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International Community Looks to Tamp Down Off-shore Money Laundering

One of the biggest money laundering trials in Serbian history is coming to an end soon. The defendants are accused of laundering over $20 million in profits from a drug smuggling ring.

The group used several off-shore companies in the U.S. state of Delaware, as well as companies in Serbia and Montenegro, to put money from illegal activities into the cash flows of seemingly legitimate businesses, according to Serbian Prosecution for Organized Crime. Most of money was laundered by investing it in the privatization of state-owned hotels and agricultural companies in Serbia.

Drug cartels have been moving drug money across borders using shell companies for years, taking advantage of the same advances in technology, communications and trade that have driven the globalization of legal markets.

The International Monetary Fund recently warned the U.S. that “foreign persons may find it convenient to create a U.S. corporation and use it for the laundering of the proceeds of criminal activities committed outside the United States, including foreign tax evasion.”

Daniel Dudis, Senior Policy Director at Transparency International, said that in many U.S. states it’s easier to create a company than it is to get a driver’s license.

Transparency International is pushing Congress to pass a law requiring all states to collect “beneficial ownership” information, identifying the persons that actually control companies, and making that information public.

“When you see in papers that some ‘Mr. Smith’ is a director, in a lot of cases he is just there to hide the fact that some Russian oligarch, Saudi sheikh or American businessmen or drug dealer or a terrorist is actually the owner,” said Dudis.

Lack of ownership transparency represents an obstacle for authorities investigating financial crimes when the money trail leads to so called “safe-havens” and attracts those with illegitimate purposes.

Transnational organized crime networks are using “shell corporations, opening offshore bank accounts in the shell corporation’s name, and creating front businesses for their illegal activity and money laundering” according to the 2011 Strategy to Combat Transnational Organized Crime.

And a U.S. State Department report says that “drug traffickers, terrorists, money launderers, tax evaders and other criminals have found the Offshore Financial Centers a particularly inviting venue in which to conduct and conceal their nefarious activities.“

Companies that lack information on their “beneficial owners” can also be established in counties such as Cyprus, the Cayman Islands, the British Virgin Islands, Luxembourg, Switzerland and Barbados. Often business records in these countries include only the names of accountants, attorneys, notaries, bankers, or brokers, not the actual owners.

The UK and EU have made some steps toward tackling the problem of hidden ownership. As of April 2016, UK companies will be required to identify their ultimate beneficial owners and maintain a public register of those owners.

The EU adopted a new Anti-Money Laundering Directive in June that introduces a public register that identifies the ultimate beneficial owners of companies and trusts. Member states have until June 26, 2017 to transpose the new directive into national law.

Experts say that transnational criminal organizations are constantly evolving and shifting their activities from country to country to evade law enforcement.

John Walters, former director of the Office of National Drug Control Policy during the George W. Bush administration, says organized crime groups always try to find new ways for their businesses to work.

“They have used various legitimate companies and corporate entities to hid money. Criminals are adapting to your tactics, they are not geniuses, but they do learn,” says Walters.