Senate Finance Committee ranking member Ron Wyden’s (D-Ore.) investigation into American shell companies with ties to the law firm Mossack Fonseca & Co. is just beginning, but already some of those companies have made their way into the U.S. court system.
The Panamanian law firm isn’t the target of the investigation or the defendant in any of the lawsuits, but to get a glimpse into how shell companies sometimes are used, Bloomberg BNA reviewed U.S. cases in which Mossack Fonseca-registered entities were accused of involvement in alleged large-scale corruption, racketeering, and tax fraud.
The firm denies any wrongdoing, and says that when it learns clients use shell companies for illicit activity, it severs the relationship. It declined to comment for this story. The firm’s website correctly notes that offshore company creation is legal—and companies use offshore jurisdictions for legitimate reasons, including to conduct cross-border mergers and acquisitions, bankruptcies, estate planning, personal safety, and restructurings.
While registering companies is, as Mossack Fonseca states, “normal activity of lawyers and agents around the world,” critics allege that companies created in secrecy jurisdictions like Panama often are used as part of schemes to circumvent national laws, take advantage of tax loopholes and dodge rules. Richard Murphy, professor of practice in international political economy at London’s City University, says such tax havens are “deliberately designed to undermine the world’s markets.”
Plaintiffs in the following lawsuits would likely agree.
Russian Oil, Racketeering Claims.
When Russia was privatizing its oil industry, Access Industries Inc. took full advantage of the opportunity.
According to court documents filed in 2002 in Norex Petroleum Ltd. v. Access Indus., Inc., No. 1:02-cv-01499 (S.D.N.Y. complaint filed 2/26/02), Access bought a 40 percent stake in the newly privatized oil company, now called Tyumen Oil Co. (TNK), with Alfa Group through an investment vehicle called ZAO Novy Holding.
Norex claimed in the case, which the court later dismissed, that Access and Alfa then used their partial stake in TNK to leverage a full takeover of the company by bribing Russian officials and law enforcement and coordinating a network of offshore entities, one of which, Futura Services S.A, was incorporated in Panama by Mossack Fonseca. Futura was allegedly set up in coordination with Alfa Group to receive millions in salary and bonus payments through a series of companies created in the Isle of Man and the Bahamas.
Norex alleged in the complaint that the Isle of Man and Bahamian companies then paid commodities trading companies in Russia, England, Wales, Gibraltar, and Switzerland with names like “Crown Resources” and “Crown Trade” to buy up TNK’s oil at a heavily discounted price and move it out of the country to avoid taxes.
TNK and Alfa Group then used the proceeds to buy up other oil companies through allegedly bribing officials, rigging auctions, and, at one point, an armed takeover.
TNK denied manipulating the Russian legal system and dismissed the accusations as rife with hearsay.
The plaintiff, Norex Petroleum Limited is a Canadian company with a majority stake in one of the Russian oil companies. It sued Access in U.S. courts on racketeering claims under RICO statutes.
Norex alleged that millions of dollars were wired through the U.S. to the purported slush funds to pay for fake services that the plaintiff claimed drained the companies of capital and drove them into bankruptcy. Alfa and Access then rigged the auctions to buy up the bankrupt companies’ assets and debt through a shell company at below-market prices, the complaint said.
The trial judge eventually threw out the claims in 2007, which a federal appeals court affirmed in 2010, stating that it was a “rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States,” Norex Petroleum Ltd. v. Access Indus., Inc., 622 F. 3d 148, 2d Cir., cert. petition dismissed.
Embezzlement, Tax Evasion Claims in Argentina.
In 2001, when Argentina suffered a substantial debt crisis, most bondholders took a sizable haircut—except for the hedge fund NML Capital Ltd. NML would begin a more than 10-year-long battle to get full repayment of its debt from Argentina, which involved tracking down all of the country’s assets and bank accounts, and, at one point, seizing an Argentinian vessel in Ghana.
A 2014 lawsuit by the hedge fund filed in federal court in Nevada, NML Capital, Ltd. v. Argentina, No. 2:14-cv-00492 (D. Nev. motion filed 4/1/14), accused former Argentine President Nestor Kirchner and his wife Cristina Fernandez de Kirchner , who succeeded him as president, of awarding lucrative projects to insiders who allegedly embezzled billions from the country. NML claimed that some of this money was then laundered through 123 holding companies including the Mossack Fonseca-registered company M.F. Corporate Services (Nevada) Ltd.. .
According to the U.S. civil case, the accusations, sometimes referred to as the “K Money Trail,” were based on an investigation by Argentinian journalist Jorge Lanata, who reported that Nestor Kirchner awarded public construction projects to companies run by Argentine political insider Lazaro Baez. Baez’s construction company then transferred money to a hotel management firm, which would pay for rooms at hotels owned by the Kirchners whether or not they were occupied.
In the case, Argentina disputed the connection between Baez and the Kirchners, saying there was never a “direct relationship or transfer of assets.”
A separate investigation by Argentine authorities implicated some of the Nevada holding companies created by Mossack Fonseca – Aldyne Ltd.
Eyden Group LLC, and Huston Management LLC – of connections to a Swiss fund, Helvetic Services Group S.A, with connections to Baez. They accused Baez of being an owner of Helvetic and of using the Swiss fund to funnel money back to a construction company in Argentina.
As reported by the International Consortium of Investigative Journalists (ICIJ), Mossack Fonseca also denied any relation between the Nevada companies and Mossack Fonseca. ICIJ said e-mails it obtained indicate that Mossack Fonseca actively tried hiding documents connecting the two, IT operatives working remotely from Panama “tried to clean the logs of the PC’s in the Nevada office,” and another Mossack Fonseca employee whisked all paper documents back to Panama.
A Mossack Fonseca representative responded to the ICIJ’s accusations by stating that the firm doesn’t direct the companies it forms, and “merely helps clients incorporate companies.”
Additionally, statements in court documents allege that the sole employee of the M.F. Services received all of her directions from Mossack Fonseca, and her employment contract was signed by Jurgen Mossack and Ramon Fonseca.
On its website, Mossack Fonsecca denied any association with Baez, said that the firm only provided incorporation and nominee management at the request of a client in Uruguay, and that it hasn’t been investigated for any crimes related to money laundering or other unlawful behavior.
Baez was arrested in April on money laundering charges. Both Baez and Kirchner have publicly denied any wrongdoing. The NML lawsuit is ongoing although Argentina negotiated to pay out the holdout creditors in April 79 SLD, 4/25/16, See previous story, 04/25/16, 48 SRLR 908, 5/2/16, 22 WSLR 05, 5/11/16
Hotel Franchise Tax Evasion.
When the French banking institution Societe de Banque Occidentale (SDBO) loaned $92 million to the Euro-American Lodging Corp. (EALC), it was ostensibly to renovate a building in New York for the Flatotel hotel franchise.
But according to a lawsuit filed by CDR Creances S.A.S. (CDR) in 2014, CDR Creances S.A.S. v. Cohen, No. 150583/2014 (N.Y. Sup. Ct. complaint filed 1/22/14), income from the hotels all went to the developers, Maurice Cohen and his son, through a complicated management contract in the name of a Mossack Fonseca-created entity in the British Virgin Islands, Macson Express Inc., which also allowed EALC to avoid loan payments and taxes. The Cohens then sold the building, and transferred the proceeds of the sale to an HSBC account in Switzerland controlled by another Mossack Fonseca-created entity, which then transferred the proceeds to other British Virgin Islands entities registered by Mossack Fonseca, such as Bigbury Shipping Ltd., Whitebury Shipping Ltd., and Blue Ocean Finance, Ltd. .
CDR, successor-in-interest of the loan to EALC, accused the Cohens of coordinating with a Swiss attorney to control all of the funds through bearer shares, which allegedly helped the Cohens hide ownership of the family’s assets and avoid taxes.
According to the lawsuit, the network of offshore entities moved money back and forth to fund a lavish lifestyle for the Cohens, who bought yachts, real estate in Florida, sports cars and a $7.2 million condo at Trump World Tower. In 2006, a Florida court found in favor of CDR for just under 1,800,000 euros ($2.2 million) following admiralty litigation which uncovered Maurice Cohen as the owner of a yacht owned through Bigbury Shipping, one of the offshore companies.
In 2011, the Cohens were found guilty of tax evasion in a separate case for failing to report $50 million in income and $150 million in assets for which they were sentenced to 10 years in prison and ordered to pay $17.2 million in restitution. And in 2014 a judge ordered them to repay $185 million in restitution to CDR Creances over the Flatotel dispute.
Ukrainian Gas Scandal.
When the former Ukrainian prime minister and leader of the Orange Revolution, Yulia Tymoshenko, was given a seven-year prison sentence on corruption charges in 2011 over a gas deal with Russia, European leaders called the decision politically motivated. Tymoshenko called the decision a result of then-Ukrainian President Viktor Yanukovych’s move toward an authoritarian regime intent on pulling the country further from Europe.
A 2012 case filed in the Southern District of New York, Universal Trading & Inv. Co. v. Credit Suisse (Guersney) Ltd., No. 1:12-cv-00198 (S.D.N.Y. complaint filed 1/11/12), echoes many of the accusations from the Ukrainian trial—and includes claims that Tymoshenko was involved in a complex scheme of wire transfers, offshore accounts, tax evasion, kickbacks and bribes meant to directly benefit herself with some help from an offshore entity in the British Virgin Islands called Bassington, Ltd. registered through Mossack Fonseca.
The case brought by Universal Trading & Investment Co. Inc. (UTICO) against Credit Suisse (Guernsey) Ltd. details how, in 1994, Tymoshenko headed a company called Cube Ltd. that contracted with UTICO to collect debt on behalf of the Ukrainian government over commodity deals.
Working with Ukraine’s Prime Minister-designate Pavlo Lazarenko, Tymoshenko converted Cube into United Energy Systems of Ukraine, PFG (UESU), to serve as an intermediary for natural gas imports from Russia through Gazprom, according to documents in the case. The case brought by UTICO in 2012 accused UESU of using offshore companies for fraud and conspiracy to avoid debt payments.
After Lazarenko and Tymoshenko negotiated contracts between UESU and Gazprom, UESU was restructured in numerous ways. It was made a parent company of an offshore company set up in London and put under the control of another company, Somolli, which Tymoshenko controlled, in Cyprus, which then received a significant portion of the company’s profits. Other offshore entities in the Cayman Islands controlled by Lazarenko were allegedly used to direct bribes to Gazprom officials, court documents state.
According to the court allegations, Bassington, the entity set up by Mossack Fonseca with directors from Credit Suisse Trust, was then positioned as the parent company to both the London and Ukrainian companies and center of operations. Bassington’s directors became employees of Credit Suisse Trust in Guernsey, and Tymoshenko retained some control of Bassington through bearer shares. The other entities wired money to Bassington, and Bassington then controlled the kickbacks in Ukraine and Russia, according to court documents.
As detailed in the U.S. civil case, Lazarenko was eventually arrested and charged in Ukraine with money laundering and contract murders, while Tymoshenko was charged with bribing the Supreme Court of Ukraine related to the UESU scheme. Russia cancelled its warrant for Tymoshenko in 2005. When new details were uncovered in 2011 around when she was sentenced for the Russian gas deal, Tymoshenko was tried again for tax evasion, kickbacks and bribery in Ukraine. In 2012, Tymoshenko publicly denied giving directions to an accountant tied to the UESU case and requested that hearings be conducted in her absence because of her declining health. The Ukrainian bribery case was eventually thrown out in 2015.
The case in U.S. courts against Credit Suisse was eventually dismissed on jurisdictional grounds.
International Art World.
The whereabouts of the Modigliani painting “Seated Man with Cane” has been the source of an ongoing lawsuit, Maestracci v. Helly Nahmad Gallery Inc., No. 650646/2014 (N.Y. Sup. Ct. complaint filed 2/27/14), between the Nahmad art gallery and the grandson of a French antiques dealer who believes the artwork was stolen by the Nazis.
It’s also a window into how offshore entities may be used by the art world to hide ownership through freeports—free trade zones where owners pay no import taxes and inventories are not tracked.
Based on an investigation by ICIJ, Mossack Fonseca-created firms allegedly provided the tools for enabling secretive, high-end art transactions for works by famous artists worth millions. Mossack created the International Art Center S.A. (IAC) in Panama, controlled by the Nahmad family through bearer shares, and others at the center of art property disputes. The IAC then owned and controlled art that was held in various freeports.
In April, the contested painting was seized by authorities from the Geneva freeport.
An investigation by the plaintiff included in court documents found that IAC was a Mossack Fonseca-created entity with Mossack Fonseca employees as IAC’s nominee directors, which Maestrecci alleges was intentionally created “to avoid litigation such as this.”
According to affidavits submitted to the court, the Nahmad Gallery denied any connection with the International Art Center.
Nahmad Gallery didn’t respond to a request to comment. The case against the Nahmad Gallery is ongoing.
Turkish Securities Fraud Allegations.
Originally, the plaintiff in a 2008 case, Baumgartner v. Salzman, No. 2:08-cv-02582 (E.D.N.Y. dismissed 10/2/13), accused a New York attorney, Stanley Salzman, of breach of fiduciary duty over a high-yield trading program the plaintiff, a German investment company, claimed was an advanced fee fraud scam involving Turkish crime figures.
Over the course of the trial, the focus switched to Meytec Capital Holdings Limited, an offshore company created by Mossack Fonseca in the British Virgin Islands, identified in court documents as “the masterminds, if not the mastermind, in organizing, coordinating and supporting a network of forgers, fraudsters and support personnel used by the defendants” to support the conspiracy.
Defendants in the case denied the claims and any knowledge of a conspiracy to defraud. Meytec eventually settled and admitted to civil claims, which was done, according to the plaintiffs in court documents, solely to avoid “[exposing] any secreted assets or the money trail for their beneficiaries to discovery.”
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