Fraude expert: “Money laundering through a trust company is a piece of cake in The Netherlands”

Yesterday-morning, Transparency International presented its new Corruption Perception Index for 2012. The Netherlands ended at an honorable 9th place, ex aequo with Canada.

Although this is still a very good result, the country did drop two positions since last year. It might be that the recent scandals surrounding the liberal-conservative party VVD and the reputation of The Netherlands as a tax-haven caused this slight drop on the index. Both are factors that could change the perception of corruption in The Netherlands; the basis for this index.

If you look at the score and ignore the different calculation method that TI used this year, you see that all countries in the top ten scored less points than last year. This could be caused by the fact that 2012 has been a much tougher year for almost all top ten countries than 2011, from an economic point-of-view: when the going gets tough, corruption gets going.

Talking about corruption and fraudulent behavior: yesterday, 5 December 2012, there was explosive news coming from Dutch national bank ‘De Nederlandsche Bank’ (DNB). This news will not only add to the reputation of The Netherlands as a tax haven, but it might even show The Netherlands as a money laundering hotspot; something that Dutch politicians surely won’t like.

In an investigation executed by DNB among nine trust companies, it became clear that the large majority of these trust companies made a financial and administrative mess of their administration. These trust companies mostly operate as letterbox firms for multinational companies, people and organizations that want to avoid taxes.

It didn’t become clear from the initial results of the investigation whether this mess was based on ignorance and amateurism among the trust companies, or a deliberate attempt for committing money-laundering and tax-fraud.

I hope that the final report from DNB will shed some light on this. Unfortunately, I don’t have that report in my possession yet.

Business news radiostation BNR (www.bnr) held interviews with a reporter from Het Financieele Dagblad, Siem Eikelenboom (www.fd.nl) and a money laundering-expert from SBV Forensics, Cees Schaap. Here are the pertinent snips of these interviews, summarized and translated by me.:

The first interview was with Siem Eikelenboom of FD (interview in Dutch):

Interviewer: what was going on with these trust companies?

Eikelenboom: the paper trail of these trust companies was flawed. DNB has held a so-called thematical investigation. It investigated certain kinds of private limited companies that operated from within trust companies: the so-called ‘consultancy purpose limited’. In reality, these are letterbox companies who ‘consult’ and advise multinational companies.

When the paper trail of such trust companies is flawed, it is very hard for DNB to find out how much money goes through the underlying multinational company, where this money comes from and where the money finally ends.

For all the activities with money in such consultancy purpose limiteds, there should be a clear paper trail. However, this paper trail was often not thoroughly administrated and thus not transparant. This made the risk for money laundering very substantial.

For instance banks must operate according to the ‘know your customer’ principal. They must know which parties deposit money on the bank accounts of their customers and where this money ends. This requires a complete paper trail. 

For these trust companies, it is the same deal with the same obligations as banks. However, this process was not correctly implemented within six out of nine trust companies. This means that only 33% had their main business under control.

Interviewer: How does DNB want to reinforce this kind of transparancy among these trust companies?

Siem Eikelenboom: The DNB can do so by imposing a so-called Measure of Assertion. This measure can be a very urgent letter, but also a penalty of tens of thousands of Euro’s.

Interviewer: Are these trust companies impressed by such a measure?

Eikelenboom: You bet! If the trust company doesn’t follow-up such an urgent DNB letter, their clearance can be withdrawn.

Interviewer: What I don’t understand: The Netherlands is already a center for these kinds of trust activities for many years. How come that DNB signals this problem only now.

Eikelenboom: This is a consequence of this thematical investigation; it gave DNB an opportunity to dive into these letterbox companies. Besides that, DNB was worried with this year’s exploding number of letterbox companies. The number in 2012 is 247, from 153 in 2011. DNB didn’t like that at all.

Interviewer: These letterbox companies; do they all represent worldwide renowned multinationals?

Eikelenboom: Yes. These companies only exist on paper. They are a part of international financial constructs. This is a way for multinationals to pay out for instance management and consultancy expenses at the lowest possible tax rate. The Netherlands is extremely well suited for this, because of its very favorable tax rates.

Interviewer: Was the flawed paper trail just a case of bad management and lack of transparency? Or do you think there might be fraud and money laundering going on?

Eikelenboom: DNB doesn’t want to inform us yet. The trust companies categorically deny fraud. We have to believe them on their nice smile.

You might still think after the first interview that DNB's findings were just a testimony of amateuristic trust companies with a sloppy administration and accounting. Ignorant, but harmless. The second interview, however, left less room for this point of view:

Interview with Cees Schaap of SBV Forensics:

Interviewer: What are the consequences of the failed monitoring and administration of the trust companies?

Cees Schaap: Not only the administration and accounting by the trust companies concerning these ‘consultancy purpose limiteds’ is flawed. These trust companies have a duty to perform thorough due diligence-investigations. They have to thoroughly investigate the origin and destination of the money they receive. Transactions take place based on contracts, but the trust company never sees the reality behind it.

Trust companies have the “caretaker duty” to not get involved in money-laundering and financing of terrorism. They need to account, administrate and thoroughly investigate the cash flows of the companies they represent, but this doesn’t happen.

Interviewer: How big is the money laundering problem?

Schaap: In The Netherlands, about €20 billion in money is laundered each year. From this amount, €15 billion is of foreign origin. The money comes from abroad, ‘condensates’ in The Netherlands, where it is spent or forwarded abroad again.

Interviewer: How does this work? We have the MOT legislation (duty to Report Unusual Transactions)? How can people launder money to the tune of €20 billion?

Schaap: At this moment we have the Act for Prevention from Money-Laundering and Financing of Terrorrism (WvWfT). This is a good law, as long as people follow it by the book. However, the definition of what an unusual transaction is, differs substantially between parties. The number of reported unusual transactions by trust companies is extremely low. One would expect that the number of reported transactions should be very HIGH in reality, with all the international money flows going through these trust companies.

Interviewer: How is this foreign black money washed white?

Schaap: Of course, the difference between black and white money is very hard to see, if you are not a forensic money expert. This is how companies can launder money:

There is money abroad of criminal origin. You and I make a nice agreement. You are in Italy and I am in Argentina. I am a meat supplier. We sign a impressive contract and go with this to the trust company. There we have a consultancy purpose limited, where we deposit this contract.

I send you an invoice for a large shipment of meat which is never delivered. You sell this ‘meat’ to a fake company and receive money for it. The difference between the sales price and the original purchase price – the profit of the transaction -  is now laundered and 100% clean money, which can be declared economically. It is a simplified transaction.

Interviewer: So we sell something without moving it physically? Only the money is moved? But what about the statement of delivery and the shipping bills?

Schaap: What should really happen is that the trust company visits the facilities of their customers. Is there a fixed arrangement – a cold store –  where the meat can be stored? Are the freight bills and statements of delivery present? Has the meat been insured during transportation? These are all questions that the trust company should ask in this situation.

Interviewer: When does this happen in reality? Never, I presume?

Schaap: That’s exactly my point. In The Netherlands, there is currently a yawning gap between the different national interests, concerning these trust companies: At one hand, these trust companies bring tax income and employment. At the other hand, we should stop fraud and criminality and end their bad practices.

If the insights of Cees Schaap are correct and I don’t have any reason to doubt them, then the Dutch government is in a very awkward situation.

The Netherlands is already the center of international tax avoidance for foreign dividends, capital growth and royalty earnings. Famous companies like Google and Starbucks, pop groups like U2 and the Rolling Stones and even people, like Mitt Romney process their foreign cash flows, dividends and royalty earnings in The Netherlands, in order to pay as little taxes as possible.

However, the scheme that has been signalized by Cees Schaap is not used for tax avoidance, but straight-away tax evasion, money laundering and perhaps even for financing of terrorism and guerilla wars.

Schaap is totally right when he speaks about the yawning gap between interests. The Netherlands doesn’t want to slaughter the goose with the golden eggs: our private cash cow. The Netherlands doesn’t give one darn thing about the fact that we pinch off tax income for other (needy) countries with our ‘token taxes’.

It also doesn’t give a thing about the tax-evasion and criminal cash flows that are signalized here: ‘It is our money and it are our jobs. How they are created is not our darn problem!’

After this report by the Dutch national bank DNB, we will probably see that the Dutch government is going through the motions with some symbolic legislation. They say a few times the words ‘disgrace’, ‘thorough investigation’ and ‘perpetrators will be prosecuted’ in parliament, a investigative commission will be appointed and everything stays the way it was. Deal done!

You can take my word for it.