Shell Companies…Facilitation Tool for Money Laundering and Terrorist Financing

By Dennis Lormel

In January 2007, I was contacted by Elizabeth MacDonald from Forbes magazine concerning an article she was researching. Elizabeth inquired if I was aware of any terrorist financing cases that involved use of domestic shell companies. Unfortunately, without hesitation, the answer was yes. The most notable case was the Hezbollah cigarette smuggling case known as Operation Smokescreen in North Carolina in the late 1990s. The example I provided to MacDonald was from an ongoing FBI investigation. The case focused on a variety of bank frauds, to include mortgage fraud. The investigation centered on Shawqi Omar, who was arrested in Iraq in 2004. Shawqi Omar was a lieutenant to Abu Musab al-Zarqawi. Five of Omar’s relatives, including two of his brothers Sharif and Bassam, were subsequently indicted and arrested in 2006 for perpetrating a series of bank fraud and money laundering schemes. Shell companies were used to facilitate the crimes. Proceeds from the frauds were laundered from the United States to Jordan. From Jordan, it was alleged that funds were withdrawn in cash and couriered to Iraq to Shawqi Omar.

The above two cases represent troubling symptoms of an area of significant systemic vulnerability to the financial system in the United States. By virtue of offering ownership anonymity and lacking transparency, shell companies afford criminals, money launderers and terrorist financiers a mechanism to exploit the financial system and operate without impunity.

According to FinCEN, the term “shell company” refers to non-publicly traded corporations, limited liability companies (LLCs), and trusts that typically have no physical presence (other than a mailing address) and generate little to no independent economic value. In April 2006, the Government Accountability Office (GAO) published a report on company formations which sited the proliferation of shell company formations and the critical lack of ownership information or transparency. In November 2006, FinCEN issued guidance about the potential money laundering risks related to shell companies.

In assessing the situation, the root causes of the problem are:

• Every state has statutes governing the organization and operation of business entities, to include shell companies. The requirements differ from state to state causing a lack of consistency.

• According to the GAO report, states formed nearly 2 million new corporations and LLCs in 2004, without knowing who owned them. This ownership anonymity and lack of transparency has been the source of exploitation by criminals, money launderers and terrorist financiers.

• States generate considerable revenue from the formation of new companies, especially through use of the internet.

• Many states do not believe there is a problem, resulting in a lack of consensus.

On the surface, the solution to the problem is simple. Identify and implement mechanisms which require identification of the beneficial owners of shell companies. Ownership identification would enable financial institutions to perform adequate know your customer due diligence inquiries. This process would seriously minimize the risk caused by shell companies. Oh, if it were only so simple. The lack of consistency and consensus among states makes solving the problem quite challenging.

The only viable resolution to the problem is for Congress to enact legislation regulating shell companies, by mandating rules that are consistently and equally applied by the states. However, before taking such action, Congress must address the likely adverse impact any regulation would have on state revenues, resources and budgetary demands. These are legitimate concerns and must be dealt with before any action can be taken.

The solution, although extremely challenging, must be pursued and attained because of the significance of the existing vulnerability caused by shell companies. The threat and documented successful exploitation of the financial system by criminals and terrorist financiers resulting from shell companies must be stopped. The threat to the US is real and significant. Money launderers pose a threat to the economy while terrorists pose a threat to national security.

Congress must enact legislation regulating shell companies. There must be uniform regulations applicable in all states requiring transparency and specific ownership information. There has not been much appetite on the Hill to deal with this issue. One of the few members of Congress who has addressed this problem has been Senator Carl Levin. Senator Levin understands the depth of the problem and has held hearings in the Senate Permanent Committee on Investigations. Unfortunately, unless other members in both Houses demonstrate Senator Levin’s tenacity concerning this issue, it is unlikely that meaningful legislation will ever be passed or enacted. All the while, criminals and terrorists continue to benefit to the tune of millions of dollars from the gaping hole and lack of systemic control concerning shell companies.

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