Dutch Curbing Phantom Company Culture That Aided Dos Santos

(Bloomberg) -- Dutch regulators say the country’s trust industry is failing to properly control the type of shell companies used by Isabel dos Santos, Africa’s richest woman, who is accused of bilking millions of dollars from companies in her native Angola.

The country’s trust offices, which help establish and manage Netherlands-based businesses for mostly foreign companies, still aren’t vetting their clients properly despite increased government scrutiny, Frank Elderson, executive director of supervision at the Dutch central bank said on Wednesday. The number of sanctions imposed on these companies by the DNB “must decrease. I don’t see that yet” he said.

The criticism comes after the International Consortium of Investigative Journalists reported that dos Santos used a network of shell companies, including in the Netherlands, to build a fortune through questionable deals. In December, Angola’s public prosecutor froze some of her assets, including about one billion euros ($1.1 billion) in cash and stocks. The daughter of the former Angolan president has denied wrongdoing.

Such journalistic investigations help the central bank push the trust offices to improve their controls, Elderson said. The regulator’s tougher stance on the industry has seen the number of companies shrink to 171 from around 300 five years ago, he said.

“We look very carefully at these kind of things, like we also did with the Panama leaks,” he said. “The trust sector is inherently high risk, and therefore can count on our attention. Last year, we revoked 27 licenses. Some voluntarily, some not.”

In the case of Dos Santos, Elderson said he was happy to read in the media that multiple trust companies had broken their ties to her businesses long before the investigation came to light. “Apparently there’s a notion that the central bank will find out. Fleeing is not an option.”

Trust service providers help foreign clients set up a legal entity in the Netherlands. For example, they do their client’s administration, act as a director and provide a postal address. In that way, the foreign client can be based in the Netherlands on paper without actually needing to have employees or business activities in the country.

‘Phantom’ Investment

The Netherlands and Luxembourg together host nearly half of the world’s “phantom” foreign direct investment, funds that travel through corporate shells with no business activities, according to the International Monetary Fund. The nation’s many tax treaties, ease of setting up a business and political stability have made the country a popular choice to set up such businesses.

There isn’t a single solution that can prevent illicit money from entering the system, and the problem should be tackled on multiple fronts, according to Elderson. “We have a tax system that facilitates huge international money flows going through the Netherlands, he said. “That’s a political decision.”

The government plans a total ban on “funnel companies” at trust offices, Dutch Finance Minister Wopke Hoekstra wrote in a letter to Parliament last week. He also said the trust sector is still too lax in complying with integrity rules.

Hoekstra also seeks to prohibit trust companies from working with countries with a high compliance risk or that are labeled by the European Commission as non-cooperative in terms of tax policy. Angola isn’t on that list.

Dutch banks have also been feeling the heat of increased government scrutiny. ING Groep NV paid a record fine in 2018 for failing to prevent money laundering and ABN Amro NV is facing a criminal investigation after prosecutors received a tip from the central bank pointing to shortcomings in its client controls.

The central bank said in its supervisory outlook that it will continue to make financial crime prevention one of its top three priorities for the coming years. Gatekeepers -- like banks and trust offices -- play a “crucial role” in this, it said.

To contact the reporter on this story: Ruben Munsterman in Amsterdam at rmunsterman1@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen, Christian Baumgaertel

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