03.02.06 | We continue our series on how compliance officers can ascertain whether a private company seeking to become a bank client is indeed a government-controlled corporation that is a politically-exposed organisation requiring enhanced due diligence and heightened Source of Funds analysis. Our previous article detailed how agovernment-controlled company may have special access to financing, or even grants, how its officers and directors may be fronting for its real ownership , and how its ability to obtain public funds without accountability may make it a high-risk, or even unacceptable, client. Today we examine a more dangerous variety of government-controlled company: where its ownership is but a portion of the total shares of stock. While identifying nominee owners of 100% of a company as fronts for government beneficial owners, record holders of minority interests are often overlooked, or disregarded entirely in due diligence investigations.
Recognise that the laundrymen know your policies.
As a compliance officer, I was instructed by bank counsel to ignore owners of less than 20% of a company. I later ascertained that potential clients were routinely advised to set company ownership at exactly 19%. Their agents obviously knew where our enquiry threshold was , so we quickly abolished the arbitrary benchmark , and checked out anyone whose holdings were just under the formerly used figure. Why is it difficult to recognise companies where government ownership is less than a controlling interest ? Let’s examine the general corporate landscape where a quiet transfer of partial ownership has occurred:
– Officers and directors generally are unchanged; however, there may be direction from behind the scenes, reducing the officers to figurehead status.
– The company, previously known as private and closely-held, has no legal obligation to disclose its new situation. Indeed, corporate records are usually only available to shareholders.
– Certain benefits may inure to the company by virtue of the new owner that it does not want the commercial world to know about. ( e.g. contracts, new business, new raw materials and/or facilities made available.)
Why be concerned ?
Over and above the obvious, there are clear and important potential dangers when a financial institution handles a government-controlled company where the private and public sector share ownership. Some important things to be aware of:
– Covert governmental aims and goals, whether diplomatic or economic, may cause serious reputational damage to your bank when publicly disclosed in the media.
– The company may be immune from civil, or even criminal action, by virtue of its hidden governmental control. Can you be the banker for organised misconduct, or criminal elements ? Obviously, no.
– Intelligence or espionage activities may be conducted, either domestically or abroad, by agents using the company for these operations. The linkage of such ‘dirty tricks’ as the Watergate break-in, or the Nugan Hand scandal, can be fatal to the existence of a financial institution.
– Goverment-sponsored money laundering may be part of the company’s operations.
A frightening case study.
An illustrative company should help explain the nature of the beast, and why it could be compliance suicide to knowingly allow a government-controlled corporation to bank with you. Last week the world’s largest corn flour and tortilla manufacturer, Mexican agrarian giant, Grupo Maseca, also called GRUMA, announced that it was selling a 40% share of one of its Venezuelan subsidiaries, known as Molinos Nacionales, CA, to Ricardo Fernandez Barrueco, for $65.6m. But do the Mexicans really know who they are doing business with ? Readers who absorbed the first installment of this series will recall that Sr. Fernandez Barrueco emerged from penury and obscurity to become a major owner of Venezuelan companies closely aligned with the immediate family of Venezuelan President Hugo Chavez Frias. Fernandez has such power that his “friends” in government and the military succeeded in quashing a major law enforcement investigation into his suspected smuggling operations.
More suspect comrades.
We have already covered Fernandez’ “colourful” background, and his shady associates, but perhaps it is best to mention two additional individuals who are his frequent traveling partners on his Bell 206 Ranger helicopters. They are the radical Lebanese brothers Khaled Khalil Majzoub, born 26 August 1965, Cedula 6290182, and Majed Khalil Majzoub, born 23 April, 1970, Cedula 13526338.
Believed to have improperly transferred prohibited advanced technology from the US to Venezuelan government agencies using a Miami company called Hardwell Computer, Inc., their US visas were revoked in 2004. The Khalils appear to be the preferred contractors of the Venezuelan armed forces, and are allegedly linked to Venezuelans involved in laundering money siphoned off from public contracts and from other illicit activities. Like Fernandez, their companies appear to be involved in tax evasion and customs schemes. Fernandez and the Khalils are linked to the same customs agency, TMB Aduanas.
Financial pirates looting funds at public expense.
Fernandez is also considered to be a member of the New Bolivarian Elite, the Venezuelan inner circle, all of whom, by the way, clearly rate PEP status due to their ready access to billions of dollars of Venezuelan oil revenues diverted by Chavez from the public treasury, and used to promote his radical political agenda in Latin America. Rotch Energy Holdings, the Fernandez company that controls the other half of DAMASECA, GRUMA’s other subsidiary, is a registered PDVSA broker. Energy brokers purchasing petroleum products from Venezuela are regularly forced by PDVSA to send a large portion of their commissions to powerful Venezuelan PEPs, often in tax haven countries. Would you like to see a client of your bank named as a funding source of criminal organisations ? The bank would surely run afoul of US anti-terrorism financing laws, or worse, in today’s strict regulatory enforcement climate.
Is Fernandez the worldwide laundryman for Chavez?
The is an additional, more dangerous, red flag: Fernandez’ businesses, which are strictly agrarian, and are domestic in focus, cannot be reconciled with his dozens of personal overseas bank accounts, many of which are in the unreformed active tax havens of the Caribbean and Europe. A partial list impresses even this old veteran of the “ banking republics. “
Compliance officers note well how he has accounts at both the London offices as well as the tax haven branches of some of the world’s largest international banks, including Barclay’s . Such inter-branch transfers rarely incur enhanced due diligence, as the receiving compliance staff assume the client’s transaction has already been vetted. Such multiple accounts at many branches of the same bank allows virtually foolproof layering enroute to a final destination, as investigators rarely would be allowed access to internal transfer information between branches that have bank secrecy laws in effect.
Do you really want to be moving suspect funds for a company with a hidden, governmental agenda, run by the right-hand man of the family of the president of Venezuela , and whom may be a master laundryman ? That’s just one risk one takes when banking government-controlled companies. As the foregoing aptly demonstrates. Getting involved with clients who may be a government-controlled company is not just a PEP problem, it may indeed result in a financial infection from which your bank may not recover, They should only be allowed under strictly controlled and monitored circumstances, and if a link to hidden government ownership is shown regarding a present client, steps should be taken to terminate the relationship.
Alek Boyd 