Introduction
Trust and Company Service Providers (TCSPs) play a vital role in corporate structuring, estate planning, and financial administration, offering legitimate services to businesses and individuals worldwide. However, their ability to set up and manage trusts, shell companies, and offshore entities also makes them a prime target for organised criminals seeking to launder illicit funds.
Several high-profile cases have demonstrated how criminal organisations exploit TCSPs to conceal their wealth, disguise illicit transactions, and avoid financial scrutiny. This article explores real-world case studies of TCSP-based money laundering and provides practical steps to prevent such exploitation.
Case Study 1: The Panama Papers—Massive Offshore Laundering Through TCSPs
In 2016, the Panama Papers leak exposed how Mossack Fonseca, a Panamanian law firm and TCSP, helped criminals, corrupt officials, and business elites launder money by setting up offshore shell companies and trusts.
Criminals used Mossack Fonseca’s services to:
- Create anonymous shell companies in tax havens to move illicit funds undetected
- Use nominee directors and shareholders to obscure the real owners
- Hide money in offshore trusts to evade financial regulators
How did this happen?
Mossack Fonseca’s lax Know Your Customer (KYC) and Customer Due Diligence (CDD) procedures allowed criminals to set up and control anonymous companies without proper background checks.
How can you avoid this happening to your business?
- Verify the identity of all clients, including Ultimate Beneficial Owners (UBOs)
- Reject clients who refuse to disclose their financial activities
- Ensure compliance with global AML standards, such as the Financial Action Task Force (FATF) recommendations
- Report suspicious company formations and trust activities to financial intelligence units (FIUs)
Case Study 2: The Russian Laundromat—$20 Billion Laundered via Shell Companies
Between 2010 and 2014, criminals used a network of over 21 shell companies to move $20 billion in illicit funds from Russia into Europe and the U.S. via trust and company service providers in multiple jurisdictions.
TCSPs were used to:
- Establish complex corporate structures to create layers of anonymity
- Use fake loan agreements between shell companies to justify large money transfers
- Transfer illicit funds through international bank accounts opened using these shell companies
How did this happen?
TCSPs operating in weakly regulated jurisdictions failed to conduct proper due diligence on their clients, allowing criminals to manipulate the system undetected.
How can you avoid this happening to your business?
- Conduct Enhanced Due Diligence (EDD) for clients from high-risk countries
- Scrutinise transactions involving complex corporate structures with no clear business purpose
- Monitor for red flags such as multiple shell companies registered at the same address
- Refuse to establish companies without verifying their economic legitimacy
Case Study 3: The 1MDB Scandal—Trusts and Offshore Companies Used to Steal Billions
The 1Malaysia Development Berhad (1MDB) scandal involved the theft of over USD$4.5 billion from Malaysia’s sovereign wealth fund, much of which was laundered through offshore trusts and companies set up by TCSPs.
Trust and company service providers assisted in:
- Registering offshore entities that acted as financial intermediaries
- Opening bank accounts linked to these companies to move illicit funds
- Falsifying financial documentation to justify large transactions
How did this happen?
Some TCSPs ignored clear red flags and facilitated these transactions to maintain high-value clients. Others failed to apply AML regulations, allowing criminals to take advantage of offshore structures.
How can you avoid this happening to your business?
- Reject politically exposed persons (PEPs) with unclear sources of wealth
- Demand proof of business operations for offshore companies
- Report transactions involving unusually high-value transfers between related parties
- Train employees to detect financial irregularities linked to large-scale corruption
Case Study 4: The UK Real Estate Laundering Scheme—Anonymous Companies Hiding Criminal Wealth
A Transparency International report found that over £4 billion worth of UK property was bought using anonymous offshore companies, many facilitated by TCSPs. Criminals used these structures to launder money through real estate investments.
TCSPs helped criminals by:
- Setting up anonymous corporate entities in tax havens
- Registering properties under these entities to disguise ownership
- Avoiding scrutiny by using nominee directors to shield the real investors.
How did this happen?
For years, the UK allowed foreign property ownership via offshore entities without requiring disclosure of beneficial owners, making it easy for criminals to exploit the system.
How can you avoid this happening to your business?
- Comply with the UK’s Economic Crime (Transparency and Enforcement) Act, which requires foreign companies to disclose UBOs
- Avoid working with clients who refuse to reveal their identities
- Ensure real estate transactions involving offshore entities undergo strict due diligence
How Trust and Company Service Providers Can Protect Themselves from Being Exploited
1. Strengthen Customer Due Diligence (CDD) and Know Your Client (KYC) Procedures
- Verify the identities of all clients, including those behind corporate entities
- Identify Ultimate Beneficial Owners (UBOs) to ensure transparency
- Assess the legitimacy of the client’s source of wealth and business activities.
2. Monitor and Report Suspicious Transactions
- Flag unusual financial activities, such as large cash transfers or rapid fund movements
- File Suspicious Activity Reports (SARs) with relevant financial intelligence units
- Watch out for multiple companies registered at the same address with no clear operations
3. Establish a Strong AML Compliance Program
- Appoint an AML Compliance Officer to oversee risk management.
- Conduct internal audits and risk assessments regularly.
- Ensure all employees receive AML training on recognizing financial crime.
4. Avoid High-Risk Clients and Transactions
- Be cautious of clients operating in tax havens with no clear business purpose
- Refuse to set up companies or trusts for clients unwilling to provide financial transparency
- Ensure that all corporate entities registered through your services have legitimate economic activities
5. Cooperate with Regulators and Law Enforcement
- Engage in AML training and compliance programs
- Report non-compliant entities to regulators when necessary
- Stay updated with international AML regulations and best practices
Closing Remarks
The TCSP sector is a key enabler of global financial transactions, but it is also a primary target for criminals seeking to launder money through anonymous companies, offshore trusts, and complex corporate structures. The Panama Papers, Russian Laundromat, 1MDB, and UK real estate laundering cases show how weak AML controls allow billions of illicit dollars to flow through TCSPs unnoticed.
To prevent this, TCSPs must:
- Implement strict due diligence procedures
- Reject anonymous clients and demand full disclosure
- Report suspicious corporate activities and financial transactions.
By adopting robust AML compliance measures, TCSPs can protect themselves from legal liability, reputational damage, and financial crime while helping safeguard the global economy.
