Graham Stack in Berlin and Guntars Veidemanis in Riga -

The trail of company service providers in Scotland that have churned out thousands of shell companies over the last few years leads to the top echelons of Latvian banks, according to bne IntelliNews enquiries.

A cluster of interlinked Edinburgh corporate service providers have been churning out Scottish shell companies by the thousands over the last few years, constituting a veritable ‘factory’ of companies that do not actually do any business or have any assets.

A report by US corporate investigators Kroll into how $1bn was stolen from Moldovan banks have pinpointed these Scottish shell companies as having played the role of getaway cars for the money looted from the Moldovan banks. According to the report, a total of 28 firms registered in Scotland, along with 20 from elsewhere in the UK, were involved in the heist. But with Scottish shell firms being such a rare phenomenon until recently, tracing their creators is proving more straightforward than usual.

Enquiries by bne IntelliNews sources in Edinburgh suggest that the bulk of Scottish shell companies relate to a handful of addresses – and these can again be traced mostly to two company service providers, Royston Business Consultancy and Arran Business Services, registered at the same Edinburgh address, together with a third Edinburgh outfit that shared personnel with Royston and Arran, and other feeder structures at around a dozen different addresses, mostly linked by personal or corporate ties.

As bne IntelliNews has reported, these addresses have not just churned out firms for the Moldovan bank heist, but also for two previous massive money-laundering schemes that have wracked Moldova – one of them seeing a staggering €20bn moved from Russia via Moldova to Latvia during 2010-2014.

The proliferation of Scottish limited partnerships (LP) – which date back to the Limited Partnerships Act of 1907 and under the law are not required to disclose their annual accounts or even the names of the people who control them – is also visible in other Central and Eastern European (CEE) countries, although they have not yet triggered scandals on the scale of the recent Moldovan disaster. Anger over the looting of the three banks – Banca Sociala, Banca de Economii and Unibank – to the tune of almost MDL1.8bn (€897mn), more than 10% of Moldova’s GDP, has brought thousands of Moldovans out on to the streets to protest against the government since it was uncovered in November 2014.

For instance, Ukraine’s company register shows up more than 100 Ukrainian firms owned wholly or partly by Scottish LPs, almost all of them since 2010, many of them with the same handful of addresses as featured in the Moldovan scandal.

According to an investigation by Scotland’s Sunday Herald, as many as 11,000 shell companies may have been created in Scotland in recent years, with current production running at about 300 per month – the bulk of which can be accounted for by the same dozen addresses.

But for readers of bne IntelliNews, there is nothing new in the mass creation of UK shell companies, partly for use in money laundering in the CEE region. And in this case as well, the original driver behind the mass creation of shell companies appears to come from the same place: Latvia’s controversial offshore banking sector, which played a key role in the Moldovan heist, according to the Kroll report. “Shareholders financed their acquisition [of Moldovan banks] with funds borrowed from UK Limited Partnerships who have accounts at Latvian banks... Subsequent to the change in ownership, [$1bn] loan receipts [from the Moldovan banks] were passed to Latvian bank accounts in the name of UK Limited Partnerships,” the Kroll report reads.

Laundered in Latvia

The $1bn Moldovan bank fraud is only the latest in a series of monster money-laundering scandals that have been linked to the offshore Latvian banks. But the scandal usually explodes in the country of origin of the stolen money, with barely a murmur in Latvia itself.

While Latvia’s domestic banking is largely in the hands of respectable Scandinavian banks, it hosts a segregated dollar-denominated offshore banking sector that caters to clients from Russia and other former Soviet states of the Commonwealth of Independent States (CIS). The welcome mat for Russian money stands in stark contrast to the Baltic state's strident political posturing against Russian aggression in Ukraine and elsewhere in the post-Soviet space.

It is widely accepted that the basic operation performed by Latvia’s offshore banks is to move funds out of the post-Soviet countries into the international financial system, often ultimately landing in Swiss bank accounts or elsewhere in the West. Latvian regulators refer to this business model as “financial logistics” and justify it by saying that Latvia strictly complies with all state-of-the-art anti-money laundering requirements.

CIS clients of Latvia’s offshore banks are usually incorporated as shell companies registered in Western countries or tax havens, which explains why the business generates mass demand for UK shell companies.

According to unpublished figures from Latvian regulators Financial and Capital Market Commission (FCMC) seen by bne IntelliNews for 2011, 13.7% of depositors in Latvia’s offshore banks were incorporated as UK firms, another 23.3% were incorporated in the British Virgin Islands, 7% in Cyprus, and the rest in a whole spectrum range of tax havens across the world, compared with a mere 6% actually incorporated in Russia.

Introducing the introducers

As bne IntelliNews has frequently described, a shadowy but key role in the Latvian bank model is played by so-called ‘business introducers’ – structures that not only set up shell firms for bank clients, but also handle the process of opening the bank accounts for these clients.

Leading Latvian offshore banks openly seek relationships with new ‘business introducers’ on their websites. Such business introducers handle customer identification both for the shell firms and the bank accounts – a role that is at the heart of anti-money laundering laws. Critics argue that the arrangement creates a layer of deniability between the bank and clients, and thus massively dilutes anti-money laundering regulations.

According to bne IntelliNews enquiries, such business introducers are themselves usually shadowy structures, registered in offshore jurisdictions, with hidden ownership, shifting management configurations, and often personal ties to banks. All this makes them unlikely fighters of money laundering.

Latvian regulators reject the criticism. “It is the legal duty of banks to carry out customer due diligence based on risk assessment to every client, including business introducers,” Latvia’s Financial and Capital Market Commission told bne IntelliNews, adding contrary to the evidence, “the use of such intermediaries is not widespread among banks in Latvia".

Strange Arran-gements

In the case of the Scottish offshores, the trail to Latvia’s banks is particularly easy to trace: the Edinburgh company service provider Arran Business Services, part of the cluster of addresses churning out Scottish shell companies, is an affiliate of Arran Consult, a ‘business introducer’ operating across CIS countries. And the Arran Consult Russian-language website advertises its partnership with leading Latvian banks, among others, with its services encompassing setting up shell firms in multiple jurisdictions and opening bank accounts for those shell firms.

The Latvian banks listed as partners include three of Latvia’s largest offshore banks – ABLV, Rietumu and Norvikbanka. Notably, 14 of the shell companies listed in the Kroll report had business relationships with ABLV, formerly known as Aizkraules, which describes itself as providing “the most highly valued private banking experience, based on a unique understanding of our clients".

Arran Business Services is owned by a Panamanian offshore company with untraceable ownership. But its manager since 2011 is a Latvian, Vitalijs Savlovs, who is also owner and director of a UK firm called Arran Consult, while in Latvia he is owner of Riga firm Arran Latvia.

Savlovs’ services for Latvian banks appear to go beyond doing mere paperwork for bank clients to a more hands-on role in their business, as well as close personal ties to the banks themselves.

In 2014, a London High Court decision cited Arran Business Services and Savlovs as incorporating companies used as ‘getaway vehicles’ in an enormous $175mn fraud committed in 2010-2011 against Russia’s Otkritie investment bank by its own traders.

Otkritie brought the lawsuit against its former employees, among them a certain Ruslan Pinaev. The court case established that Savlovs – transliterated in the court decision from the Russian version of the name as Vitaly Shavlov – had set up one of the shell firms used by Pinaev for shifting the loot, and introduced him to a second. Savlovs himself was not accused of any wrongdoing in the Otkritie lawsuit.

According to the court decision, Savlovs was a “trusted acquaintance” of fraudster Pinaev. Notably, Pinaev was married to a Latvian banker, his co-defendant, Marija Kovarska, a former deputy vice president of Latvia’s Parex – the bank which had pioneered offshore banking model in Latvia from 1991 until its collapse in December 2008.

The Otkritie cases provides yet another example of how Latvia’s offshore banks are used to move dirty money westwards. The clients of three different Latvian banks were involved in laundering the $175mn funds stolen from Otkritie. The firms that Savlovs organised for Pinaev, according to the court decision, both had accounts at Latvia’s Baltikums Bank, “an international private bank that provides a wide range of financial and advisory services, including tailor-made solutions for high net worth individuals and businesses,” according to its website.

bne IntelliNews found further pointers to Savlovs’ close connections to the upper echelons of Latvian offshore banking, and Baltikums Bank in particular in 2010-2012. Such connections underscore that the shadowy ‘business introducer’ structures partnering the banks may be personally linked to the banks.

According to Latvian company records, Savlovs had a seat on the board of one Latvian affiliate of Baltikums Bank, BB Trust Consultancy, until 2012. “BB Trust Consultancy Ltd was not Baltikums Bank’s subsidiary in legal terms,” Baltikums Bank told bne IntelliNews.

Savlovs may also have organised at least one Scottish company directly for Baltikums Bank: Edinburgh-registered CityCap Development LP, set up by Arran Business Services, owns a historical Riga office building, reportedly on behalf of Baltikums Bank. The bank has a subsidiary called Citycap Service, and registered another subsidiary in the building.

Notably, a 2010 version of the Arran Consult website lists as a Skype name for contacts simply ‘Baltikums’. “Skype contact Baltikums is not related to Baltikums Bank in any way,” the bank claimed to bne IntelliNews.

Baltikums Bank was not one of the banks mentioned in the Kroll report as having clients who transited funds stolen from Moldova, and is also not a bank featured on the Arran Consult website as a partner. The bank denied having any current business relationship with Savlovs or his Arran companies.

According to the Otkritie court case, Savlovs was based in Scotland already in 2010, roughly the same time as when the mass production of Scottish shell companies started. Savlovs became director of Arran Business Services in 2011.

Savlovs failed to respond to emails to his London office where he is currently based. His wife and business partner Aleksandra Savlova also failed to respond. A woman with the same (unusual) name as Aleksandra Savlova is listed as having been a manager at leading Latvian bank ABLV in 2006-2008.

bne IntelliNews spoke with Dmitry Sokolov, head of Arran Consult’s office in St Petersburg, Russia. Sokolov acknowledged that Arran Consult specialises in supplying Scottish companies to Russian clients of Latvian banks, praising Scottish firms for easy administration, low costs and prestigious jurisdiction. He also acknowledged that the business has its representatives in Scotland who incorporate the firms. But he denied any current connection to Savlovs. “We have broken off our partnership with Vitalijs because of poor quality of service,” he said. “Arran Consult in Russia is no longer connected to Vitalijs, and we have no connection to the Moldovan case.”