Pandora Papers Highlight Ongoing Abuse of Corporate Structures: ACAMS Analysis

Online buzz from compliance professionals following the disclosure of the Pandora Papers on Sunday has focused on whether corporate transparency has even marginally improved since the release of an earlier trove of data, the Panama Papers, five years ago.

Despite the global push for ownership registries and the adoption of related measures to combat criminal exploitation of legal entities since 2016, the latest release of millions of confidential records by the ICIJ reveals that fraudsters, corrupt leaders and other criminals still can, and still do, rely on providers of anonymously held trusts and shell companies to help them move billions of dollars around the globe without scrutiny.

ACAMS subject matter experts weighed in what the Pandora Papers teach us about the current state of financial secrecy, and how banks and other financial institutions should respond. Below are edited comments from Rosalind Lazar, Lauren Kohr, William Scott Grob, Ciara Aitchison, and Carolina Prelazzi.

What do the Pandora Papers reveal about transparency of beneficial owners?

Rosalind Lazar, regional director, AML, APAC: It’s not just about beneficial ownership, it’s also about “legal persons.” If there is a misuse of a legal person, the true beneficial owner should be prosecuted for money laundering or for misappropriation, corruption, tax evasion, sanction evasion or other predicate offenses.

It’s often the case that financial institutions are penalized for ineffective AML/CFT controls, but the key is that institutions also determine if there is a misuse of the legal person. “Misuse” is not just about formation of the legal person, it is also about the illegal purpose of that legal person’s account. This remains the responsibility of the financial institution to identify, investigate and report. There are red flags for potential misuse during the formation process, as well as when the legal person seeks to open an account. These are cases where there is a lack of transparency in the effective control and ownership of the legal person. For example, where there is an undisclosed nominee arrangement, or there is an unnecessarily complex structure with several layers of ownership.

The Pandora Papers may actually help reveal if and why financial institutions are still missing red flags.

William Scott Grob, director, AML, Americas: As an industry, we should be most worried about the rise of corrosive capital that influences, distorts and corrupts the fabric of our democracies. Instead, like the previous Panama Papers and Mauritius Leaks, the Pandora Papers demonstrate how easily Russian oligarchs and others can still disguise their money within traditional corporate structures, financial arrangements and wealth management businesses.

Carolina Prelazzi, AML subject matter expert: Details about the networks identified in the Pandora Papers are still largely undisclosed, and the analysis to date does not clearly distinguish between legitimate and illicit activity. Further investigation is needed to prove possible wrongdoings. However, the Pandora Papers echo what the Panama Papers exposed five years ago: the international financial system’s lack of transparency around beneficial ownership.

What legislative or regulatory gaps do the Pandora Papers highlight?

WSG: For decades, governments have kept transparency requirements low. As a result, tax havens in the Caribbean, the United States and other places have existed for quite a long time. Reinforced with confidentiality and privacy rules, with the help of many types of intermediaries, large companies still execute tax avoidance strategies and optimize their statutory requirements.

Ciara Atchison, AML subject matter expert: Many countries have taken steps to implement legislation—and thus AML requirements—on DNFBPs [designated nonfinancial businesses and professions], so the question is: how strong is the oversight of these gatekeepers? The U.K. Office of Professional Body AML Supervision, OPBAS, released a report last month highlighting significant oversight weaknesses. The report notes that more than a third of U.K. professional supervisory bodies do not effectively separate their regulatory and advocacy functions, which raises the risk of a conflict of interest.

It also notes that more than 80 percent had not implemented an effective risk-based approach, and more than half do not take timely action to address compliance gaps. These findings alone raise doubts over the strength of efforts to monitor sectors that deal with high-risk, complex transactions, many like those described in the Pandora Papers. Until the U.K. and other countries take a more consistent approach to regulatory supervision, the issues highlighted in the Pandora Papers will continue to arise.

What legislative or regulatory changes could address issues raised by the Pandora Papers?

CA: The U.K. proposed draft legislation in 2018 to set up a register for overseas entities and their beneficial owners, which still needs to be moved through parliament. These papers highlight the need for this to be accelerated, to increase ownership transparency in the U.K. property market and thus enable the public and private sector to stem illicit activity where it exists. In tandem, draft legislation that would give Companies House [the national corporate registry] investigation and verification powers has been proposed but not implemented. The registry is currently set up to accept whatever information it has been provided by U.K. companies. To date, regulators require financial institutions and other obliged entities to report discrepancies when onboarding new customers. With the proposal, this may extend to existing customers. However, without providing Companies House powers to effectively address these discrepancies, the value becomes somewhat limited. It can be argued that tackling the fundamental issue of transparency of ownership would bring the U.K. a long way forward in understanding what money laundering risks it is exposed to, and take action to stem them.

WSG: Efforts to improve global transparency are likely to meet significant resistance. Whether in South Dakota or the British Virgin Islands, countries profit from these structures. Unless leaders stand for openness, a transparent state for beneficial ownership will not happen.

RL: Looking squarely at anti-financial crime controls, countries should continue in their efforts to regulate and enforce standards around the formation of legal persons. All parties responsible for the formation should be held accountable for cases where they knew or ought to have known of undisclosed nominee structures for the true beneficial owner or settlor. In this regard, FATF standards on DNFBPs and their AML/CFT obligations are being transposed into the regulations of several countries. New, local regulations have been enacted which require DNFBPs to undertake CDD, record retention and the obligation to file suspicious activity reports.

Hopefully, the coverage extends to all persons responsible for the formation of legal persons, namely: trust and corporate services providers, lawyers and accountants. Regulators in certain countries have already followed up on the implementation by these new regulated entities and have taken appropriate enforcement actions when there is ineffective AML/CFT controls, or none at all. There will be more enforcement actions against DNFBPs if countries wish to demonstrate effectiveness in this area before their next mutual evaluation by FATF or their FATF-regional style body. Countries will also want to tighten rules on the use of the accounts of legal persons and financial institutions. DNFBPs and other financial intermediaries should be taken to task when they fail to detect potential misuse, or worse, when they willfully ignore the red flags for potential misuse of legal persons, including the use of shell companies.

CP: At the 2016 London Anti-Corruption Summit, 36 countries committed to enhance their beneficial ownership framework. Despite some modest progress, most beneficial ownership registers remain private and not easily accessible to the private sector. Companies House, the U.K. company register and one of the few publicly available beneficial-ownership registers in the world, at present does not verify beneficial ownership information, a characteristic which renders it fundamentally ineffective. In the EU, the Fifth AML Directive required members states to establish public registers of beneficial ownership data by January 2020. Nearly two years later, three EU countries have not yet established a centralized beneficial ownership register and six maintain only private beneficial ownership registers. Even more problematic is that the countries that introduced regulations to increase ownership transparency have often not implemented them successfully.

What do the Pandora Papers reveal about the role financial institutions play in secretive finance through trusts, shell companies and other legal entities? What do they reveal about DNFBPs and financial intermediaries generally?

Lauren Kohr, senior director, AML, Americas: Financial institutions should seize these revelations as a chance to evaluate their domestic and jurisdictional risks. For example, U.S. institutions should refamiliarize themselves with their customer base through a geographic lens: How many businesses have opened accounts in tax haven states, such as South Dakota, Delaware, Las Vegas, Wyoming? What corresponding activity (domestic or international) do their customers conduct? Also, financial institutions should re-examine their risk-ratings for certain businesses and trusts, and, given the information gleaned from the leaks, determine whether their risk-ratings for businesses and trusts registered in any U.S. state whose name appears in the Pandora Papers align with the actual threat.

CP: Financial institutions rely primarily on information provided by clients, and are often unable to check the veracity of this information on independent and verified databases. Even when financial institutions are committed in the fight against financial crime, the lack of accessible corporate registers and beneficial ownership information domestically or in other jurisdictions makes it very difficult to identify the full extent of business networks and interests linked to company directors and beneficial owners. This also complicates the identification of individuals closely connected to politically exposed persons through their business interests, and also complicates a holistic assessment of clients’ sources of wealth and funds.

How much do the Pandora Papers reveal actual illegal activities versus legitimate activities? How, for example, would you use an SPV for benign purposes?

RL: The Pandora Papers (and earlier ICIJ) leaks do not necessarily point to illegal activity, a fact the ICIJ states upfront. Leaving aside the probable political fallout connected to many of these accounts, there are legitimate and economically viable reasons for a PIC [personal investment company] or trust structure to be set up. There are also legitimate and economically viable reasons for these PICs and trust structures to open offshore bank accounts and receive/maintain funds. Of course, at all times, the true beneficial owner of the PIC or the settlor of the trust has to be identified and verified by the financial institution opening the account.

What key areas of their anti-financial crime programs should compliance officers re-examine in light of the Pandora Papers?

LK: The net takeaways, whether it is day one, day two or day 60 of the Pandora Papers leaks, are that financial institutions need to be evaluating the effectiveness of their risk-based anti-financial crime programs and determining whether the high-risk transactions identified by the leaks would have been detected, monitored, and, as applicable, reported as those programs currently exist. Institutions should specifically evaluate the effectiveness of these areas of their programs: CDD/EDD [enhanced due diligence] and beneficial-ownership identification; risk monitoring of customers, products, services and geographies; and transaction monitoring and suspicious activity reporting.

If those areas would not have identified the high-risk indicators, then institutions should adjust them to be more effective in detecting the threats. Governments and regulators should assess the effectiveness of their frameworks and address the deficiencies noted in their FATF mutual evaluation reports around beneficial ownership and DNFBPs, and also considering what needs to be addressed to make those frameworks more effective at tackling the issues raised by these leaks to ICIJ. Beyond a traditional depository financial intuition, independent, state-regulated trust companies in the U.S. should ensure they are screening the names, countries and entities identified in the papers, and investigate and report in accordance with state and federal oversight.

WSG: These flows are often found in plain sight because people seldom question the business profile or transactions and many profit from these flows. Subsequently, reporting entities need to be vigilant in conducting know-your-customer and CDD checks on these entities to thoroughly understand their sources of wealth and ensure they have legitimate owners. Illicit money flows to where there are holes in these processes, and exploits the trust of the people. We should all be alarmed by the pervasive misuse of legal persons.

RL: In response to every leak, financial institutions undertake internal investigations. It is no different for the Pandora Papers. For every disclosed name, they are now checking CDD records to determine whether they serve the PIC or trust. Next, they will check whether they have duly recorded, identified and verified the true beneficial owners or settlor, and that there was no undisclosed nominee structure. Then comes the hard part: analyzing the transactions of the impacted accounts to detect potential misuse. For shell companies, financial institutions will want to discern if there is little or no legitimate known business activity or operations, or not enough to support the volume or value of transactions passing through the entity’s account. For PICs and trusts, FIs will look for undisclosed revenues, corrupt payments and other proceeds of crimes which were received, parked in the account, or moved out soon after to another account.

Topics : Anti-money laundering , Know Your Customer , Corruption/Bribery
Source: Nonprofits/Private Organizations
Document Date: October 6, 2021