Global Financial Integrity

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As Strong as the Weakest Link

Company Registration and Money Laundering Vulnerabilities in Latin America

This report, which focuses on the five largest economies in Latin America – Mexico, Colombia, Brazil, Argentina, and Chile – analyzes how corporate structures can be exploited for money laundering or other financial crimes. Specifically, it considers the safeguards in place to stop bad actors from creating anonymous companies that could be used for illicit purposes, and whether these safeguards are adequate.

This report is part of a larger effort by Global Financial Integrity (GFI) to analyze vulnerabilities in corporate structures. In 2019, GFI published a report 2 showing that in the United States, it is easier to establish an anonymous company than it is to register for a library card. The United States is an important jurisdiction since more corporations – anonymous and public – are established there each year than anywhere else. While company formation is big business for states, the dark side of anonymous entities is readily apparent, this report found. In addition to tax evasion and shady campaign contributions, US-based shell companies have been used to hide the proceeds of everything from cigarette smuggling to weapons dealing. Despite these risks, states require little information about who really owns a company, where it is located, and who its directors or officers are. New legislative developments in the US regarding beneficial ownership transparency will address many, though certainly not all, of these vulnerabilities.

Latin American countries also face challenges in terms of anonymous companies and illicit financial flows (IFFs), though they are somewhat different in nature. In the US context, little information is requested, and few steps required, to start a company. In Latin America, countries generally have much longer and more complex processes with sizable information requirements. Unfortunately, the information that is requested doesn’t necessarily lead to greater transparency and security. In many cases, countries are requesting a plethora of information from the person registering the company – oftentimes a lawyer – but little about its true or “beneficial” owner, a person of much greater importance from an anti-money laundering/countering the financing of terrorism (AML/CFT) perspective. Similarly, since the information requested is seldom verified for accuracy, it is of limited utility in terms of preventing, detecting, or investigating financial crimes.
This report also analyzes real cases from the countries in question to see the mechanisms being used to move illicit funds. Anonymous corporate structures are one of many methods used to store, move, launder and reinvest illicit funds. They are often used in contexts when things cannot be done in broad daylight because of law enforcement and regulatory controls. Yet in situations where law enforcement and regulators have limited presence, capacity, resources, or integrity, the use of anonymous companies may not be necessary. Instead, those who wish to move these funds can bribe an official, drive across a porous border, or rely on a friend in politics to get the job done.
Just as crimes, such as drug trafficking or human trafficking, move across borders and involve multiple jurisdictions, so too do the financial crimes associated with them. In the Chilean case (see pp.33, for example), complex corporate structures spanned from Texas and Miami to the capital city of Santiago, with illicit gold exports reaching as far as the United Arab Emirates. The problem is that the corporate registration process provides a guise of legitimacy and respectability: an illicit company, having gone through the required steps, can go on to engage with local, national and international markets with relative ease.
The scope of this report is limited in several ways. To begin with, its focus is on corporate formation requirements at the national level, rather than the state or municipal level. However, it should be noted that important local differences do emerge, particularly as pertain to corruption and state capture. Moreover, in countries with federal structures, such as Mexico, Argentina and Brazil, many of the corporate formation steps occur at the state level. While a state-level analysis is beyond the scope of this report, it represents an interesting and important area for future research. The research and analysis for this report was conducted during the course of 2019 and 2020 and some countries may have adopted legal or regulatory changes since that time.
In addition, this report is intentionally limited in focus to corporate formation requirements, and does not consider other requirements that may come into play. In some instances, corporate entities face additional requirements in order to sign contracts, lease office space, open bank accounts or move funds. They may be required to present additional forms of identification, for example, or to go through additional verification processes to ensure that information presented was accurate. In some cases, they may be required to present information on the real person behind the company, the so-called “beneficial owner.” While these subsequent requirements may help to reduce financial risks, it is important to recall that not all corporate entities go on to do these steps, particularly within the Latin American and Caribbean context. Therefore, the company registration process alone should be sufficiently transparent and robust so as to prevent the creation of illicit shell companies or front companies.
In terms of its methodology, this report analyzed laws and regulations from each of the five countries in question. To complement this legal review, it also drew on information from other sources, such as government publications and websites, reports by multilateral organizations such as the World Bank and GAFILAT, and research by civil society groups working on these issues.
As such, it is important to consider stronger, more transparent policies for business registration as part of a national and international security strategy. For the Latin American countries in question, it is not a matter of requesting more information, but rather, of requesting more targeted and pertinent information, as well as conducting verification for accuracy. For countries balancing a desire to promote entrepreneurship with a need to ensure security, this approach will not place undue burden on legitimate businesses but will ensure that law enforcement have the tools to prevent, detect and investigate financial crimes.