Beneficial Ownership Concealment, Avoidance And Impunity: The Chimeric And The Ethereal.

Perhaps sensing that time is running out for such games, the offshore financial services industry has raised the campaign for beneficial ownership concealment and avoidance to a whole new level, creating ownerless ‘chimeric’ entities and, in the case of the adaptation of blockchain and cryptocurrency transactions, literally moving to a higher, meta-jurisdictional plane. [2]

Chimeric Entities

Obscurity is made all the easier, and impunity all the more likely, by the very nature of the solutions employed, which are little known and even less well understood. They are mostly referred to by regulators, law enforcers and academics alike in merely generic terms. But this will not do.

Not only structures but also concepts follow a different evolutionary path offshore. There can be unintended and unforeseen (or fortuitous) consequences when a legislative initiative, developed onshore, transfers to a low tax jurisdiction.

Simply castigating ‘offshore trusts’ and ‘shell companies’ without specifics, as so many commentators do, is on a par with describing every illness as an ‘ague’ or ‘bug.’ A detailed knowledge of the construction and effects of the structures is essential. To understand how each chimeric structure functions is to be able to challenge it on its own terms, and to predict what further evolved form it may take.

The adaptation and abuse of established fiscal and legal principles helps to sustain kleptocracies; to facilitate corruption, financial crime, money laundering, illicit funds flow, tax avoidance and tax evasion; to ensure the defeat of creditors; and to guarantee an escape from family responsibilities. Morphed, those principles become tools of abuse. They are – wholly or in part – common to many of the chimeric structures. Those tools of abuse are:

1. The structures are subject to artificially low levels of domestic taxation or are wholly exempt from income and capital taxes or customs duties.
2. Reciprocal enforcement of foreign judgments in domestic courts is limited or dis-applied altogether (and domestic court proceedings may be held in secret).
3. Limitation periods (the time within which a claim may be brought, at the expiration of which that right is extinguished) may be so short as to preclude in practice the preparation and filing of a claim.
4. Foreign rules on forced heirship or inheritance generally are disapplied.
5. Foreign rules on the division of property upon divorce or separation are disapplied.
6. The concept of beneficial ownership is disapplied.
7. Domestic remedies relating to fraudulent transfers (the transfer of property into a structure which either intentionally defeats or is deemed in law to defeat the interests of legitimate creditors and other claimants) are disapplied.
8. The structure may be aggressively asset protective, and assets held within it may not be capable of being alienated or passed by bankruptcy, insolvency or liquidation; or liable to be seized, sold, attached, or otherwise taken in execution by process of law.
9. The requirement to place details of the structure, its existence, its finances, and its activities in the public domain (in the form of a publicly accessible register) may be minimal or entirely absent.
10. Structures which under generally accepted legal principles have a limited life span (such as private trusts) may be given perpetual existence.
11. Fiduciary responsibilities of those administering or managing structures – be they directors, trustees or any other responsible officer – may be disapplied, or, if applied, those otherwise responsible may, through a combination of manipulated limitation periods and indulgences, be deemed not culpable, or culpable but absolved.
12. Regulatory constraints, including those on money laundering and the financing of terrorism, may be undermined by the imposition of severe penalties on whistle-blowers.
13. The structure may take a form unknown under generally accepted legal principles or may have the power to shape-shift.

The following table, sampling some of the more prominent chimeric structures, correlates these tools of abuse:

Ethereal: ‘Super’ Tax Havens

The potential to launder funds through tax havens has always been a truism, but as each tax haven in turn introduces – some more reluctantly than others – anti-money laundering and anti-terrorist financing provisions, the would-be launderers are migrating.

Tax havens do not exist solely in the physical world. They do not have to have a geographical presence, or even a government to rule them. Those that do not are the ‘super’ tax havens. They operate in virtual reality, and interface with the world through portals provided by the ‘blockchain havens.’ The super tax havens are created through the manipulation of cryptocurrency and transactions on the blockchain in such a way as to replicate the tax haven services offered in the real world. Money launderers are leaving today’s tax havens behind and moving to cyberspace. The super tax havens have filled an evolutionary niche.

How is this relevant from the perspective of beneficial ownership concealment?

The State authorisation and use of bearer securities has declined in recent years for the self-evident reason that a bearer security, regarded as being owned by the person who has possession of it, is anonymous, travels freely and neatly avoids detection. Cryptocurrencies represent a renaissance in the bearer security industry, unrestrained by geography or jurisdiction [3], and a facilitator of transient ownership and fraud. Ascertaining where ownership information may be located amongst the industry sectors of exchanges, wallets, payments and mining has become bewilderingly complex. When referring to “owners” of cryptocurrency, it is the “owner” of a wallet which is meant. It is reasonable to assume that the provider of the wallet holds appropriate ownership information on each wallet, and even that there may be a global procedural standard for determining ownership. None exists however, and the industry resembles a free for all.

Jan Lasky comments: “One individual can even own millions of cryptocurrency accounts for a single cryptocurrency, created by a few seconds. […] The creation of a new account initially guarantees the owner’s full anonymity. The term anonymity means that nobody (except the owner) can identify the account owner from the account data. It is recommended to use an account for one transaction only, which implies that an individual will have tens to hundreds of thousands of accounts over the course of his or her life.” [4]

Where cryptocurrency engages with the non-virtual world, as for example in fiat currency to cryptocurrency exchanges and vice versa, compliance programmes may be in place – imposed by the regulatory authorities in that non-virtual world. However, where the activity is cryptocurrency-focused, entirely along the blockchain (peer-to-peer), in so far as they can be ascertained at all, transactions are wholly unregulated, and by virtue of their anonymity may not be susceptible to State regulation.

Even where regulation is introduced, it struggles to be sufficiently comprehensive. Take the European Union (EU) as a contemporary example. On 31 May 2023, the EU adopted its Markets in Crypto-assets Regulation (MiCA) [5]. Three worrying weaknesses are at its heart.

Firstly, MiCA focuses on rendering accountable the Cryptocurrency Asset Service Providers (CASPs) themselves. However, CASPs are not financial intermediaries. They are not indispensable for users to own crypto assets or to undertake exchange transactions. Self-hosted wallet users can easily trade crypto assets by relying on peer-to-peer trades or fully decentralised applications.

Secondly, MiCA excludes non-fungible tokens (NFTs), and therefore fails to regulate one of the principal digital strategies for the concealment and avoidance of beneficial ownership. This exclusion is justified on the sole ground that non-fungible tokens pose only limited risks to holders and the financial system. MiCA takes no account of their potential for abuse.

Thirdly, decentralised autonomous organisations (DAOs) are not caught by MiCA, and this leaves a huge amount of leeway within the European Union for those Member States which are de facto tax havens, such as Luxembourg, Malta and the Netherlands, to promote this burgeoning offshore phenomenon.

Reflections

“There is something visceral about ownership.
This is mine; you can’t have it. This is mine; you can share it. This is ours.
Try to find it”.

Chimeric structures ensure that beneficial ownership cannot be ascertained, for there is no beneficial owner. The issue is simply avoided. Ownership in the blockchain may be fleeting or multiply fragmented, or the products on offer may be so evolutionary that regulators cannot keep pace. Concealment becomes a function of numbers, with transient owners faceless in a crowd. Laws offshore are morphed to fill niche market needs and there exists no law to be applied in the meta-jurisdictions.

Impunity is assured.

1   “A controlling ownership interest depends on the ownership structure of the company. It may be based on a threshold, e.g. any person owning more than a certain percentage of the company (e.g. 25%)” Interpretive Note to Recommendation 10 (Customer Due Diligence), The FATF Recommendations (2012, as amended February 2023) 65 fn 35 <https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html> (accessed 5 November 2023)
2   For a detailed analysis of the structures referred to in this article, and to many others which function as chimera, including those based on blockchain technology, see Paul R Beckett An Anatomy of Tax Havens: Europe, the Caribbean and the United States of America (De Gruyter, Berlin, 2023) and Paul Beckett Beneficial Ownership and Legal Responsibility: Concealment, Avoidance and Impunity (Routledge, London and New York, 2024).
3   An overview of the problems of determining which laws of which jurisdiction, if any, govern a cryptocurrency transaction is found in Leigh Sagar, Fighting over nothing: Cryptocurrency litigation issues <https://www.chba.org.uk/for-members/library/overseas-seminars/cryptocurrency-litigation-issues> (accessed 5 November 2023). Indeed, cryptocurrency may stand outside the national/international dichotomy altogether: “For the regulatory authorities, the concern is to reconcile the limited jurisdictional reach of their powers with international (anational) and distributed nature of the cryptocurrency sector. The transnational nature of cryptocurrencies complicates the task by requiring almost universal consensus among the states holding radically different positions on cryptocurrencies.” Michael McKee, DLA Piper Regulation of Virtual Currencies (26 April 2018) <www.ucl.ac.uk/laws/sites/laws/files/02_mckee_ucl-blockchain.pdf> (accessed 5 November 2023)
4   Jan Lansky, ‘Possible State Approaches to Cryptocurrencies’ (Journal of Systems Integration 2018/1) 21 <https://www.researchgate.net/publication/322869220_Possible_State_Approaches_to_Cryptocurrencies> (accessed 5 November 2023)
5   Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets, and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937 <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R1114&qid=1687674524617> (accessed 5 November 2023)
6   Bob Michel, ‘EU ambition for DAC8 transparency on crypto is cut short by failure to think outside the OECD box’ (Tax Justice Network, 25 May 2023) https://taxjustice.net/2023/05/25/eu-ambition-for-dac8-transparency-on-crypto-is-cut-short-by-failure-to-think-outside-the-oecd-box/ (accessed 5 November 2023)
7   The technicalities of the minting (creation) and commoditisation of NFTs are outside the scope of this article. A useful starting point for coming to grips with this still arcane subject is available from leading NFT creator Etherium: ‘Non-fungible tokens (NFT)’ (Etherium.org)<https://ethereum.org/en/nft/> (accessed 5 November 2023). From the perspective of the United States of America, see Kirsten E Busch, ‘Non-Fungible Tokens (NFTs)’ (Congressional Research Service R47189, 20 July 2022) <https://crsreports.congress.gov/product/pdf/R/R47189> (accessed 5 November 2023)
8   Paul Beckett Ownership, Financial Accountability and the Law: Transparency Strategies and Counter-Initiatives (Routledge, London and New York, 2019) ch 1 Introduction: Why ownership matters.

Advocate Paul Beckett
Paul is a Lawyer and Academic, specialising in company, commercial and trust law; banking and fund management; cryptocurrencies and the blockchain; fraud, bribery, white collar crime, anti-money laundering and financial services regulation; commercial arbitration; business immigration; and domestic and international human rights (civil, political, economic, social and cultural rights). Recent publications include 'European Cross-Border Estate Planning' (Isle of Man chapter) (Sweet & Maxwell, London, first published 1995, current edition 2022), and 'Digest of Commercial Laws of the World' (Isle of Man chapter, co-author) (Thomson Reuters, USA, 2016, current edition 2022). His latest book is 'An Anatomy of Tax Havens: Europe, the Caribbean and the United States of America' (De Gruyter, Berlin. Published 6 November 2023). Upcoming is 'Beneficial Ownership and Legal Responsibility: Concealment, Avoidance and Impunity' (Routledge, London/New York. In preparation, publication due Spring 2024).