Concealment of Assets: Money Loves Quiet

Dmitry Konstantinov, Lawyer

Source: Invest-Forsite

Recently the media, as well as the expert community, started to actively discuss the methods of concealment of assets located in the Russian Federation and abroad. Such discussions were triggered by investigations carried out by the Anti-Corruption Foundation (FBK) in relation to the property owned by the high-ranking state officials. However, such problem is not only limited by the funds possessing the property in the interests of certain politicians. For obvious reasons certain Russian businessmen and officials traditionally strive to conceal their assets. For the recent 25 years the mechanisms have changed, although their nature has remained the same – in our country money loves quiet.

Legacy of the 90s’

Instruments which were used for these purposes in the nineties were not very sophisticated on the legal side, but solved the mattes that were challenging at that time. In the first years after the birth of the market economy concealment of one’s own property was a matter of security. In addition, the property, which was being hidden, had not always been obtained on lawful grounds; it had to be concealed not only from criminals, but also from law-enforcement authorities. As a rule the owners of the concealed assets were represented by limited liability companies whose members were nominal individual persons. At the same time, the said nominal members were the person who did not only have any own assets, but also their own place to live. Such a simple scheme had its disadvantages – it was only possible to see the nominal directors only once – when the documents were signed. Further such schemes were not used, at most the powers of attorneys were used, but more often forged signatures were attached to the necessary documents. Sometimes the “nominals” even assisted the competitors of the beneficiaries. In this case the assets were under the risk of getting into the hands of third persons.

But gradually the outrage of the organized crime has ceased to be the decisive factor of business conduct, and the typical structure of ownership of assets has started to change as well. The more civilized market started feeling the need for more transparency. It turned to be necessary also for engagement of funding and for flattering vanity of the owners.

Decades of offshore companies

Together with the Western banks and oil companies (and with their money) the Russian economy welcomed the universal international schemes. The first decade of XXI century the most widespread has become the ownership structure when the assets are owned by Russian companies. And such Russian companies, in their turn, are owned by the firms from numerous jurisdictions, first and foremost from Cyprus, which has become very popular among our business men. In many such jurisdictions the services of nominal directors were totally lawful and were provided together with the company address. This is why such structure really met the interests of the Russian business as regards to hiding the names of the real owners of the assets. The law of these jurisdictions contained a requirement regarding the disclosure of the ultimate beneficiary of the company. However, the company was required to provide only the declaration about the real beneficiary, which was never verified.

The offshore jurisdictions were widely used not only by the Russian business. If the latter was interested in the matters of confidentiality, the western companies were looking, first and foremost, the tax optimization. The growing popularity of the offshores did them no good – under the pressure of the economically developed countries the major part of offshore jurisdictions were forced to considerably tighten their corporate regime. In addition, such popular in our country Cyprus had to bring its laws in conformance with the legislation of the European Union when it became the new EU member. At the same time, it has become more difficult for the SPV companies (which do not carry out their own independent activities) to perform banking settlements, which made the use of the foreign companies even less attractive.

Modern age

It cannot be said that the former schemes of hiding assets have vanished from the modern circulation – they have been just supplemented by new schemes. Today the lawful business companies have no reasons to hide their assets and the process of engagement of loans and investments requires great openness. However, for “not-very-lawful” businesses, as well as for certain state officials, keeping the fact of ownership of their property secret, remains the burning issue.

It needs to be understood that the situation as it is, when a legal person owns certain property, and in the reality all the title powers are performed by a certain individual person, is totally within the boundaries of the norm. In the end, any legal person is not more than just a formality which is created for the purposes of convenience of the circulation, and any company has the beneficiaries – individual persons. This is why possession of the assets for a company, to a certain extent, is always of a nominal nature and there is nothing bad or unlawful in this.

At the same time the use of services of nominal individual persons as the participants/shareholders is continuing to be popular. Any commercial organization built according to the principle of corporate participation of the owners, as well as the fact of the participation in our country is always known to the tax authority or to the registrar. This is why the simplest solution for concealing the real owners of the company is the use of a fictitious member-shareholder who has informal arrangements with the real beneficiaries. This most primitive scheme is still popular today so far forth as the tax service had to introduce a special register of individual persons holding membership in several limited liability companies (the tax authorities have no access to the data about shareholders). Such method is simultaneously the cheapest one as soon as the expenditures are limited by the remuneration of the “fake” director, and the simplest one, as soon as requires no special knowledge. This makes it accessible for the business of any scale. The main disadvantage of the scheme is the absence of any legal protection of interests of the real beneficiary, in principle.

Foreign legal persons are also still used as the owners of the Russian assets. In the majority of cases they cannot be referred to as off-shore companies as long as the jurisdictions, which are most popular with our business companies, are actively cooperating with the tax authorities of other countries, including Russia. The registrars in these countries are now more insistently asking to file information about the ultimate beneficiaries and, as opposed to the Russian tax authorities, even ask for the proof that the declared persons are actually the owners of certain businesses. It is obviously not an insurmountable obstacle to proposing the “nominals” to the positions of the companies’ beneficiaries. But such a scheme cannot provide guarantees of total confidentiality – it is enough to remind the recent disputed under the participation of Mukhtar Ablyazov and Sergey Pugachov where the courts were able to identify the respondents as the real beneficiaries of the Russian assets in spite of using by the latter of the off-shore companies with nominal shareholders. But one cannot deny the fact that it is much more difficult to obtain information about the shareholders or beneficiaries of a foreign company; it is especially difficult to do this to the Russian state authorities (for example, courts) who do not maintain good cooperation with the colleagues from other countries. On the other hand, this option is also more expensive as a national nominal service, especially if one chooses to follow all formal requirements imposed by the law of a corresponding state.

But the “offshore scheme” can also be successfully used to conceal the real beneficiaries if the foreign laws are used skillfully using the complex approach. The Anglo-Saxon law in general, and the institute of trust, in particular, provides enough instruments allowing not to disclose the names of ultimate beneficiaries. But, in this case one requires much more complex architecture of corporate ownership than simple ownership by a company of one nominal shareholder. Building such architecture requires substantial expenses both for the corporate support of the engaged SPVs, as well as for the consultants’ services in various jurisdictions. It is the high cost of services which explains the very limited application of such schemes.

The Russian law also allows using legal mechanisms similar to the institutes stipulated by Anglo-Saxon law. And these mechanisms are also used to conceal the assets although they are not always fit for that. Here we can go back to the big story with the funds – owners of the elite real estate. This form of non-commercial organizations allows to safely own the property without disclosing its real beneficiary. It is understood that according to the law the funds are established not to favor the owners of villas, but to achieve certain socially useful goals. However, there are no obstacles for the funds to be the property owners as well. On the other hand, the funds do not look like an ideal form of hidden ownership of assets because their founder and sponsors are always known. This is rather a convenient form of ownership which does not yield profit.

There are numerous ways to hide the real owner of the property these days. Such ways are differentiated by price, effectiveness and the level of lawfulness, but the main issue here is why there is constant demand for them. For those businesses, as well as for the persons who legally obtained their property, there is no need to conceal it. The demand for such mechanisms confirms that there is enough property the origin of which is still requires to be concealed.