Misuse of corporate entities for illicit aims


By Cheah Foo Seong

IN this modern age of global telecommunication and advanced technological transfer of information, corporate entities originally conceptualised as legal entities in the conduct of a variety of commercial activities, including and not limited to legitimately holding properties and assets, have in recent times been misused for illicit purposes.  

Such illicit purposes may include money laundering, terrorism financing, bribery and corruption, illicit tax practices, self-dealings and defrauding assets. The abuses by many corporate entities or “corporate vehicles” include corporations, trusts, foundations and partnerships – all with limited liability features.  

New legal framework 

The proposed amendments to the Anti-Money Laundering Act 2001 (AMLA) and the Securities Industry laws to provide adequate protection and provisions for whistleblowers, point towards introduction of relevant legal clout to serve as mechanism for those who know to inform authorities of such malpractices.  

It would also allow jurisdictions that do not require up-front disclosure to obtain information on beneficiary ownership and control of corporate vehicles, malpractices and unlawful activities carried out by persons who manage such entities and who are in control of the corporate entities.  

The guidelines on prevention of money laundering and terrorism financing for capital market intermediaries issued by the Securities Commission (SC) in March explain that in principle, money laundering is a process intended to conceal the benefits derived from unlawful activities which are related, directly or indirectly, to any serious offence so that they appear to have originated from a legitimate source.  

“Serious offence” means any of the offences specified in the Second Schedule of the AMLA such as drug trafficking, smuggling arms and ammunition, insider trading, including in the aiding and abetment of any of these offences.  

“Money laundering” is defined as the act of a person who: 

  • Engages, directly or indirectly, in a transaction, the proceeds of which are derived from unlawful activities; 

  • Acquires, receives, possesses, disguises, transfers, converts, exchanges, carries, disposes of, uses, removes from or brings into Malaysia proceeds arising from any unlawful activities; or 

  • Conceals, disguises or impedes the establishment of the true nature, origin, location, movement, disposition, title of, rights with respect to, or ownership of, proceeds of any unlawful activities. 

     

    Effective prevention mechanism 

    The willingness to share information would seem to be the only way to effectively combat and prevent the misuse of corporate entities for illicit purposes.  

    This is because perpetrators of illicit schemes make arrangements with apparently innocent identities such as corporate service providers to act as their nominees in whatever capacity as shareholders, directors, or officers; trustees and agents in order for them to remain anonymous.  

    Thus any jurisdiction that provides mechanisms enabling individuals to hide their identity behind a corporate vehicle by restraining the authorities from obtaining information on beneficial ownership, the risks of such corporate vehicles being misused and abused will increase.  

    Following the report of the Financial Stability Forum (FSF) Working Group on Offshore Financial Centres in April 2000, which among other things, recommended that an appropriate international forum be asked to explore the issue of developing mechanisms to prevent the misuse of corporate vehicles, the Organisation for Economic Co-operation and Development (OECD) steering Group on Corporate Governance agreed to undertake the drafting of a report on the Misuse of Corporate Vehicles for Illicit Purposes.  

    At the July 2000 meeting in Japan, the G-7 Finance Ministers welcomed the forthcoming review. Upon its completion and adoption by the Steering Group, the final report was submitted to the OECD Ministers, G-7 Finance Ministers and FSF. The G-7 Finance Ministers in July 2001 welcomed the report noting its potential contribution in efforts to combat money laundering and corruption.  

    Offshore companies used for illicit purposes 

    It was reported by the Financial Action Task Force (FATF) that offshore shell companies had been used unwittingly for the purpose of carrying out money laundering activities involving a three-pronged process: 

  • Placement – introducing illegal profits into legal financial system or smuggling them out of the country; 

  • Layering – separating proceeds from its source through a series of transactions, i.e. using numerous vehicles in different jurisdictions with the objective of distancing them from their source; 

  • Integration – reintroducing the laundered funds back into the economy. 

    In all these stages, corporate vehicles found in both onshore and offshore jurisdictions were used for these illicit activities. 

    The G-7 Finance Ministers have in recent years undertaken substantial work to enhance international co-operation and information sharing. In 1998, the G-7 produced a document on 10 key principles on International Co-operation and Information Sharing.  

    Then in 1999, the G-7 Finance Ministers prepared another 10 key principles for the improvement of international co-operation regarding financial crime and regulatory abuse.  

    In the latter document, all G-7 countries where encouraged, while remaining consistent with fundamental national and international legal principles and essential national interests, to ensure, among others that their laws and regulatory systems provide for maximum co-operation domestically between financial regulators and law enforcement authorities by sharing information with law enforcement authorities and, if applicable, with the national Financial Intelligence Unit.  

    Anti-money laundering legislation 

    Money laundering is the process whereby proceeds from illicit activities undergo a transformation when laundered, so that, at the end of the process, they appear to have been derived from legitimate activities. Money laundering offences also include the concealment of the proceeds from crime-related activities.  

    To counter these illicit activities, the Anti-Money Laundering Act 2001 (AMLA) established the Financial Intelligence Unit within Bank Negara as the competent authority. AMLA also defines that reporting institutions should be licensed dealers, fund managers, futures brokers and futures managers as licensed under the Securities Industry Act 1983 and the Futures Industry Act 1993.  

    The reporting institutions must keep proper customer identification such as the identity and legal existence of persons applying to do business with them. Anonymous accounts or accounts in fictitious names of their clients should not be kept.  

    There should be appropriate guidelines to learn essential facts about their clients’ background, investment objectives, knowledge and experience in dealing in securities and futures broking, financial background and to judge, where possible, the amount of cash or other financial instruments going through accounts are consistent with the line of business being undertaken by the customer. 

    Under AMLA in an attempt to obtain information of identities that are dubious, and in order to effectively combat the laundering of money, the net must be wide and deep enough to rope in corporate vehicles, offshore trust service providers, financial institutions located in tax havens and other intermediaries such as company formation agents, trustees, lawyers, notaries and many other professionals who all play a role in the management of corporate vehicles, that may provide a haven to preserve anonymity and frustrate any effort by the authorities to identify the beneficial owner.  

    Cheah Foo Seong is a council member of MAICSA.  

  • Bank Negara Malaysia will be conducting a series of talks on AMLA throughout Malaysia with other professional bodies, including MAICSA, MIA, Bar Council, MACS, IACS and PESMA from July onwards.  

    Members of the public who wish to know more about AMLA and the proposed amendments to invoke corporate service providers are invited to attend these sessions. 

    Details of the scheduled events will be posted on http://www.maicsa.org.my. 

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