When doing asset tracing and recovery work we frequently have to deal with offshore service providers whose companies were used for asset laundering, concealment of control in the course of the crime or other assistance essential to the completion of the criminal act which we are trying to unravel.
In many cases our effort to convince the offshore agent to cooperate, or at least stop assisting their criminal client is not met with much understanding. Hence the pondering of the issue which is the title of this article.
The business of offshore service providers is simple: get as many clients as they can, stay competitive on pricing and not ask too many questions, because the moment they start asking questions, the business goes elsewhere.
The unobtrusive attitude of offshore agents to the activities of their clients is largely based on the assumption of own impunity as far as their clients’ potential problems with law are concerned. The dominant presumption is: unless the local judiciary is able to prove that the agent acted with direct criminal intent (as opposed to carelessness) and thus committed a crime under its domestic law (as opposed to assisting a crime overseas), the agent should feel reasonably secure.
We must say (obviously with much regret) that this opinion has a basis. Law enforcement authorities in most offshore centres do their utmost to avoid starting criminal action against local offshore service providers: it is bad for the business of the offshore financial centre. Besides that, in small countries (the majority of offshore centres are very small) the local political and judicial establishment is closely interlinked with the local offshore services business, very often by family relationships. You are not going to put your brother-in-law into prison and he may offer you a managerial job after you are through with working for law enforcement or regulation.
This is a sad fact for the business of asset recovery, as offshore agents are often the key link between the entity used as a tool of the crime and the actual criminal. There may be more layers to penetrate (such as the ‘second-tier corporate service provider’ in some other country), but the offshore agent is still an important link.
We have pondered this issue for many years and tried various techniques to make crime-assisting offshore agents more cooperative. Below is a summary of our findings so far.
Understand who you are dealing with
‘Offshore agents’ and ‘corporate service providers’ are journalistic terms and not exactly helpful to understand who you are dealing with. So the first step is always to determine the legal definition of the service function performed by the local agent.
In countries like the British Virgin Islands the main providers of offshore corporate services are ‘registered agents’. Their function is to provide an address for the company and maintain a link between that company and the local authorities. There are other types of service providers in the BVI, such as trustees or other fiduciaries, but no company can function without a valid registered agent, so these are key.
Registered agents are prescribed by law in those countries where no local presence for the offshore company is expected: too remote, no real financial infrastructure etc. Just good secrecy laws and no taxes on foreign activity.
In countries where at least some form of local activity is envisaged, local service providers exist in a different form. Take Cyprus for example. There are no ‘registered agents’, and local offshore incorporators and service firms are defined by law as ‘companies providing administrative services’ which includes provision of a registered office, directors, secretaries, management of bank accounts etc.
Getting the definition right is important because different types of offshore services are regulated differently. You would not want to assert that the corporate service provider did not do it’s job properly (as a pressure point) only to know later that local law does not require the provider to bother with the issue you claim it overlooked.
First pressure point: breach of local professional regulations
Although we said above that offshore courts and law enforcement tend to avoid taking punitive action against the local offshore industry, this does not mean that they do not react to complaints at all.
However, protected from outside pressure, inside the offshore zone the corporate services business is very competitive, as many local groups and families compete for their slice of the ‘easy money’ brought by the offshore business and, in this competition, having too many regulatory complaints is a setback so, although not lethal, this is still a pressure point.
You may not get from the regulator any meaningful feedback (as long as you are the ‘outsider’), but do file the complaint anyway. Have it drafted by a local attorney, but lodge it personally (very few local attorneys can be trusted to honestly represent an outsider against the pillars of the local offshore business – we learnt this the hard way during the 1990s). The complaint must, with full legal clarity, state which local regulations applicable to the service business your particular agent has breached.
Add a paragraph that you reserve the option to address this issue in the international media and chances are the regulator will talk to the agent privately and recommend to resolve the issue before another offshore scandal spills out. In some instances we succeeded to cause the regulator make an audit of the services firm and cause them some trouble.
If you do not get what you want, break the story in the media and name names. Rule of our profession: always make good on a threat if you do not want to be ridiculed as a loser.
Can you hit their market?
Talking about media exposure, we are coming to a very important point. Offshore agents have full protection and support from their own governments and judiciaries, but their market is not domestic – by the very definition of offshore business it is overseas, where they can control neither the media or law enforcement.
Offshore business is an incredibly cynical one, and this is good for you. Banks and lawyers from industrially developed nations referring business to offshore agents know very well that those agents deal with crooks as part of their daily routine. But some of those agents f**k up, others don’t. No-one wants to keep dealing with those who f****d up, cleaner ones are always available, and it is a competitive world.
So media reporting on the offshore agent shielding criminals and refusing to cooperate with the crime victims could be an important marketing setback for the agent. No-one wants to be another Mossack Fonseca. So if you legitimately have a story, start breaking it.
Our advice when planning a publicity campaign, though, is to refrain from siding with the special interest donor- and government-funded non-profits who are very loudly promoting themselves as concerned with anti-corruption, tax or social justice. Those activists and their methods are irritating to any serious business and although your goals may seem to be tactically similar, you are better advised to stay clear of their activist crowd. Give no comment to their publications and provide no material for them to exploit.
Criminal liability of the offshore agent is still possible
Now for the best part.
As we have demonstrated above, law enforcement bodies in offshore financial centres are very unlikely to open criminal probes against members of their domestic offshore industry. However, it does not mean that the ‘long arm of the law’ from other countries can not reach offshore providers whose behaviour facilitated the crime.
Criminal law statutes in many countries allow some form of outreach beyond the borders of their own State. An overly generalized formula for that is if a foreigner commits an act outside the State which seriously harms the interests which the State is to protect (including its citizens and organizations), then the State may assert criminal jurisdiction over such act and seek to punish it as a crime within its domestic criminal justice system.
In practice this means that the police probe of the original crime can be – typically on the petition by the victim’s attorney – supplemented by probing the role of the offshore corporate services provider in facilitation of the crime (which includes covering up and dealing with its proceeds). Our own experience is that the most difficult obstacle to overcome (besides ordinary police laziness and reluctance to review many foreign language documents) is the necessity to prove intent – as a necessary element for conviction.
The issue of ‘intent’ is either dealt with by demonstrating that the overseas corporate provider acted recklessly (gross negligence is sometimes allowed as ‘intent’ in criminal law) or – if you are dealing with an ongoing cover-up or laundering – by simply informing the agent by a registered letter that they are dealing with criminal proceeds. Such letter’s proof of delivery would eliminate the necessity to demonstrate ‘intent’, if the agent persists in helping the crooks to cover up their crime.
Although the offshore centre’s assistance with such criminal investigation is likely to be very limited, it would only protect the suspect in that very country. Traveling outside would mean the risk of extradition to the investigating State or at least a pre-extradition detention in a third country.
Civil liability: why not?
In the course of recovering damage inflicted by crime it is quite possible to add any person who assisted the wrongdoer (voluntarily or through negligence) as a civil co-defendant to the recovery action.
It is not particularly difficult to establish that the offshore service business has played an important role in the commission of the crime – by helping to conceal the mastermind behind companies used as tools of crime, by assisting in acquisition of the stolen or embezzled assets and ultimately in the laundering of the proceeds.
Obviously, if the offshore service provider can demonstrate that it followed every letter of the local regulations and acted reasonably, civil liability will be very hard to impose. However, in our business we have yet to see the first offshore agent who follows every letter of the local AML regulations: those rules are typically drafted in such a way that full and honest compliance with them would put the service company out of business in the course of months due to a lack of new clients.
If litigation for recovery of damages is already ongoing, it makes sense to add the offshore agent as a co-defendant within the existing lawsuit and worry about enforcement later. An alternative is to seek damages in the offshore agent’s domestic court. We hate this for obvious reasons although, at least by the book, such action is not impossible.
Take Cyprus law for example. Article 29 (“Civil Liability”) of The Law Regulating Companies Providing Administrative Services And Related Matters of 2012 reads: “(1) Any person who violates this Law or the Directives issued pursuant to this Law, must compensate any person who suffers damage or loss of profit or both, which has arisen due to his act or omission in violation of the obligations emanating from this Law or the Directives issued pursuant to this Law. (2) Criminal liability or liability of administrative nature does not relieve the offender from any civil liability.”
If you can demonstrate in the local court (after seeking appropriate access to the agent’s files) that the corporate service provider seriously neglected its duties (e.g. assisted in moving assets around even after being notified of their likely criminal origin), you may have a chance in the offshore court.
Conclusion
The media covering the offshore industry lead us to believe that service providers of the secrecy havens operate with practical impunity due to the offshore laws supporting their business.
There is some truth in this, as we have demonstrated. However, using the legal instruments and media from outside of the offshore centres, it is possible to put pressure on those operating within. Asset recovery strategies should not neglect the importance of getting the offshore facilitators to cooperate – one way or another.