Inside scandal-rocked Danske Estonia and the shell-company ‘factories’ that served it
22 Sep 2020

By Simon Bowers, Karrie Kehoe and Holger Roonemaa, ICIJ, 21 September 2020

ICIJ — The Estonian banker was frantic: A whistleblower inside the bank suspected nine anonymous companies — all registered in the United Kingdom — of serious financial crimes and was threatening to go to authorities.

“The whistleblower demands ALL OF THESE CLIENTS … ACCOUNTS be closed in 48 HOURS,” Aivar Rehe, the head of the Estonian branch of Denmark’s Danske Bank, wrote in emailed instructions to his staff.

In that moment, in 2014, one of the largest money laundering scandals in history was starting to unravel in the scandal’s unlikely banking hub of Tallinn, Estonia, capital of one of the Baltic States, three little countries tucked between Russia and the Baltic Sea in Northern Europe.

At the heart of the scandal: hundreds of mysterious U.K.-registered companies that had accounts at the bank but no apparent business operations and no publicly visible owners.

Five years after writing that desperate email, Rehe was dead — found in his family’s garden in a suburb of Tallinn.  The 56-year-old banker had used an extension cord to hang himself from a tree. Later, the cord snapped, and his body fell into a ditch and went unnoticed for two days.

By then, Danske Bank Estonia was consumed in a $230 billion money laundering scandal.

Newly leaked Estonian police files, including internal paperwork taken from Danske Estonia, reveal the extraordinary steps a tiny division of the Tallinn bank took to serve a shadowy, and highly lucrative, clientele largely from Russia and from former Soviet republics and satellites in Eastern Europe and Central Asia. The documents show that many bank accounts were held in the name of U.K. vehicles, known as “limited liability partnerships,” or LLPs, and “limited partnerships,” LPs, which had no purpose other than to hide the identity of who really owned the money.

An investigation by the International Consortium of Investigative Journalists found that thousands of LLPs and LPs that owned accounts at Danske Bank and elsewhere had been mass produced by only a handful of secretive agencies that registered them at government offices in Cardiff, Wales, and other U.K. locations.

Almost all these agencies, ICIJ found, were run by individuals with personal ties to the Baltic region, often with links to Baltic banks, including Danske Estonia; some agencies helped LLPs and LPs open Baltic bank accounts for their secret clients.

The Estonian police records, obtained by ICIJ’s Italian partner, L’Espresso, reveal that the Danske Estonia bankers — required by law to vet their customers to prevent money laundering — instead ran a secret company on the side that helped set up U.K. LLPs and LPs that were designed to conceal the identity of bank clients.

Rehe’s frantic email was about nine LLPs and LPs, but in fact the bank was overrun with this brand of U.K. shell company, which had become a vehicle of choice for international criminals and corrupt officials seeking to hide ill-gotten gains.

The Estonian police documents supplement another, larger cache of documents known as the FinCEN Files: top-secret reports that banks suspecting money laundering are required to send to a U.S. Treasury Department agency known as the Financial Crimes Enforcement Network, or FinCEN.

The Treasury documents, obtained by BuzzFeed News and shared with ICIJ  and 108 media partners, include more than 2,100 suspicious activity reports filed by major banks that control access to U.S. dollars and process transactions for smaller banks like Danske Estonia. The reports are known in banking circles as SARs.

An ICIJ data analysis found that the FinCEN Files contained a startlingly large number — 3,267 among just more than 2,600 leaked files — of U.K.-registered LLPs and LPs.

SARs in the FinCEN Files show the New York operations of Deutsche Bank and other global banks playing a critical role at the center of what is a money laundering conveyor belt.  ICIJ found the banks overlooked obvious money laundering signs and routinely waved through U.K. LLP and LP transactions from accounts at Danske Estonia and many other Baltic banks.  The processing of international payments in New York is a critical step in concealing the money’s true origins.

Together, the FinCEN records, the Estonian police documents, and ICIJ’s data analysis provide a comprehensive view of the sprawling money laundering industry: from the creation of U.K. LLP/LPs in Cardiff, Wales, to banking them at Danske Estonia in Tallinn, to finally moving their dollar transactions in Lower Manhattan.

The importance of being a UK LLP or LP

U.K. business partnerships date back centuries. But they only became popular with money launderers in the early 2000s after the United States and some banks tightened rules on certain kinds of U.S. corporate entities and on shell companies in notorious secrecy jurisdictions such as the Cayman Islands, the Seychelles or the Isle of Man.

U.K. registration and the LLP and LP forms — commonly used by British law firms, accounting firms and other businesses — offer a patina of legitimacy that offshore havens can’t. As a result, the number of the U.K. LLPs and LPs has skyrocketed, from fewer than 20,000 in 2004 to more than 100,000 in 2017. (LPs, many established under Scottish law, have fewer disclosure requirements, but are otherwise similar to LLPs.)

Many are set up through formation agencies, which for a fee, register LLPs and LPs online at Companies House and provide other services to keep the true owners anonymous.

Despite their bland name, the impact of anonymous U.K. LLP and LPs can be anything but bland; they’ve been used as cover for people tied to serious financial crime — and worse.

Among these:  Aierken Saimaiti, one of the most successful money launderers in Kyrgyzstan, made extensive use of LLPs with bank accounts in Latvia. Kyrgyz authorities believe that he and associates channeled close to $1 billion in dirty funds out of the country between 2011 and 2016.  He was shot dead outside a cafe in Istanbul in November 2019.

And there is Altaf Khanani, a U.S.-sanctioned global money launderer said to have moved illicit money for Australian biker gangs, Mexican drug cartels, even al-Qaida. The FinCEN Files and other leaked documents show one of his key laundering fronts was involved in transactions with LPs separately linked to Russian money laundering. In 2016, he was sentenced to just 68 months jail as part of a plea agreement. He was released in July.

And there’s Lazar Shaybazian, an Uzbek associate of violent Russian mafia boss Vladislav “Blondie” Leontyev, who controlled a Dubai-based jewelry firm which received payments from an LLP banking in the Baltic region. Shaybazian was sanctioned by the United States in 2012 for his ties to Leontyev, a senior figure in a group referred to as the “Brothers’ Circle,” notorious for drug trafficking and violence. And these are just the beginning.

The rise and misuse of anonymous U.K. LLPs and LPs attracted critics, and in 2016, the government moved to require most British companies to disclose individuals with more than 25% control. While the rules apply to all LLPs and to some LPs, the law contains no verification or enforcement mechanism, and many don’t provide ownership information.

“If you’re intent on masking the ultimate ownership and control of a company, these rules do nothing to stop that happening,” said Graham Barrow, an expert who has advised several global banks on combating money laundering.

Two days before ICIJ and its media partners started publishing FinCEN Files investigations, the U.K. government announced new reforms it said would help weed out money laundering shell companies. They promised verification checks would be made on the identity of directors, owners and formation agents.

The U.K. LLPs and LPs in the FinCEN Files often have little or no internet presence or other signs of real-world operations, according to the bank compliance officers who write the reports.

The FinCEN Files, a fraction of all SARs filed by global banks, are a jumble of narrative reports of varying quality that reveal the private concerns of global bank money-laundering compliance departments about certain transactions. Some come with attached spreadsheets of raw transaction data. Many have no spreadsheet attached. And many spreadsheets — filled with interested parties’ names, bank names, figures, and dates — came unattached to any narrative to explain them.

According to BuzzFeed News, some of the records were gathered as part of U.S. congressional committee investigations into Russian interference in the 2016 U.S. presidential election while others were gathered following requests to FinCEN from law enforcement agencies.

Matching U.K. shell company names and other information in the FinCEN Files against Companies House records, ICIJ identified 3,267 LLPs and LPs as holders of bank accounts — many at Baltic banks — involved in transactions flagged as suspicious.

As it turns out, many of the LLPs and LPs had features in common — the same mailbox addresses, signatures, and so-called nominee owners, normally other shell companies in far away tax havens — pointing to a handful of actors, with each of them forming many entities.

An ICIJ data analysis found that more than half of the U.K. LLPs and LPs in the FinCEN Files — 1,656 — were all created by the same four agencies. Nine agencies each created more than 100 U.K. entities mentioned in the leaked SARs; one was responsible for 646.  Many agency principals live in the Baltics or are Baltic nationals living in the U.K.

A U.K. LLP or LP can appear in the FinCEN Files for a number of reasons. Some had been flagged based on bank compliances officers’ cursory investigations of transactions that they believed showed signs of money laundering.  Some appear in spreadsheets without the narrative attached.

And some played a clear-cut role in money laundering, fraud, grand corruption and other wrongdoing.

U.K. law requires LLPs to file annual financial statements with Companies House.

ICIJ’s investigation found the signature of a Belgium-based dentist on Companies House financial statements of nine LLPs  that understated their revenues by more than $4.1 billion. The dentist says his signature had been forged and that he had never heard of LLPs.

The data show that while U.K. LLPs and LPs in the FinCEN Files made extensive use of Danske Estonia, they also used an array of other, mostly Baltic, banks, including scandal-ridden ABLV Bank,  Trasta Komercbanka in Latvia and Stockholm-based Swedbank’s Estonian branch.

Formation agencies’ Baltic ties

For some formation agencies, creating shell companies is a volume business.

One of the busier agencies found in ICIJ’s analysis is CMC, a network of companies in the Seychelles, the U.K. and Latvia, operated by Dmitrijs Krasko, a Russian-speaking entrepreneur who had started in the business after a spell as an intern at Latvia’s ABLV Bank. Some 112 U.K. companies established by Krasko and his team are named in the FinCEN Files. Krasko’s signature appears on hundreds of incorporation documents and annual financial statements for U.K. LLPs and LPs that claim to operate in industries as diverse as electronic equipment, coal purchasing, leather goods and freight shipping.

ICIJ partner Re:Baltica, based in Riga, Latvia’s capital city, approached Krasko in June on the lush Ozo golf course on Riga’s outskirts, where he was playing in a tournament popular with senior bankers. Wheeling a golf bag along a gravel path near the course, Krasko defended the bulk production of anonymous U.K. LLPs, LPs and other companies and said some of his competitors create many more than CMC does.

“You want to sell companies,” Krasko explained. “You’re looking for customers. That’s how it should work; otherwise it’s not profitable.”

Krasko has signed annual financial statements for hundreds of U.K. LLPs, but he said, “There is no possibility that we can be 100 percent sure what this company is actually doing.”

He added: “But we have our due diligence policy and our [anti-money-laundering] policy. And we collect the information which, to our knowledge, is correct.”

On its website, Krasko’s agency also advertises, in Russian, that CMC helps customers open bank accounts at “leading Baltic, European and Offshore banks” for the U.K. LLPs, LPs and other firms it creates.  And the actual customer needn’t even show up at the bank.

“Our company has concluded agency agreements with a number of banks, which allows us to carry out client identification,” the website says. “In this case, the client only needs to meet with us to open a bank account.”

In answers to written questions from ICIJ, Krasko said he was in the process of shutting down his formation agency, and that CMC had never helped a customer open a bank account, at ABLV or elsewhere. He said he carries out anti-money laundering checks in accordance with U.K. regulation and he only signs LLP financial statements to ensure the paperwork is promptly filed. “It might take months to deliver a letter from any CIS country to U.K.,” he said. “Not to mention that letters could have been easily lost on its way to Companies House.”

Krasko says there is no risk to him if the financial statements are false because he insists on an indemnification agreement before signing them.

Much paperwork, no place of business

Formation agencies are often loose, low-profile networks of companies operating across many countries. The agencies typically offer a full suite of secrecy-protection services: paperwork preparation, an official U.K. address — sometimes just a post office box shared by hundreds of LLP and LP shell companies — and functionaries paid to sign the paperwork.

In filling out Companies House forms, a formation agency usually lists the publicly declared “owners” as other shell companies — invariably registered in secrecy havens such as Belize, Panama or the Seychelle Islands —  that are owned by the formation agency itself. The paid functionaries, essentially straw men or women, usually sign as a representative of one of the anonymous shell company owners.

As a final maneuver,  the formation agency writes a private power-of-attorney letter secretly transferring full control of the new company to its true owner, who, in exchange, often indemnifies the shell company owners, shielding the formation agency from any legal threat.

U.K. shell companies usually have no greater connection to Britain than a mailing address, often a post office box at a mail-forwarding company. An ICIJ analysis found that at least 393 LLPs and LPs in the FinCEN Files have been registered to nine Mail Boxes Etc. stores, including in London’s Mayfair district, Dundee, Scotland, and Belfast, Northern Ireland. Mail Boxes Etc., based in Milan, Italy, is a provider of post office boxes and other services.

Read more at the International Consortium of Investigative Journalists

Photo (cropped and edited): Finn Årup Nielsen [CC BY-SA 3.0]

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