Part 1 – Background
Skip this Part 1 if you know about Mossack Fonseca and shell and shelf companies.
The movie “The Laundromat” is about lawyers and big law firms and the system that fuels offshore money movements, often involving the proceeds of crime.
The movie is about a big law firm called Mossack Fonseca that was based in Panama. It didn’t appear to have provided much in the way of legal services; rather it sold the services of, inter alia, hiding wealth in little offshore tax havens through the use of what are called shell and shelf companies.
The way it worked and still works today at some big law firms, is that the law firm flips shelf or shell companies to a client, which are incorporated in a jurisdiction known for lax anti-money laundering compliance and tax evasion. These little jurisdictions are countries whose sole resource is providing a place to allow for incorporation where the identity of the directors, officers and shareholders are protected from disclosure, with a bank account. The two must go together (the offshore shell with a bank account) because the shell by itself is not the actual service the client of such services wants – it wants to move money and do it anonymously. The bank account is the critical piece for such persons – the thing of value – the shell merely sits over the bank account and is the figurative key to the often looted treasure.
The money such persons are moving is either illegally acquired or legally acquired, but either way the person wishes to hide it sometimes to defeat the rule of law. But it wasn’t just tax havens involved. British Columbia was a significant corporate host jurisdiction for Mossack Fonseca, where over 1,100 companies were set up.
Mossack Fonseca also had a stable of nominee directors, officers and shareholders like a stable of horses. For a handsome fee they would come out of the stable and appear on the corporate records to fake to be the director, officer or shareholder of a shell. Mossack Fonseca pimped out those services, and if asked, secured bank accounts for the shell and shelf companies they sold.
On occasion, the shells used bearer shares. A bearer share is one where the owner of the share is its possessor, meaning that whomever is in possession of the share is the shareholder of that share. There is nothing illegal or wrong with bearer shares except that only the company knows who the shareholders are. They are like a promissory note in that rights arise upon presentment. British Columbia’s corporate legislation allows for the issuance of bearer shares. In practice, no one ever uses bearer shares. It’s because to use them, one still has to engage with the corporation and they do not give a person any rights to a bank account where the money is parked.
It wasn’t just Mossack Fonseca that drove the creation of shell and shelf companies – 90% of its clients were big law firms and accounting firms in Germany, Canada, Hong Kong, China, the UK and other places, who were asking them to provide such services, and were advising their clients in their offices about the bona fides (or not) of the practice.
In 2014, a reporter named Ken Silverstein wrote an explosive article about Mossack Fonseca which launched inquiries into the law firm for the first time.
Then in 2016, a John Doe acquired 11 million documents from Mossack Fonseca illegally and disclosed them to the media. The law firm did not bring an injunction application to stop the publication of the files on the basis of privilege and confidentiality. Today it would lose such an application because of the criminality now known to be associated with some files, but back then, it may not have. The leak and trove of documents became known as the Panama Papers.
The Panama Papers reverberated around the world because it disclosed more widely, the practice of law firms that flip shelf and shell companies, and how those entities are used to move around the wealth of politically exposed persons anonymously, in disregard of PEP laws and anti-money laundering law. Lawyers at big law firms who practice in the area of corporate finance, immigration for wealthy persons and taxation were familiar with shell and shelf companies (because they are the group that mostly flips them for hundreds of thousands of dollars each) but regular lawyers and the public were not aware of such practices.
Mossack Fonseca did provide some legal services – among other things, they set up new corporate entities that were not shells for some clients, where the company had a real underlying business and the directors, officers and shareholders were legitimate.
8 Questions you Maybe Had About the Movie “The Laundromat”
1. When Gary Oldman and Antonio Banderas, who play Mossack and Fonseca, respectively, say that there are many more law firms all over the world still in business exactly like them (that flip shells and shelfs to hide who is behind companies to allow them to move money anonymously), is that true?
Yes. Probably not so much in the US but many big law firms assist with the creation of shell companies, flip shelf companies and set up bank accounts for clients to give them anonymity. Many still use little offshore tax havens and help clients park money there.
2. John Doe, played by Meryl Streep, says that the problem is “the massive pervasive corruption of the legal profession” and that the fact that the Panama Papers was the event that shed light on what lawyers do is cause for concern. Has anything changed?
It’s hard to say. The US government has signalled that it is prepared to prosecute lawyers who flip shell and shelf companies, and those foreign lawyers who worked with Mossack Fonseca to create shells associated with criminality. It is also the big accounting firms with massive offices in little island tax havens that drive a lot of this work. In the US, the American Bar Association has faced criticism for not supporting changes that address the problem and that would help prevent people from breaking the law.
3. John Doe, played by Meryl Streep, says that as a result of the legal profession, global instability could be around the corner. What does she mean?
She means that the law firm (and the lawyers around the world that fed the machine that was Mossack Fonseca), serviced politically exposed persons who removed millions of dollars, sometimes hundreds of millions from their countries and moved those funds out through banks and shell companies to other countries, and that the corruption underlying that activity and the bankrupting of poorer countries, will lead to civil unrest. EURPOL, for example, has said that if wealth disparity grows, there will be disrespect for the law that leads to global instability.
4. Mossack and Forseca say, in the movie, that what they did was make assets safe from scrutiny by supplying shell companies located where the laws are favourable on islands in the middle of the ocean. Is that true?
Yes. Shell companies they set up are in little islands in the middle of the ocean which have favourable laws; usually favourable to defeat the law that is. But they did other things that are problematic such as doctoring corporate documents to change ownership, or remove ties to a person or corporation or back-dating them. They admitted to back-dating corporate documents and have said that it is “a well-founded and accepted practice”. If corporate documents are back-dated, the ability of law enforcement to successfully peel away the onion to ascertain who is behind a shell, becomes harder. Such practices are not consistent with corporate legislation, tax laws, or financial crime laws either. Mossack Forseca charged fees and a per-document price to back-date corporate resolutions, registers, shareholders and such, as a disbursement from a menu of services.
5. Was there a Boncamper in Nevis who worked with Mossack Forseca to front some shells and did they really doctor documents to remove him?
Yes, Malchus Boncamper was an accountant in St. Kitts and Nevis, who acted as a nominee (fake officer or director) for a number of shells for Mossack Forseca. He was arrested for money laundering and pleaded guilty in the US. For ten years, he laundered the proceeds of crime from a fraudulent scheme that sold fake insurance. He banked in Liechtenstein.
After his arrest, Mossack Forseca did a kind of a “cleanse” pursuant to which they cleansed the corporate records of many shells in which Boncamper was a nominee to remove his existence from those shells. Doing that invalidates all previous corporate actions, including consent resolutions which must be unanimous to be effective. When a lawyer goes back and cleanses resolutions to change the name of a nominee, who did not consent to a resolution or to any corporate actions, then there is not consent for the resolution.
St. Kitts and Nevis is a little island where Chinese foreign nationals are, according to legend, told by immigration lawyers that they could buy citizenship for a price commencing at $250,000 where no questions were asked and no expertise existed on the AML side, and where banks and law firms were friendly. Rich politically exposed Chinese foreign nationals were told by those immigration lawyers that they could come to Vancouver to park money because they became part of the Commonwealth if they were citizens of St. Kitts and Nevis, and that’s why St. Kitts and Nevis is popular – its an entry point to Vancouver.
6. In the movie, when Mossack says that with a shell company, the window is in the BVI and the room is in China, what does that mean?
What it means is that for Chinese foreign nationals, for example, they may have a trust set up under the laws of Guernsey which is controlled by a shell in another jurisdiction, such as the BVI, with bank accounts in Vancouver. When law enforcement, or someone doing an investigation for an asset recovery, attempts to determine where assets are and who controls them, they could be looking through many windows that are illusory because the room (the assets) is not what the view in the window is showing. So, for example, the room is China and one window is Guernsey, another window could be BVI and a third window is Vancouver for the exact same family of PEPs from China.
Basically, it means that unless you know the structuring of these schemes and how Chinese foreign nationals use trusts and private shell companies in, for example, Guernsey and BVI, with banking in Vancouver, what you see in the window for whatever purpose – let’s say asset recovery – is not what is in the window. In other words, you may spend years asset recovering in Vancouver only to later learn that you were looking through the wrong window – the window you want to look through is closed to you if you don’t understand how offshore jurisdictions function in the corporate law sense.
7. Is it true that Bo Xilai and Gu Kailai were clients of Mossack Forseca?
Yes. This article describes how they moved money from China illegally to France through shells.
8. Obama says in a news clip in the movie that what Mossack Forseca did was legal. Is that true?
Yes and no. It is legal to set up a company, even in little tax havens. It is legal to flip a shelf company for hundreds of thousands of dollars, although it is not the practice of law. It is legal to flip a shell company, but that is also not the practice of law. This is as opposed to incorporating a company fresh, which is legal and is the practice of law.
If a service is not the practice of law, the advice is neither privileged nor confidential and is similar to advice received from an accounting firm (not protected).
It is not legal to doctor corporate records. It is not legal to switch out officers, directors, shareholders of shell companies without the underlying corporate approvals or to back-date corporate records. It is not legal to knowingly flip shells and shelf entities, and secure bank accounts for clients to commit crimes or to facilitate the commission of crime, such to launder money, evade taxes or commit securities fraud. It is not legal to set up a whole corporate structure to obfuscate ownership and directors on purpose to provide anonymity to move money offshore to defeat or circumvent the laws.
In some countries, it is also not legal to accept or deal with the proceeds of crime or deposit such proceeds into a law firm bank account, so unless the services were provided for free, legal services can’t be provided, with the constitutional exception of providing legal services to defend an accused in a criminal proceeding.