One purpose of a so-called shell company is that the money put in it can't be traced to its owner. Say, for example, you're a dictator who wants to finance terrorism, take a bribe, or pilfer your nation's treasury. A shell company is a bogus entity that allows you to hold and move cash under a corporate name without international law enforcement or tax authorities knowing it's yours. Once the money is disguised as the assets of this enterprise—which would typically be set up by a trusted lawyer or crony in an offshore secrecy haven to further obscure ownership—you can spend it or use it for new nefarious purposes. This is the very definition of money laundering—taking dirty money and making it clean—and shell companies make it possible. They're "getaway vehicles," says former US Customs investigator Keith Prager, "for bank robbers."
Sometimes, however, international investigators are able to follow the money. Take the case of Rami Makhlouf, the richest and most powerful businessman in Syria. Makhlouf is widely believed to be the "bagman"—a person who collects and manages ill-gotten loot—for President Bashar al Assad, who during the past three years has helped cause the deaths of more than 200,000 of his citizens in the country's civil war.
Besides Assad, there are few people more hated in Syria than Makhlouf. He's the president's cousin and the brother of the chief of Syrian intelligence. Using these connections, Makhlouf built a business network that spanned from telecommunications to energy to banking, and by the time he reached 40 he had accumulated a fortune estimated to be in the billions. When the uprising against the regime began in early 2011, protesters torched a branch of his mobile-phone company and chanted, "Makhlouf is a thief!"
In 2006 the British magazine the New Statesmen said "no foreign company can do business in Syria without Makhlouf's approval and involvement," and a classified 2008 cable from the American embassy in Damascus released by WikiLeaks described him as the "poster boy of corruption in Syria." In that same year, the US Treasury Department banned US companies from doing business with Makhlouf, saying that he'd "amassed his commercial empire by exploiting his relationships with Syrian regime members" and "used Syrian intelligence officials to intimidate his business rivals."
When the Syrian civil war kicked off in 2011 and state security forces began gunning down Assad's opponents, the US and the European Union put Makhlouf on a list of regime cronies whose international assets should be traced and seized, because, as the Treasury Department put it, he'd grown rich by bribing and "aiding the public corruption of Syrian regime officials."
If Makhlouf was a bank robber, his getaway car was a company called Drex Technologies SA. In July 2012, the Treasury Department identified Drex—a dummy entity with a British Virgin Islands address—as the corporate vehicle Makhlouf secretly controlled and used "to facilitate and manage his international financial holdings." In other words, say Makhlouf had skimmed a few million dollars off the top of a secret business deal with a crooked Syrian official. He wouldn't put it into a bank account that he could be linked to; instead, he'd funnel it through Drex so the money couldn't be connected to him.
In late October, I obtained several documents about Drex from the British Virgin Islands business-registration office. The records reveal very little—Makhlouf's name, for example, is nowhere on them. It was only because the Syrian civil war had prompted international investigations to try to track down and freeze the assets of Makhlouf and other Assad regime bandits that the US Treasury discovered that he controlled the company and was its owner, officer, and shareholder. But by the time the Treasury Department did it was too late, as Drex had by then disappeared from the British Virgin Islands' corporate registry. In other words, Drex Technologies SA was a vehicle that hid Makhlouf's shadowy financial activities, and before that was discovered Makhlouf had had plenty of time to move its operations and assets to another offshore jurisdiction.
Across the globe, there are vast numbers of competing firms, and many of them register shells that are every bit as shady as Drex.Yet who makes these fictitious entities possible? To conduct business, shell companies like Drex need a registered agent, sometimes an attorney, who files the required incorporation papers and whose office usually serves as the shell's address. This process creates a layer between the shell and its owner, especially if the dummy company is filed in a secrecy haven where ownership information is guarded behind an impenetrable wall of laws and regulations. In Makhlouf's case—and, I discovered, in the case of various other crooked businessmen and international gangsters—the organization that helped incorporate his shell company and shield it from international scrutiny was a law firm called Mossack Fonseca, which had served as Drex's registered agent from July 4, 2000, to late 2011.
Founded in Panama in 1977 by German-born Jurgen Mossack and a Panamanian man named Ramón Fonseca, a vice president of the country's current ruling party, it later added a third director, Swiss lawyer Christoph Zollinger. Since the 70s the law firm has expanded operations and now works with affiliated offices in 44 countries, including the Bahamas, Cyprus, Hong Kong, Switzerland, Brazil, Jersey, Luxembourg, the British Virgin Islands, and—perhaps most troubling—the US, specifically the states of Wyoming, Florida, and Nevada.
Mossack Fonseca, of course, is not alone in setting up shell companies used by the world's crooks and tax evaders. Across the globe, there are vast numbers of competing firms, and many of them register shells that are every bit as shady as Drex. Proof of this includes the case of Viktor Bout, who, in the 1990s, peddled arms to the Taliban through a Delaware-registered shell. More recently, in 2010, a man named Khalid Ouazzani pleaded guilty to using a Kansas City, Missouri, firm called Truman Used Auto Parts to move money for Al Qaeda.
Scattered news accounts and international investigations have pointed to Mossack Fonseca as one of the widest-reaching creators of shell companies in the world, but it has, until now, used an array of legal and accounting tricks that have allowed it and its clients to mostly fly under the radar.
(The company disputes this claim and asserted in an email that "there is no court or government record that has ever identified Mossack Fonseca as the creator of 'shell' companies. Anything tying our group to 'criminal activity' is unfounded, inasmuch as we have not actually been notified of the existence of any legal proceeding... thus far.")
But a yearlong investigation reveals that Mossack Fonseca—which the Economist has described as a remarkably "tight-lipped" industry leader in offshore finance—has served as the registered agent for front companies tied to an array of notorious gangsters and thieves that, in addition to Makhlouf, includes associates of Muammar Gaddafi and Robert Mugabe, as well as an Israeli billionaire who has plundered one of Africa's poorest countries, and a business oligarch named Lázaro Báez, who, according to US court records and reports by a federal prosecutor in Argentina, allegedly laundered tens of millions of dollars through a network of shell firms, some which Mossack Fonseca had helped register in Las Vegas.
Documents and interviews I've conducted also show that Mossack Fonseca is happy to help clients set up so-called shelf companies—which are the vintage wines of the money-laundering business, hated by law enforcement and beloved by crooks because they are "aged" for years before being sold, so that they appear to be established corporations with solid track records—including in Las Vegas. One international asset manager who talked to Mossack Fonseca about doing business with them told me that the firm offered to sell a 50-year-old shelf company for $100,000....MORE
Previously in shell studies:
SEC Approves Eight Russian Shell Companies (AMOK.OB)
Chameleons on the Pink Sheets
A Look at the Old Shell Game: Reverse Mergers From China and Russia (CGA; SGAS; QING; AGVO; AMOK)
London's Russian IPO's
Tax Havens--"Kenya: want a shell company? No question"
Money Laundering With Inga Slavska and the Sinaloa Cartel
