AML In The Caribbean: UBOs and Shell Companies

In 2016 and 2017, the Panama Papers and Paradise Papers leaks exposed the financial affairs of dozens of multinational companies, politicians, and other high-profile individuals that had been exploiting secretive offshore jurisdictions for decades in order to avoid paying tax on their wealth. 

Millions of the documents from the leaks specifically related to entities known as shell companies in Caribbean jurisdictions such as Bermuda, the Bahamas, the Cayman Islands, and the British Virgin Islands, that had been set up for the purpose of holding cash, stocks, shares, or assets such as property, yachts, and aircraft, in order to facilitate tax avoidance strategies. The companies and individuals that were shown to have set up offshore entities in Caribbean tax havens were able to do so thanks to regional beneficial ownership rules that allowed them to conceal their involvement in, and connection to, shell companies. 

In response to the Panama and Paradise Papers revelations, investigations were launched against companies and individuals that were using shell companies in the Caribbean, while regulators around the world increased their AML/CFT scrutiny on the region. With that in mind, banks and other financial institutions that do business with entities located in the Caribbean should understand their risk exposure and regulatory obligations, and how to deploy appropriate AML/CFT measures to detect and prevent illegal activities.

Shell Companies in the Caribbean

The Caribbean has a reputation as a destination for shell companies and tax avoidance schemes because of a combination of regulatory and legislative factors. Many Caribbean countries implement liberal tax regimes, in some cases imposing 0% tax, while also permitting the formation of offshore companies in order to attract lucrative foreign investment. At the same time, those countries impose strict banking secrecy laws that allow owners to conceal the ultimate beneficial ownership (UBO) details of the companies they set up and, by extension, their identities. 

With the benefit of that anonymity, individuals and entities are able to move money and assets into Caribbean countries, or purchase properties in the Caribbean using their shell companies, and so avoid taxes and duties in their countries of residence. Shell companies may also be used in money laundering schemes to disguise the origin of illegal funds and help criminals to avoid AML/CFT measures that would otherwise have triggered suspicious activity reports (SAR) to the authorities. 

Examples of Caribbean shell company activity exposed in the 2016 and 2017 leaks include:

• Investments by the British royal family in a Cayman Islands fund that was subsequently used by a company with a reputation for exploiting poor and vulnerable people. 
• An investment of millions of pounds by the Prince of Wales’ private estate in a Bermudan company dedicated to land acquisition.
• A Cayman Islands trust fund purposed towards tax avoidance managed by a close associate of Canadian Prime Minister, Justin Trudeau. 
• A British former Treasury Minister sheltering hundreds of millions of dollars from tax in a trust fund location in the Bahamas. 
• Ownership of an offshore holding company and bank accounts in Bermuda by New England Patriots owner Robert Kraft. 
• Extensive offshore holdings in the Caribbean linked to US president Donald Trump’s cabinet members, advisors, and donors. 

AML for Caribbean Shell Companies

When dealing with customers and entities in the Caribbean, banks and other financial institutions must be aware of the potential criminal risks associated with shell companies, not least the possibility that they are being used to launder money or finance terrorist activities. Since the threat posed by shell companies is primarily the result of the anonymity they offer, the AML response that firms deploy should emphasize customer due diligence (CDD) which requires firms to establish and verify the identities of their customers. 

International regulators such as the Financial Action Task Force (FATF) require firms to take a risk-based approach to AML, deploying measures commensurate with the risk that their customers present. In practice, this means that firms that deal with entities in the Caribbean should subject them to enhanced due diligence (EDD) measures to reflect the elevated level of risk. 

In the context of business relationships involving Caribbean customers, the CDD and EDD measures that are used to verify the identity of customer entities should focus on revealing UBO so that firms can be confident that their customers are being truthful about their identities and the nature of their business. 

Accordingly, in addition to suitable due diligence measures, firms should develop and implement AML programs with the following controls and measures: 

• Transaction monitoring: Firms should monitor their customer-entities’ transactions for suspicious activity, including unusual transaction patterns or transactions with high risk countries. 
• Sanctions screening: Individuals and countries may attempt to subvert international sanctions by using shell companies. With that in mind, firms must screen customers against relevant sanctions lists such as OFAC’s Specially Designated Nationals and Blocked Persons List. 
• PEP screening: Politically exposed persons are at a greater risk of money laundering and may seek to use shell companies to evade due diligence identity verification. Firms should monitor and screen their customers’ PEP status on an ongoing basis. 

Adverse media monitoring: Shell companies and their owners are often the subject of negative or adverse media stories indicating that they are involved in criminal activity. Firms should monitor for adverse media involving their customers from a range of global sources including online platforms.

Caribbean UBO Registers

In response to the misuse of shell companies and international scandals like the Panama and Paradise Papers, several Caribbean countries have introduced UBO registries which record the names of their owners on semi-public lists. 

In the Caribbean, regulations like the British Virgin Islands’ Beneficial Ownership Secure Search System Act (BOSS) facilitates the storage and retrieval of UBO information which is accessible by government authorities while the Cayman Islands maintains a similar government UBO Register. The UK government has stated that its overseas territories must implement public UBO registers by 2023 and in 2020 eight territories had committed to that goal: Anguilla, Bermuda, the Cayman Islands, Montserrat, the Pitcairn Islands and St Helena, the Cayman Islands, the Turks and Caicos Islands, and Ascension Island and Tristan da Cunha. 

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