Excerpt from the SAR Activity Review Use of United States-Based Shell Corporations and Foreign Shell Banks
by Eastern Europeans to Move Money
In recent years following the public reporting of a 1999 investigation into questionable
Russian-related correspondent banking activities, the publication of a 2000
General Accounting Office report entitled “Possible Money Laundering by U.S.
Corporations Formed for Russian Entities,2” and the 2001 Senate hearings on the
role of United States correspondent banking in international money laundering,
there has been an increased focus on the money laundering risks associated with
foreign-owned, United States-based shell corporations3 and foreign shell banks with
no presence in the United States other than a bank account. Recent findings by the
State of New York Banking Department4 have noted a steady increase in the number
of Suspicious Activity Reports filed by New York banks.5 These filings report an
increase in the volume of shell company wire transfer activity in both dollar
amounts and the number of transactions through high-risk correspondent bank
accounts. Specifically, extraordinary sums of money are passing through correspondent
accounts established for Eastern European banks. The use of shell corporations
and shell banks to launder money and possibly finance terrorist activities is a
concern shared by government financial intelligence units worldwide. In light of
the continuing concerns about foreign shell banks, in October 2001, the Congress
included provisions in Title III of the USA PATRIOT Act to prohibit correspondent
accounts for foreign shell banks.
Recently, FinCEN conducted a preliminary analysis of Suspicious Activity Report
filings of suspicious activities involving foreign shell banks, specifically those in
Eastern European countries, to determine trends and patterns in transactions
before and after enactment of Section 313 and Section 319 of the USA PATRIOT Act
(Public Law 107-56).
Shell Corporations
Shell corporations are described as companies with no independent assets or
operations of their own, which are used by their owners to conduct business dealings
or maintain control of other companies. A shell corporation is registered or licensed
in the state or country in which it is incorporated or established, is not traded on a
securities exchange, and does not operate on its own. While shell corporations are
not illegal or improper, money launderers, tax evaders and terrorist financiers have
used shell corporations as a means to disguise the illicit nature of their money.
They are easily established and can be interlocked with other shell corporations
located all over the world. If a shell corporation is established in a jurisdiction with
strict secrecy laws, it can be almost impossible to identify the owners or directors of
the corporation and therefore nearly impossible to trace illicit funds back to their
true owner. This is precisely the effect the launderer, terrorist financier and tax
evader seeks, and is why shell corporations are an effective means of interrupting
the paper trail used by investigators.6
Shell corporations typically exist only on paper. The corporation’s formation documents
may list a valid bank account and little more than the name and address of the
lawyer or agent handling the incorporation, some officers, and perhaps a few shareholders.
When criminals seek to utilize shell corporations to disguise ownership or
other illicit activity, they will provide fictitious names or nominee names on the
corporate formation documents. These accounts play very important roles in illicit
money movements because they can be used to receive deposits and as transfer
points to the accounts of other shell corporations, legitimate businesses or individuals.
The incorporation documents give shell corporations the outward appearance of
legitimate businesses, allowing their bank accounts to be used to receive structured
cash deposits designed to avoid currency reporting requirements.
A review of Suspicious Activity Report data indicates that suspected shell corporations,
like legitimate businesses, appear to establish customer relationships with financial
institutions in other countries around the world—many of which are located in
Eastern European countries.
397 Suspicious Activity Reports filed between April 1996 (the time financial
institutions were mandated to file Suspicious Activity Reports) and January
2004 involved shell corporations, Eastern European countries,7 and the use
of correspondent bank accounts. The aggregate violation amount reported in
those 397 Suspicious Activity Report forms totaled almost $4 billion.
Many of these financial institutions, in turn, had established correspondent banking
relationships with financial institutions in the United States.8
USA PATRIOT Act Provisions
As required by §313(a) and §319(b) of the USA PATRIOT Act, on September 26,
2002, FinCEN published a final rule at 67 FR 60562, codified in 31 CFR Part 103,
addressing an important subset of shell corporations: foreign shell banks. 31 CFR
§103.175 defines a foreign shell bank as “a foreign bank without a physical presence
in any country.” Foreign bank is defined in 31 CFR §103.11(o) as “a bank organized
under foreign law,” but not including its agents, branches, or offices located in the
United States. 31 CFR §103.177 imposes certain responsibilities on banks and
broker-dealers operating in the United States if they maintain correspondent
accounts for foreign shell banks and foreign banks. Specifically, §103.177 prohibits
covered financial institutions from maintaining correspondent accounts for foreign
shell banks.9
The record-keeping requirements of §103.177 implement the statutory requirement
of §319(b) of the USA PATRIOT Act. The portion of §103.177 that implements
§319(b) requires covered financial institutions that maintain correspondent accounts
for foreign banks to obtain records of the owners of those foreign banks and of their
agents who are authorized to accept service of legal process. Section 319(b) is an
important tool for regulators and the law enforcement community by allowing
them to quickly obtain ownership information about these foreign institutions and
identify individuals who can accept legal process when a subpoena for financial
records must be served.
31 CFR §103.177 requires any covered financial institution that provides a
correspondent account for a foreign bank to maintain records of the foreign bank’s
owners and to maintain the name and address of an agent in the United States that
has been designated to accept service of legal process for the foreign bank for records
related to the correspondent account. 31 CFR §103.177 requires covered financial
institutions to obtain from the foreign bank a certification with certain information,10
or otherwise obtain documentation of the required information. For correspondent
accounts that existed on October 28, 2002, 31 CFR §103.177 requires a covered
financial institution to close the correspondent account, within a commercially
reasonable time, if the covered financial institution had not received the appropriate
certification from the foreign bank, or otherwise obtained documentation of the
required information, on or before March 31, 2003.
Suspicious Activity Report Analysis Trends for Foreign Shell Banks
Financial institutions have used Suspicious Activity Report narratives to report
their assessment that suspected foreign shell banks have facilitated the movement
of monies through the financial systems in the United States on behalf of alleged
account holders. Domestic banks reported they were able to verify incorporation in
this country for corporate entities related to possible foreign shell bank operations,
but were unable to identify corporate physical locations, ownership, officers or
directors. Prior to the adoption of 31 CFR §103.177, financial institutions filed
Suspicious Activity Reports with narratives describing instances of foreign shell
banks allegedly operating as unlicensed banks in the United States and moving
funds through domestic correspondent accounts to accounts in foreign countries.
After 31 CFR §103.177 was adopted, no Suspicious Activity Report filings indicate
foreign shell banks operating in the United States. Ostensibly, banks would have
closed these accounts to comply with the regulation. However, what financial institutions
in the United States describe in some Suspicious Activity Reports as possible
foreign shell banks continue to indirectly route account holders’ funds through
United States correspondent accounts. Suspicious Activity Reports also reported
activity conducted by alleged foreign shell banks through foreign banks’ correspondent
accounts with institutions in the United States (those institutions were acting
as intermediary banks.) According to regulation, domestic financial institutions
must take reasonable measures to ensure that any correspondent account they
establish, maintain, administer, or manage for a foreign bank is not being used by
the foreign bank to provide banking services indirectly to a foreign shell bank.11
Queries by FinCEN analysts of the database housing Suspicious Activity Reports
revealed some interesting facts.
For the period April 1996 through January 2004, 71 Suspicious Activity
Reports were filed that identified activities involving foreign shell banks.
Those 71 Suspicious Activity Reports reported an aggregate suspected
violation amount of almost $500 million.
Prior to December 26, 2002, the initial effective date of 31 CFR Part 103.177,
there were 30 Suspicious Activity Reports that reported suspicious activity
involving alleged Eastern European12 shell banks and the use of correspondent
accounts. This represents a monthly average of less than one Suspicious
Activity Report.
41 Suspicious Activity Reports were filed after the final rule’s December 26, 2002
effective date, with the most recent Suspicious Activity Report filed
October 3, 2003.13 The monthly average over this 13-month period
(January 2003-January 2004) was 3.2 Suspicious Activity Reports, not a
significant increase, but an increase nevertheless.
The current rule extended the time for obtaining certain information concerning
correspondent accounts from December 26, 2002 to March 31, 2003. During
this three-month period (January-March 2003), a total of 24 Suspicious
Activity Reports were filed, representing 8 Suspicious Activity Reports per
month, considerably higher than before the regulation was adopted.
As noted above, financial institutions have reported and continued to report through
October 2003, correspondent account activities involving suspected shell corporations
and foreign shell banks in Suspicious Activity Report narratives.
Excerpted from SAR Activity Review Issue 7, page 3
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