Switzerland: Ten Proposed Recommendations Against The Misuse Of Offshore Companies As Instruments Of Corruption And Money Laundering

Under the terms of FATF Recommendation 11, an offshore company is defined as including: institutions, corporations, foundations, trusts etc that do not conduct any commercial or manufacturing business or any other form of commercial operation in the country where their registered office is located.

1. Each country shall introduce the necessary legislative measures to ensure that offshore companies:

1. pay up the share capital by means of payments which should be verified by a state authority;
2. have available an amount of share capital which corresponds to their own assets and to their liabilities towards third parties and to their activity;
3. draw up an annual balance sheet which should be deposited with the Commercial Registry Office together with the report of an independent auditor.

2. Each country shall introduce the necessary legislative measures to ensure that the following are entered in the Commercial Register:

1. the names of all persons authorised to sign on behalf of a company as well as those vested with legal authority - especially in the form of power-of-attorney - or exercise practical managerial powers, even when such a company exercises all or part of its activity abroad and even if another company has been delegated to carry out the managerial duties;
2. the data concerning every offshore company which carries out an activity in the territory of the country concerned or has its assets managed there, even if the said company has its registered office abroad, especially in an offshore country.

3. Every country shall introduce the necessary legislative measures to ensure that, in the event of domestic criminal proceedings or a legal assistance procedure:

1. where the assets of an offshore company have been confiscated or seized by a bank, fiduciary or financial company or similar institution, it is the burden of the person in charge of the offshore company concerned to prove the lawful origin of these assets;
2. only the director of the offshore company is authorised to lodge an appeal against a court order for the delivery of documents or confiscation concerning the assets or financial transactions of the company concerned;
3. when witnesses are being heard in connection with investigations into the financial interests and the identity of the director of an offshore company, there shall be no right to refuse to give evidence even if the witness concerned is a lawyer, solicitor, banker, trustee, broker, administrator or auditor who claims to be bound by professional secrecy.

4. In order to comply with the requirements concerning the identification of offshore companies, financial institutes shall demand:

1. the official confirmation concerning the actual payment of the share capital;
2. the most recent balance-sheet accompanied by the auditors' report;
3. the yearly updating of the documents submitted at the founding of the business, in particular the signed declaration by the managing director.

5. The auditors shall require a detailed list of the services provided by the offshore company and the bills and invoices drawn up in the course of its business, together with the identity and signatures of the parties involved.

6. Banks and financial institutes shall regard the utilisation of offshore companies located in an offshore country as an indication of potential money laundering. Accordingly, every transaction made by means of such a company or in the interests of such a company must be verified with special care.

7. Offshore countries shall provide the Secretariat of the designated international organisation, on a yearly basis:

1. statistics on the number of offshore companies founded during the course of the year and statistics concerning the volume of assets managed by these companies located in the country concerned;
2. a report on the situation concerning the compliance with and application of, generally recognised norms, including these ten rules.

8. Offshore countries shall introduce the necessary legal measures to ensure that:

1. each company established in the corresponding countries has paid up a minimum amount of company share capital, whose volume corresponds to the activities of the company, the scope of the assets managed by the company itself and its liabilities towards third parties;
2. the actual payment of the share capital on the occasion of the constitution of the company or on the occasion of an increase in its capital by means of a deposit with the National Bank. Without the corresponding confirmation by the National Bank, the Commercial Registry Office shall not record the founding of the company or the increase in capital.

9. Offshore countries shall introduce the necessary legislative measures to ensure that every company draws up a current list of:

1. the persons in charge of managing the company;
2. the persons who possess power-of-attorney or authority to sign on behalf of the company;
3. the physical persons who are effectively responsible for the management of the company concerned.

This list should be deposited with the Commercial Registry Office so that it may be consulted by judicial and administrative authorities and by other private interested parties.

10. Offshore countries shall introduce the necessary legislative measures to ensure that:

1. each company draws up an annual balance-sheet and profit and loss account, which must be deposited at the Commercial Registry Office;
2. the company's accounts as well as its annual balance-sheet and profit-and-loss account must be checked by an independent auditing firm which has been officially authorised by the government to practise its profession. The auditing report has to be deposited yearly at the Commercial Registry Office.

Corruption, state inefficiency, lack of transparency in the financial markets, unregulated mingling of the activities of state bodies and the private sector, lack of regulations for settling conflicts of interest together with the spread of organised crime all constitute obstacles to the economic development and prosperity of a state. The effects of these often combined factors result in frequent financial crisis. In recent years there has been a tendency to illustrate this with examples from Asia, Africa or eastern Europe, although in earlier years there were just as many and equally serious cases to be found in all other continents and regions.

The common denominator of the above-mentioned negative factors is the clandestinity of economic activities: all economic activities that take place under ground, as it were, not only escape the attention of the fiscal authorities but also prevent the effective operation of the authorising and supervising system. Such a system is however essential for the proper functioning of the industrial, commercial and financial markets. Clandestinity is also the common characteristic of criminal activities, especially for the purpose of concealing the illegal profits of such activities. In the experience of the judicial, supervisory and tax authorities, the favourite method of concealing economic transactions in the world market consists in having recourse to the so-called shelter companies of offshore countries, namely countries which endeavour by all means to attract capital from other countries. In so doing, the numerous offshore countries offer foreign investors and traders a degree of confidentiality which often amounts to total anonymity with regard to both the market and the national authorities of the foreign countries concerned.

It is also therefore not surprising that, in all major cases of international economic crime and money laundering, companies of offshore countries have been used. Essentially, the companies concerned have neither an industrial nor a commercial activity, they have neither premises nor staff, but rather - in accordance with the definition in Recommendation No. 11 of the Financial Action Task Force on Money Laundering (FATF) - merely consist of an address (hence the expressions "letterbox or shell companies", "Briefkasten-Gesellschaften", "sociétés de domicile" and similar tax shelter or tax haven agencies). Such institutions are exclusively created in order to conceal the identity of the natural or legal person who is effectively involved in conducting one or more commercial or financial transactions. This type of company or corporation is preferred above all by people who commit offences involving property or assets, bribe officials or carry out illegal trade dealings - for example drug trafficking, illegal arms trade, trafficking in women and children for purposes of prostitution etc - and in general by members of organised crime syndicates. These types of company are also an ideal instrument for criminal activities which are widely and systematically conducted over a long period of time. They are also used for criminal activities which can lead to the liquidation or bankruptcy of whole business groups in the industrial, commercial or financial sectors. The bankruptcy of these companies can spark off a chain reaction of liquidation and bankruptcy which may threaten the entire business sector of a state which in turn can result in compromising its economic stability, its monetary stability and ultimately its political stability.

A direct link between cause and effect can therefore be detected in this form of offshore company and the specific factors leading to economic crisis: "The offshore countries render good offices to bad governance".

In this field the international community has so far not been in a position to take effective action. The most important measure so far has been taken within the OECD context, more specifically by the Financial Action Task Force on Money Laundering (FATF), whose forty recommendations adopted on 28 June 1996 provide as follows:

So far there is little indication that the authorities or the economic system of those countries for which the forty recommendations are intended have taken concrete measures to convert the said recommendations into fact. The same applies for the "interpretative note to Recommendations 12, 13, 16-19 concerning the utilisation in money laundering schemes of accounts in the name of customers who are not natural persons", contained in Appendix 1 of the FATF annual report 1993/94 dated 16 June 1994.

For the afore-mentioned reasons and with a view to stimulating stricter and more effective initiatives, ten new recommendations are proposed here which are listed in the appendix below and are briefly commented on in the following section.

Companies that intend to conduct unlawful business deals use financial resources which they have previously accumulated but which have not been recorded in their accounts, balance-sheets or financial statements. In this way, these resources are withheld from the supervisory organs of the company (above all the auditors) and from controls by the administrative and fiscal authorities. Hence the term "slush funds" ("schwarze Kassen", "caisses noires", "fondi fuori bilancio").

Various methods are used to accumulate these undeclared assets, for example the faking of losses on the stock exchange or financial market or the simulation of costs by establishing fully or partly forged invoices which may sometimes even be accepted by outside auditors without demur.

In many cases investigated by the judicial authorities, it has been shown that the assets accumulated in this way are used for purposes such as:

• bribing members of national or foreign official bodies or organs of private owned companies;
• in order to purchase stocks and shares while avoiding limits set by the administrative authorities such anti-trust laws or norms concerning the compulsory declaration of share acquisitions by companies which are quoted on the stock exchange.

Failure to enter these assets into the accounts is generally regarded, under the criminal code, as a form of forgery of documents or, in accordance with specific regulations, as falsification of accounts and, as such, are punishable offences. However they tend to be regarded as relatively minor offences and the penalties are accordingly so low that they have only a slight deterrent effect. The perpetrators are for the most part middle management staff who can be rapidly and easily replaced within the firm. If sanctions are taken against the firm these can usually be easily absorbed. Moreover, criminal investigations in this area require specialised knowledge which the authorities do not always possess so that they do not always succeed in rejecting the legal arguments put forward by the accused in their defence. Let us take the example of the sum of five million dollars belonging a group of firms whose parent company has its main office in Paris: the amount does not appear in the accounts of any member of the group because it is concealed in an English bank in Guernsey, the account holder being an institution with its headquarters in Liechtenstein. The following arguments would be used in the attempt to foil the criminal proceedings instituted by the public prosecutor in Paris:

• lack of territorial competence for punishing the failure to establish book-keeping records of assets which have been credited to the account of an offshore company;
• the fact that the offshore company concerned is not bound - according the domestic law of its offshore country - by the duty to maintain book-keeping accounts;
• the lack of territorial competence to punish the failure to record certain assets in the consolidated balance sheet of a business group whose parent company has its main office outside the country where the criminal proceedings are being conducted;
• the fact that, in the national legislation and case-law, the factual evidence consisting of a forged balance sheet has not yet been applied to the case of the consolidated balance sheet of an entire business group.

Every regulation, therefore, which is designed to restrict and punish corruption, fraud and similar offences such as the laundering of fraudulently acquired proceeds should provide for preventing and sanctioning the creation, accumulation and management of assets which are unaccountable owing to recourse to offshore companies.

The aim of the proposed new recommendations is the limitation, if not indeed the prevention, of the misuse of offshore companies.

The legal regulations governing such offshore companies are laid down in national law, which varies from country to country. For that reason alone, the regulation of offshore companies can only be achieved by means of legal norms promulgated at international level. There are further reasons for this: since offshore companies are founded abroad for the specific purpose of avoiding domestic provisions and controls, this problem can only be settled in a rational way by means of an internationally agreed set of instruments.

It is also easy to understand moreover that measures applied by an individual state which are limited to the establishment of facts in the field of fiscal law can only achieve partial success.

Regulations of international scope are also indispensable with regard to those offshore countries which have introduced legal standards in recent years similar to those of other countries, for example with reference to the criminal nature of money laundering and the duty to identify the person economically responsible for any given legal entity. For these national norms are virtually ineffectual precisely because the vast majority of activities of the companies set up in offshore countries are not conducted within the national territory where the main office is situated, but abroad. As a result the standards applied in the offshore country can scarcely be brought to bear on the majority of the effective activities of the company since the latter are conducted outside the relevant national frontiers.

If it were planned to introduce regulations in order to lessen or mitigate international competition in terms of taxation, the rules would have to apply to all offshore companies in all offshore countries. If on the other hand the aim is merely to put a stop to the abuses most frequently resorted to by criminal organisations, it will suffice to impose regulations on all those legal entities in offshore countries - as well as in countries which are not typically regarded as belonging to this category - which pursue neither an industrial nor a commercial activity; this refers therefore to all offshore companies which have been founded exclusively with the intention of disguising or concealing the identity of the natural or legal person which intends to make use of it. Essentially, such companies have neither premises nor staff, but merely a postal address, i.e. a letterbox in an office which also provides an address for innumerable other offshore companies of the same type.

Since the proposed regulations have to encompass an extremely heterogeneous sector, the operation must be restricted to drawing up a limited number of basic principles. These principles concern four different sectors which are however mutually complementary:

1. the legal order of the individual country which has to be harmonised at international level;
2. international co-operation which has to be intensified;
3. co-operation on the part of the private financial system which no longer offers any particular discretion for the benefit of offshore companies, so that there will no longer be any advantage in using such services;
4. collaboration on the part of the offshore countries.

The ten proposed rules are meant primarily to back up existing international rules and promote their application, in particular the OECD Agreement on Combating Bribery of Foreign Public Officials in International Business Transactions, dated 21 November 1997 and the Forty Recommendations of the FATF against Money Laundering dated 26 June 1996.

The ten proposed new international rules could however also back up the implementation of other future international instruments, for example those materialising the requirement of good governance in countries applying for economic support from international organisations such as the World Bank, the International Monetary Fund as well as various EU funds.

The creation and use of offshore companies should no longer be an attractive proposition. The rules proposed here are therefore aimed, after the pattern of the FATF recommendations, at achieving co-ordinated intervention by means of measures by state authorities combined with measures by economic institutions in the private sector. Thanks to the proposed measures, offshore companies which undertake to conceal securities and assets should henceforth bring no economic advantages to the offshore countries. On the contrary, countries which continue to make available instruments which facilitate concealment and clandestinity will have to expect disadvantages on the part of international organisations and on the part of the foreign private economy.

For this purpose the offshore countries will be required to provide international organisations with yearly statistics and reports. If the data concerned were to reveal significant developments which do not correspond to the economic development of a given country, the national authorities and the international community will be in a position to take appropriate counter measures in good time.

On the basis of experience with self-regulation and mutual evaluation in accordance with the FATF model, the international organisation responsible for this project will be able to draw up a yearly "order of merit". The offshore countries whose regulations and practice fail completely or partially to meet the minimum requirements shall be excluded from international programmes of economic assistance. The verification of the legal situation concerning offshore companies in an offshore country cannot be assessed according to only one criterion. In addition, investigations must also be carried out to establish not only whether the internationally valid rules have been embodied in the domestic legislation, but also whether in practice any offences have been tolerated as the result of non-existent or inefficient systems of supervision and punishment. For this purpose a standardised analytical grid (see appendix) could be applied².

Commitments that are embodied in law have become necessary, because companies' private codes of conduct do not contain compulsory norms: for example, the rule that all senior management should supervise company employees to check their observance of the legal provisions in the course of their professional activity, especially with regard to money laundering and corruption, and report any irregularities to the Board of Directors. In practice, however, it has emerged that, in the absence of government regulations, the relevant codes of conduct frequently prove to be ineffective.

This recommendation is generally designed to achieve transparency and ensure that the credit which a company enjoys in public actually corresponds to a particular financial value. More particularly, it is intended:

1. to limit the possibilities of founding offshore companies which have no capital of their own or whose capital is disproportionate and inadequate in relation to their own assets and their obligations towards third parties. As the situation stands, there is no legal obligation in the majority of offshore countries for firms to submit a balance sheet. Those offshore countries where such regulations exist do not for the most part impose the requirement to have the balance sheet checked annually by an external independent auditor. In many offshore countries the same individual is in charge of managing hundreds if not even thousands of offshore companies, as well as managing their book-keeping and in certain cases drafting the auditor's report. Usually, such individuals only receive a few figures each year from the real directors of such companies so that they can draw up a rudimentary balance sheet, which however provides no information about the activity of the company concerned;
2. to prevent a company from carrying out its business without leaving any traces and without any check whatsoever of its operations. Accordingly, every company must draw up a balance sheet, to be deposited each year with the Commercial Registry Office which can thereby supervise whether this obligation is being met. In addition, the balance sheet itself must be checked and again it is the Commercial Registry Office which is responsible for ensuring that each annual balance sheet is accompanied by an auditor's report.

This recommendation is also designed to ensure transparency, by making it possible for the public to obtain certain information before, during and after a given business transaction. The judicial and administrative authorities must also be in a position at short notice to have access to adequate and complete information. Therefore every company in every country must be obliged by legal provisions to enter the following details in the commercial register:

1. not only the names of the persons who exercise a legal function, but also those of all other persons who take a practical share in the administration and management of the company, whether they have general or specific competence to do so;
2. this rule must also be applied in cases where the administration of the offshore company does not consist of natural persons, but has been assigned to other companies, all the more so as this situation makes it particularly difficult to establish who is effectively responsible and to follow the "paper trail";
3. not only the data concerning every company founded on the territory of the state concerned, but also the data on all other companies founded in the territory of another state but which exercise their activity on the national territory, for example by managing its assets in the country concerned. This rule should not only apply in offshore countries but also in every country in which a branch or subsidiary of the offshore company has its head office, branch office or in which it operates. Such countries which for example are currently members of OECD should not tolerate the activities of offshore companies unless the same data is available for the latter as required under national legislation for nationally based offshore companies. The authorities in the United States, the United Kingdom, Luxembourg, Ireland or Switzerland, for example, should not authorise the activities of offshore companies on their territory until the latter have proved that they possess a fully paid up share capital and that they draw up an annual balance sheet checked by external and independent auditors and until they have provided a complete list of the persons who are effectively responsible for the operation of the company.

This recommendation is designed to close gaps in national law and criminal procedure and in mutual assistance in criminal matters in the following way:

1. in the case of a seizure or confiscation order, the burden of proof concerning the origin of the assets of a company lies with the person economically responsible for the offshore company;
2. in the case of an order for the delivery or confiscation of documents relating to the assets and financial transactions of an offshore company, only the person economically responsible is authorised to lodge a complaint;
3. in the course of investigations into financial data or the identity of the economically responsible person of an offshore company, witnesses are not allowed to refuse to give evidence on account of their status as lawyer, solicitor, banker, broker, administrator or auditor.

Tax evaders as well as members of crime syndicates have a tendency to use persons subject to the rule of professional confidentiality as purported business advisers, in order to prevent or hamper investigations and the confiscation of ill-gotten gains. The domestic law of several offshore countries encourages this use of professional confidentiality by granting such professional people the right to refuse to give evidence, even when they are questioned about circumstances which have come to their knowledge outside the context of their specific professional activity. The practice of various offshore countries contributes to this situation by tolerating the fact that so-called business consultants can decline to make available information about the commercial activity of certain business managers.

Experience has shown that the basic rules for the identification of the director of an offshore company are inadequate. Accordingly, when the identity of a director is being established, banks and financial institutions must obtain all the following information:

1. an official declaration confirming that the capital of the offshore company has effectively been paid up;
2. the latest balance sheet together with the auditor's report;
3. the yearly updating of the information and documents drawn up when an account was opened, in particularly with an obligation for the director to make an annual declaration regarding his powers in relation to the company assets. The anti-money-laundering system rests on the principle of identification of the director in charge. As a rule such identification was limited to a mere declaration by the client vis-à-vis a bank or financial institution without any written declaration having to be provided by the person designated as the economically responsible director. Furthermore, neither the client nor the director was obliged to inform the bank or financial institution about any change of circumstances regarding economic assets. The bank and the financial offshore company must therefore be required to request an annual signed declaration from the director stating the current assets of the company concerned.

This recommendation is designed to limit the systematic establishment of thousands of bills and invoices which are drawn up wholly or partly in the name of offshore companies. It is therefore recommended that auditors should be required to obtain lists with the actual services, the annual bills and invoices and the persons drawing up the said bills (which must always be signed). The establishment of wholly or partly fictitious bills, invoices etc is still very widespread. These are used to conceal company assets which are then used to pay corrupt officials and politicians at home and abroad and to bribe members of the board of directors and employees of other private offshore companies. Recommendation No. 5 is intended above all to ensure the application of Article 8 of the OECD anti-corruption of 1 October 1997, in particular concerning the duties of accountants and auditors.

This recommendation puts the onus on banks and financial institutions to exercise special care with regard to all activities of an offshore company. The mere use of an offshore company should be regarded as an indication of potential money laundering, and banks and other financial offshore companies should therefore supervise with the closest attention the activities and transactions of offshore companies. Only thus can the suspicion be allayed that a particular offshore company has been chosen by the economically responsible persons specifically in order to disguise their transactions more easily.

This recommendation provides that offshore countries should be required to submit statistics annually to the OECD Secretariat, which provide a picture of the number of newly established offshore companies and the extent of the assets and property which they manage. On the basis of these objective data, it will be possible to follow developments in each country in this particular sector. If an irregular pattern or development were to emerge which could not be justified by the economic situation of the country concerned, the authorities in that country and the international community would then be in a situation to take appropriate and timely action.

In accordance with this recommendation, offshore countries should introduce legislation with a view to achieving the following aims:

1. each company founded in an offshore country must possess a minimum amount of capital which is fully paid up and is reasonably proportional to the scope of the companies activities or the amount of the assets managed by the company, including its liabilities against third parties;
2. the actual payment of company capital at the time of founding the company or in the event of an increase in the company's capital must be guaranteed by means of a transfer to the national bank. On receipt thereof, the national bank shall issue a certificate without which the Commercial Registry Office cannot officially record the founding of a new company or an increase in a company's capital.

In accordance with this recommendation all companies should be required under the law to draw up a current list of persons effectively responsible for the company's administration and management, as well as persons who have been assigned general or specific authority including authority to sign documents and carry out practical managerial duties. In fact many countries authorise offshore companies without requiring the names of the persons who actually run the company to be registered officially with the commercial authorities. As a result, it is difficult for investors and creditors of the company to submit successful claims for compensation or claims involving the company's liability. This list must be deposited with the Commercial Registry so that it is available for consultation by administrative and judicial authorities and any person vested with a legitimate interest.

This recommendation pursues the following aims:

1. every company should be required to draw up an annual balance sheet and a profit and loss account which must be submitted to the Commercial Registry Office;
2. the company's accounts, together with the annual balance sheet and profit and loss account, must be checked by an independent external audit office duly authorised by the government.

1 Reviewed and updated version of the original text published under the title "Good Offices to Bad Governance: Towards International Rules against the Abuse of Offshore Companies" in: Journal of Money Laundering Control - Vol. 2, No. 2, page 120.

2 See the example of the classification of countries according to the vulnerability of their financial system prepared by the US Bureau of International Narcotics and Law Enforcement Affairs, March 1997