Following Panamanian Disclosures, a Rush to Review Client Relationships

By Valentina Pasquali

More than a week after media allegations of widespread abuse of shell companies, banks are scrambling to determine what ties they have to the Panamanian law firm at the center of the scandal.

The International Consortium of Investigative Journalists (ICIJ) and affiliated news outlets said earlier this month that 11.5 million documents leaked from Panama City-based Mossack Fonseca reveal licit and illicit offshore assets held by politicians, business leaders, celebrities and suspected criminals between 1977 and 2015.

Over the 40-year span, the firm helped form 15,600 corporate entities that did business with more than 500 banks, including HSBC, UBS, Societe Generale, the Royal Bank of Canada, Commerzbank and Credit Suisse, according to ICIJ. Mossack Fonseca has denied any wrongdoing linked to the data cache, which has not been made public.

“Many banks are panicked, [and] spending a lot of time and money pouring over historical transactions,” said David Buxton, founder and CEO of London-based compliance consultancy Arachnys. “A big challenge for them is actually working out what exposure they could have in future revelations as well,” he said.

A spokesperson for Standard Chartered said the institution is in the process of reviewing its records “and will cooperate with any and all relevant inquiries and investigations.”

Representatives of other financial institutions confirmed similar measures in statements or on background. The reviews, launched shortly following the initial April 3 reports, have continued through this week and include scrutiny of both client relationships and discrete transactions, multiple sources said.

The internal queries are likely to extend beyond simply determining whether an institution held accounts for Mossack Fonseca or its clients.

“Banks will be looking into whether there may be any correspondent banking transactions flowing back into their institution from other financial firms that are involved,” said Dennis Lormel, an anti-money laundering consultant and former chief of the FBI’s Terrorist Financing Operations Section.

In some cases, AML departments may need to file suspicious activity reports based on information revealed in the documents, he said.

Although “properly structured offshore U.S. bank subsidiaries and corporate entities” linked to Panamanian law firm may have operated legally, regulators will expect financial institutions to show that their activity has not violated safety-and-soundness requirements, according to Frank Mayer III, a partner in the law firm Dinsmore & Shohl in Philadelphia.

The disclosures, known as the Panama Papers, cite 150 current and former heads of state with links to offshore holdings, including Ukrainian President Petro Poroshenko, British Prime Minister David Cameron and Sigmundur Davio Gunnlaugsson, who stepped down from his post as Iceland’s prime minister last week following reports that his family retained ownership of an offshore holding company.

Though media outlets have primarily cited accounts held at some of world’s largest financial institutions, community banks and credit unions should also review their ties to politically exposed persons (PEPs) and other high-risk clients, according to Lauren Kohr, a former vice president and AML and sanctions director for Metro Bank.

“Community banks need to go in and scrub their wire files and look for key country names, [and] make sure they are screening for their PEPs and relatives,” she said. “They should look for wires going to domestic financial institutions with beneficiaries overseas [as well as] law firms sending wires to foreign countries.”

The reports have elicited scrutiny by officials in the United Kingdom, France, Austria, Germany, Sweden, Pakistan, the Netherlands and other nations. The U.S. Treasury Department is reviewing the reports for indications of corruption and sanctions evasion, according to Reuters and Bloomberg.

But the Panama Papers reveal “little in terms of criminal behavior and a lot that doesn’t look good for political or moral reasons,” said a compliance officer who asked to remain anonymous. Much of the activity appears to involve legal transactions made to minimize tax obligations, the person said.

“Until now, [former Icelandic Prime Minister Gunnlaugsson] was just fine to do business with,” the compliance officer said. “But all of a sudden he is a bad guy, and it is not even clear yet that he has done anything illegal.”

Topics : Anti-money laundering , Counterterrorist Financing , Tax Regulation/Enforcement
Document Date: April 12, 2016