evasion taking place? Explain.