Emmanuel Maingi- Co-Founder and Director, Athena Group


Tonight, I’ve decided to take a closer look at the global financial system relating to what we term as tax havens and shell corporations used by the wealthy to hide their vast wealth reserves tucking them away from the always prying eye of tax authorities in any given territory but also shield themselves from paying hefty settlements to their partners’ divorce. As such, I’ve done some reading and research based on how complex these systems are and wish to connect the dots for my readers on how this affects our very own legal system relating to all ongoing cases of corrupt ex-Executives of State corporations that swindled financial resources at a massive scale almost crippling the institutions in the process but to date, no conviction has been reached.

When it comes to international tax evasion tactics and possibly the most efficient way to launder money, and in my opinion how most of the international terrorist organisations and financiers have been able to evade ‘Big Brothers’ prying eyes has been primarily driven by double standards that have always propelled some of the world’s largest economies as the bullies next door and as referenced on the New York Times, “The United States demands that the rest of the world tell it when an American holds an account at a foreign institution, but the U.S. does not return the courtesy by automatically providing comparable information on foreign investors in U.S. banks to their home tax jurisdictions,” — Edward D. Kleinbard, a law professor at the University of Southern California and a former chief of staff of Congress’s Joint Committee on Taxation.

This is the very reason why people use tax and legal expertise to ensure that they repatriate their money to ‘untouchable’ territories and what’s interesting as per a former McKinsey chief economist [James S. Henry], who referred to these institutions as the economic equivalent of an astrophysical black hole because once they manage to get their wealth out there, it’s almost impossible to trace, find and link it to them – [An astrophysical black hole is a term in astronomy that refers to a region of space having a gravitational field so intense that no matter or radiation can escape and that can swallow stars and planetary matter] and according to him there’s an estimated $21 trillion of the world’s financial wealth in these so-called tax havens and to give perspective, this is more than the GDP of the US which according to the Bureau of Economic Analysis as of Q2 of 2015 was at $17.9 trillion.

For all that thought that the only place you can register a shell corporation is in the Cayman Islands or Panama, well here’s some food for thought; you can easily do so in the US of A and States like Delaware and Nevada have made significant revenue from advertising this provision and as one former Special Agent of US Treasury Dept. stated — “Why incorporate in Nevada?” the state’s website advertised in 2007. “Minimal reporting and disclosing requirements. Stockholders are not public record.” In his own words whilst on the job — “If somebody is investigating and it comes back to a Delaware company and you want to find who or what is behind that company, you basically strike out,” he said. “It doesn’t matter if it’s the F.B.I., at the federal level, state or local. Even the Department of Justice can’t get the information. There is nothing you can do.” and this is one of the key problems with the complex global financial system specifically protected by laws of States and other foreign nations across the world.

This is a clear indication of how systems of governments normally ‘shoot’ themselves in the foot by first monetising any opportunity to attract foreign investors by offering financial privacy which in my opinion is a by-product of the extremely bureaucratic processes in systems of governments hindering to some extend their intention to fight international money laundering and potential terrorist financing activities.

What’s my point and lesson in highlighting this to you folk? Well, if you happen to be an entrepreneur conducting business in any country where your businesses happen to use the financial services of any multinational bank that have a footprint in the US, you can personally attest to the horrors of the time consuming process of signing IRA’s declaration documents as is required by the US Treasury Department in pursuit of any potential US Citizen banking with them overseas and not possibly declaring this in their tax returns but also as an track and trace provision for money laundering and possible terrorist activities’ finance.

This is a provision by the US Treasury that all banks must ensure that all accounts held in their overseas operations must conform with the provisions of the IRA for financial transparency but more so of those persons of interest that might be using their infrastructure to launder money that potentially end us being used to committing major crimes by major international criminal syndicates. And the irony of this provision is that they do not conform to the some of the international requirements as a reciprocal to their provision (double-standards).

Closer home i.e. Kenya, The Central Bank of Kenya (CBK) has also mandated all banks that fall under its jurisdiction to report any suspicious financial activity and interestingly, no amount more than $10,000 or its equivalent can be transacted in any Kenya-based bank account without the approval of the CBK and this requires proof or reason of the transaction. This gives confidence in our evolving and maturing financial regulatory environment. We’ve been following major cases of looting in state corporations by former Executives who in turn hid their vast loot overseas, often referred to as tax havens and we’ve had foreign governments like the UK, US among others coming out strongly and offering their financial and legal support to the Kenyan government to repatriate these funds back into the country but also ensure that the perpetrators are prosecuted for their heinous crimes of looting public funds.

And it’s at this point many Kenyans ask themselves, why’s the government not keen on pursuing this given the support offered by the powerful Western Nations but also how comes these individuals have been so far successful? The answer lies in the complexity of the cleverly structured tax evasion and shell corporations that somehow end up not having even a single name or signature of the target person as executed by their able legal firms. According to New York Times, “More even than the laws of the world’s tax havens, the offshore financial system is kept afloat by the legions of professionals — accountants, lawyers, incorporation agents — who are paid well to service it” and there’s nothing any state can do as these are often within the boundaries of any territorial laws and that’s why it’s also easy for international crime syndicates to hide their financial proceeds in foreign and legally protected havens where they remain untouchable so long as no one connects the dots and being an ardent fan of the famous Netflix TV Series – Narcos, one tiny detail that might have been left out in the entire depiction of Pablo Escobar and his vast Cocaine empire was how these Shell corporations might have been used to ‘hide’ or launder most of this wealth beyond the traditional methods shown like taxi businesses, property, burying cash in farms et al.

To give insight on possibly how our home-grown ‘Narcos or Bandits’ have been so far able to beat the system, there are 60+ offshore jurisdictions where one can choose as a haven to hide their wealth and the process is as follows:

1) Choose a haven – from the 60+ jurisdictions

2) Create a corporation – this can be in the form of a trust of company and of course with offshore investment advisors who are easily found just by Googling or referring to the inner circles of the rich and wealthy. As an example, an off-the-shelf option can be approved within as little as three (3) days at a very meagre fee – ndio siku tatu tu. To give perspective in a very elaborate, smart and legal way of doing it is as announced by Mark Zuckerberg and his wife Dr Priscilla Chan who a few months back announced a donation of $3 billion to ‘cure all diseases’ and were ‘looking for opportunities to fund medical research’ —- this is a way of parking a mountain of cash in a private foundation (non-profit) which can then own a profit making corporation resulting to an extra layer in the secrecy scheme and in the case of Mark, it’d be the ‘opportunities in medical research’ as the Foundation would own the research institutions which in turn through their cutting edge research would patent and generate revenue streams.

3) Creating a [secret] identity – the [secret] is a nominee who acts on the owner’s behalf appearing on all company documents hence not being able to connect the owner to the entity

4) Opening a bank account in another foreign location from there the shell or corporation sits adds an extra layer of secrecy more like encryption which has three different key lengths – 128, 192 and 256 bits (Encryption is a mode of ciphering data on an information processing network ensuring that only authorised parties have access to read and write rights). To put it into perspective, just as the term literally means – a shell or cover to hide what’s inside and without a forensic look, an assumption on its contents is made and that’s where the legal trail goes cold.

As for the wealthy and informed, the use of Trusts makes more sense than any other form whereby they keep assets and financial proceeds hidden from authorities and anyone who might develop an interest in their dealings and wealth. This, in the long run, can also help their beneficiaries in the case of death hence avoiding inheritance, gift or any regular tax applicable.

Once you get to understand how complicated the process of finding any hidden assets and other financial proceeds hidden under these trusts, foundations, havens becomes almost impossible and a majority of individuals who use these have vast financial resources to pay the creme de la creme of firms that ensure their clients’ chosen wealth and assets remain well tucked away from any prying eyes that might result in reputational damage, asset/ financial freezes by governments, or reduce the amount liable in a divorce settlement and alimony required if and when their marital issues go South.

These processes remain legal and protected under law and until governments break the barriers of bureaucracy and look beyond the york of wealth creation, the financial services world will always remain a murky one. In Kenya, we remain hopeful that justice shall be served in the long run and I urge fellow taxpayers to remain vigilant and get to read wide to better understand some of the statutory limitations when it comes to some of these cases that link to the overseas repatriation of funds.


Credits: Bloomberg LP, CBC News, US Bureau of Economic Analysis and The New York Times