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Thursday
Mar132014

Was Mt. Gox a Delaware shell game?

The fraud allegations aimed at Japan-based Mt. Gox, formerly the world's biggest bitcoin exchange, have exposed the possible use of a shell company in Delaware in a way that law enforcement authorities have been concerned about for years.

Mt. Gox filed for bankrupcy a month ago in the U.S. and Japan. Founder and CEO Mark Karpeles claimed hackers overwhelmed the site and stole the company's entire inventory of customers' bitcoins, worth roughly $540 million. Some of those customers are alleging Mt. Gox wasn't hit by hackers but concocted the story as a ruse to defraud them.

Reuters reported that CEO Karpeles had registered a company in Delaware called Mutum Sigillum. (The name is Latin for "worthless little symbol.") The company left practically no paper trail about itself or its ownership. But, according to Reuters, Karpeles used Mutum Sigillum to transact with a U.S. bank via Dwolla, an online payment network, and "real money" flowed through the Delaware company.

Delaware, along with a few other states, allows foreigners to register new corporations without having any presence in the United States, using agents as conduits for the corporate owners.

The agents usually keep no records, such as tracking the company's true beneficial owner. When law enforcement officials need the ownership information, the agents typically provide only the name of the overseas entity designated to receive correspondence on behalf of the company.

Mutum Sigillum was registered by Vincent Allard, a French Canadian lawyer who for the past 13 years has been living in Dover, Delaware. He runs a business with his daughter that acts as a registered agent for Delaware corporations.

When Reuters called Allard for comment, he said he hadn't heard of Mt. Gox's bankruptcy and would have nothing to offer investigators if they were to question him about it.

A study in 2012 by researchers from Brigham Young University, the University of Texas and Griffith University (Australia) found that the United States was the second easiest country after Kenya in which to incorporate a shell company. Nearly half of the U.S. jurisdictions surveyed (48 percent) didn't ask for proper identification and 22 percent did not ask for any identity documents at all to create a shell company. A copy of the study can be downloaded in pdf here.

In August 2013, Senator Carl Levin (D-MI) introduced a measure to eradicate the use of shell corporations with hidden owners. And six months ago, G-8 leaders agreed to tackle the issue of shell companies by requiring owners to identify the beneficial owners who ultimately control and profit from these businesses.

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Julie DiMauro is the executive editor of FCPA Blog and can be reached here.

Reader Comments (1)

Greetings:

I found some of the studies examining the mechanics of money laundering to be extremely enlightening and disturbing.

I especially enjoy the work being done at Griffith University -- http://www.griffith.edu.au/business-government/centre-governance-public-policy/research-publications/?a=454625.

These studies are important contributions to the debate over risk-based or rule-based AML/ATF systems.

Nonetheless, the disclosure of what information is collected for inputting into the "systems" is an inherently vulnerable that can be circumvented. Even if the inputs are used to create a data base over time, this will not solve the problem. If there exists a lucrative reason to beat the system, this will occur over time.

Furthermore there is always the issues of competing governmental priorities, the difficulty of obtaining institutional cooperation (both within a country and across borders), timeliness, and the quality of the personnel assigned the task of making all nodes of the system work. Just think of the high turnover rates for bank tellers.

In addition, there are other areas of concern that cannot be ignored:

(i) persons operating through shills will not always be picked up by the system as ML/TF risks (clean arrest/Interpol histories and good credit histories); and

(ii) legal entities engaged in legitimate business (including their personnel), is always a potential threat due diligence that alone will not uncover.

Traditionally, money has been successfully laundered through art galleries, auction houses, hotels, parking lots, restaurants, etc.

Hence, it is difficult if not impossible to determine the true beneficial owner of both private and public companies. Even if ascertained, the information may be of limited value. If countries were to require business/individuals to input this information into some data base, there is always the question of reliability of the information transmitted.

Will the financial interest throughout the world be willing to end the practice of allowing publicly-traded companies to issue their shares in street name or in the name of the broker.

There are not shortcuts to good due diligence and while technology has helped AML/ATF efforts tremendously, I doubt that artificial intelligence will supplant human intelligence.

There will always be the question of how much one needs to peel the onion, which must be weighed this against the costs incurred and the effectiveness of the entire effort.

Businesses are in the business of making money. Granted, no system will be 100% effective, but what level of success will be acceptable.

Lastly, Senator Levin should be applauded for his efforts in this area.
March 14, 2014 | Unregistered CommenterEthan S. Burger
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