I. Introduction
II. Analytical Framework
This essay will use the so called Troika Laundromat discovered by Organized Crime and Co
uption Reporting Project as a case study to analyse the use of offshore centres and shell companies as a means for money laundering and tax evasion and its impact on a domestic economy, in this case Russia. The essay will begin by detailing the incidence of the Russian Laundromat and how it has been used to avoid taxes and then proceed to analyse the role of offshore and shell companies and in facilitating the high degree of tax evasion and capital flight in Russia as well as its effect on the Russian economy.
III. Case Study: Russian Laundromat
In March 2019, it was disclosed through leaked banking records that Canada’s Bombardier Inc. was paid US$42.5-million over three transactions in 2008 by a company called Flashback Services Limited, a shell company, that received money from what is commonly known as the Russian Laundromat, a massive tax fraud scheme that resulted in the alleged murder of Sergey Magnitsky, who discovered it. The money received had not in fact been earned by Flashback Services, a shell company registered on the Birtish Virgin Islands, but in reality was loaned to it by other shell companies, including some involved in the 2007 tax fraud that led to Mr. Magnitsky’s death in a Russian prison.
The case at hand is useful case study for the “the opaque world of offshore companies. While the banking records show the names and addresses of the parties involved in each transaction, there’s no information about who really controls the shell companies themselves.” (Remiorz, XXXXXXXXXXA spokesman for Bombardier Business Aircraft, assured the comepltion of due diligence, arguing that no anomalies had been detected. He emphasized the routine use of holding companies in business as a means of managing transactions.
The transaction is question is closely linked to some other 1.5 million banking transactions which were found by the OCCRP to form part of a web of shell companies – the so-called “Troika Laundromat” − that used the Ukio Bankas, a bank based on Lithuania, to move billions of dollars into Western institutions as part of a sophisticated money-laundering operation. The name is derived from an investment bank called Troika Dialog, based in Moscow.
An initial transaction between the shell company and Bombardier occu
ed at the same time that the shell company was loaned an identical amount by Quantus Division Ltd., one of the central companies in the Troika network, and reportedly to be the central actor in the laundromat. Subsequently, two additional transactions between the two companies both occu
ed after payments from Quantus Division to Flashback Services, which at the same time obtained transfers from different shell companies associated with the Troika Laundromat. The leaked documents demonstrate that all of the money paid to Bombardier came the Lithuanian Bank Ukios Bankas, cu
ently being investigated for large-scale money laundering. (Remiorz, 2019)
Bombardier forms part of plenty of companies that have become participants in one of the largest and most sophisticated laundromats, a mechanism for “moving money that allow co
upt politicians, organized crime figures, and wealthy business people to secretly invest their ill-gotten millions, launder money, evade taxes, and fulfill other goals.” (OCCPR, 2019)
Key players in this scheme was a web of offshore companies that comprised the Laundromat as well as the Russian investment bank Troika Dialog, whose director denies any wrongdoing. The use of offshore companies, he said, “ are technical service companies of Troika Dialog clients, among them, mine.” “A similar practice still exists at foreign banks. Most of their clients work through international companies. I repeat: We always acted according to the rules of the world financial market of that time ….” (Radu, 2019)
Through the use of such offshore accounts the Laundromat was used for money-laundering it is also a major vehicle for wide spread tax evasion scheme. Thus, for instance the well-known Sheremetyevo Airport fuel fraud, which occu
ed between 2003 to 2008 was linked to the Laundromat. It fakely hiked the prices for aviation fuel, thereby avoiding to pay more than $40 million in taxes and increasing the price in plane tickets. Of these avoided taxes, more than $27 million was sent by companies involved in the fraud to Troika Laundromat accounts. (Radu, 2019)
IV. Analysis:
a. The Role of Shell Companies and Offshore Companies in Tax Avoidance
Komisar, L., “Profit Laundering and Tax Evasion, Dissent Magazine, available at https:
www.dissentmagazine.org/article/profit-laundering-and-tax-evasion (Last acccessed April 12th, 2019)
· Troika Laundromat as a useful example to highlight the role of shell companies and offshore centres for tax evasion. Useful both for corporations and individuals.
· System rests on the existing seventy “offshore” centers-tax havens, which include the Bermudas, British Virgin Islands or Cyprus. Here, so called shell companies which hide ownership and bank accounts are used to ca
y out transactions that create paper profits and losses, and where the legerdemain is immune from the eyes of tax authorities and law enforcement. Shells often have no function other than to hold the assets of corporations or individuals.
· About three million shell companies exist that hold a significant amount of global wealth. “The Global Wealth Report” for 2003 by the Boston Consulting Group (BCG) estimated the total holdings of cash deposits and listed securities of high-net-worth individuals at $38 trillion and then
oke that down by North America-$16.2 trillion, of which less than 10 percent was controlled offshore; Europe-$10.3 trillion of which between 20 percent to 30 percent was controlled offshore; Middle East and Asia-Pacific area-$10.2 trillion, with assets controlled offshore ranging from 10 percent (Japan) to 70 percent (ME); and Latin America-$1.3 trillion, of which more than 50 percent is held offshore. according to Me
ill Lynch and BCG estimates, assets held in tax havens, beyond the reach of effective taxation, would equal one-third of total global gross domestic product, the value of goods and services, which in 2003 was $36.2 trillion.
·
· 50% of the world’s trade goes through offshore centers, as corporations shift profits to where they can avoid taxes. Companies set up offshore “subsidiaries” that, on their books, perform functions that allow the firms to cut their taxes. (need to paraphase these as they are bullet points taken from the article)
Dizik, A., “Saudi and Russian residents have among the most offshore assets”, Chicago Booth Review, available at http:
eview.chicagobooth.edu/economics/2017/article/saudi-and-russian-residents-have-among-most-offshore-assets (last accessed April 12th, 2019)
· Shell companies play a crucial role in facilitating capital flight from Russia. As much as 60 percent of GDP in Russia is held a
oad, according to research by Annette Alstadsæter of the Norwegian University of Life Sciences, Niels Johannesen of the University of Copenhagen, and University of California at Berkeley’s Ga
iel Zucman. (Dizik, 2017)
· amount of global wealth being kept offshore has risen in the past four decades. “Among countries with a large stock of offshore assets, one finds autocracies (Saudi Arabia, Russia) and countries with a recent history of autocratic rule (Argentina, Greece) alongside old democracies (United Kingdom, France).
· offshore wealth is also more concentrated at the top. While the top 0.01 percent of households hold 50 percent of all offshore wealth, the top 0.1 percent of households own 80 percent of all offshore wealth.
· Offshore financial wealth have tax revenue implications. The majority of offshore wealth is undeclared, and even when it is declared, it is often not taxed, because of the way the wealth is structured. (Annette Alstadsæter, Niels Johannesen, and Ga
iel Zucman, “Tax Evasion and Inequality,” Working paper, September 2017)
Offshore and Shell Companies facilitate Capital Flight
· As Buiter and Szegvari XXXXXXXXXXnote, some of what is termed capital flight is a rational reallocation of capital from the home country to other countries in response to more favorable risk-return opportunities a
oad and to investors' desire for portfolio diversification. At the other end of the spectrum is money laundering, transactions that hide the illegal origin of the funds and convert them into legal income (Reuter and Truman 2004; Perez et al.)
· money laundering involves illegality in two ways. First, the money to be laundered is often earned though illegal activity such as prostitution, drug distribution,
ibe taking, etc. Second, the money is then moved a
oad, possibly in contravention of capital or cu
ency controls, to hide its criminal origin and possibly to evade taxes. Falling somewhere in the middle in terms of legality are transactions that involve income that may be legally earned, but, because the home country has restrictions on capital outflows, investing such capital a
oad effectively criminalizes the movement of money offshore.
· Russia has a consistently high level of capital flight (Brada, 2011)
. Consequences for the Russian Economy
· Laundromats, especially if taken to the extent of the Troika Laundromat, bear severe consequences for domestic economies, in this case Russia. “The schemes stunt national economic development, undermine human security, and diminish the quality of life for people left behind”. (Radu, XXXXXXXXXXThis leads to the loss of capital which could otherwise be used for infrastructure development, education, health, [and] the development of new businesses, of entrepreneurship
· Indeed, in the context of Russia, the country has lost £22 billion annually in tax avoidance plans and another £33 billion illegally flowed to the country in 2012. Central Bank Governor Sergei Ignatiev said the "shadow operation" to transfer funds a
oad is equivalent to approximately 2.5% of Russia's annual GDP.
· "This may be the payment of medicines or other goods fo
idden to enter the Russian te
itory. It can be illegally imported payment
ibes and commissions from civil servants, "he said. Ignatiev resigns in June (Amos, XXXXXXXXXXHe said that about 50% of illegal transfers could be traced back to the organization and refused to disclose them. More than half of these shadow operations are ca
ied out by companies that are indirectly or directly linked through payment. Create the impression that they are all controlled by a well-organized individual. Ignatiev said that false "one-day" companies, some of which are registered at remote addresses to unsuspecting people, are often involved in illegal transactions. People who use a Russian company called odnodnevniki will not pay taxes at the municipal, regional or federal level.
· "Odnodnevniki is just the disaster of our economy," he said. He added that 3.9 million companies are registered with the Federal Tax Administration, but only 1 million are real organizations. Even among 2 million people, about 12% pay no taxes at all, and 5-7% pays only the nominal amount of tax. Deputy Prime Minister Igor is responsible for a serious decline in tax revenues. "Look at the data of the central bank: given the rapid development