Financial Crime World

Liberia’s Economic Woes: The Dark Side of Shell Companies

In the West African nation of Liberia, the use of shell companies continues to pose a significant threat to economic growth and development. This article sheds light on the criminal use of these corporations and the impact on the country’s financial systems, inspired by a recent National Crime Agency (NCA) investigation.

NCA Investigation and Seized Assets

The NCA’s recovery of $8 million in May 2020 following an extensive investigation into dubious Liberian business accounts held in shell companies is just one example of the vast scale of illegal activities perpetrated through these entities. Two related FrontPage Africa reports detail this recovery: ‘UK’s National Crime Agency Forfeits US$8 million Deposited During Tubman, Tolbert Era’ and ‘Why Liberia May Not Recover Seized Stolen Assets Forfeited in the UK’.

Economic Consequences and Illicit Financial Flows

Illicit financial flows, estimated to reach over $2 trillion globally per year, contribute significantly to this problem. The misuse of shell companies, along with front companies, nominees, or other means to conceal the true beneficial owners of assets, helps facilitate these flows. In Liberia, tax evasion, fraud, and bribery and corruption are among the prevalent offenses linked to money laundering. By engaging in such criminal activities, millions of dollars in revenue intended for budget financing, development funds, and other essential services are instead illegally diverted from the country.

What are Shell Companies?

A shell company is a Corporation that exists only on paper and lacks a physical office or employees. However, it may have a bank account and hold inactive investments or even serve as the registered owner of intellectual properties, ships, and other assets. Shell companies often have their registered addresses at offices of accounting firms, law firms, or other organizations that help set them up or provide related services. These entities act as agents for receiving correspondences and serve as channels for business transactions, making them attractive for both legal and illegal purposes.

Legitimate Uses and Criminal Activities

While shell companies have legitimate applications, such as acting as trustees or creating limited liability for businesses, they can also facilitate illegal activities like terrorist financing, money laundering, tax evasion, and illegal business practices. Their use can help obscure the true ownership of assets and make it more challenging for law enforcement to trace the source of the funds.

Prevalent Misuses in Liberia

The pervasive use of shell companies for criminal activities has been a major issue in Liberia for years. Instances of foreigners, residents, and high-ranking government officials exploiting these corporations include financing terrorist activities in other countries, concealing illegally acquired funds, transferring funds from fraudulent activities through Liberia to other destinations, and evading taxes on legitimate business income. Conspiring to transfer government funds for personal or political purposes and siphoning funds intended for budget support and development projects are further misuses of shell companies.

Combating Criminal Use of Shell Companies

To combat these criminal activities, several measures must be taken:

  1. Conducting comprehensive investigations into the use of shell companies and strengthening laws and regulations.
  2. Implementing stringent measures over business registration by ensuring ownership verification and making beneficial ownership information available to law enforcement.
  3. Strengthening the regulatory framework surrounding the transfer of business income through implementing Letters of Credit requirements, thresholds, and enforcing existing regulations.
  4. Enhancing information communication systems and database integration for financial analysis and investigation institutions.
  5. Responding effectively to information requests from these institutions by improving the responsiveness of the banking system.

Conclusion

Although Liberia’s government faces challenges in recovering the $8 million seized in the UK, it is crucial to intensify efforts in curbing the criminal use of shell companies and other illicit financial flows. As noted during the September 2019 Development Financing Dialogue, low-income economies like Liberia lose more to illicit financial flows than they receive in foreign aid. Governments and international communities must take action to prevent such flows, recover stolen assets, and bring perpetrators to justice.

Author

Alexander Cuffy is a financial crimes specialist and Senior Business Development Consultant at Alan Bernard International. He previously led the development, administration, and monitoring of Liberia’s Anti-Money Laundering program as the head of the Financial Intelligence Unit.