Global Money Laundering Part II

The FinCEN files has quickly swelled into a news story globally with new revelations coming thick and fast – with everyone from Michael Flynn to the Tokyo Olympics now caught up in the scandal. But the FinCEN files – while rich in information – pale in comparison with the 2016 Panama Papers leaks. The Panama Papers involved the leaking of 2.6 terabytes (that’s 2600 gigabytes) of files from the servers of Panamanian company Mossack Fonsenca, the world’s fourth largest offshore law firm (at the time).

An offshore law firm is a multi-jurisdictional law firm which typically specializes in the laws of offshore financial centers like the British Virgin Islands, Cayman Islands and Luxembourg, among others. Mossack Fonsenca, at the time of the leaks, had 600 people working across 42 countries and had acted on behalf of more than 300,000 companies across the world.

Graphic from The Guardian

The leaks from the Panama Papers were an order of magnitude more explosive than the FinCEN files. Some of the most shocking revelations included:

  • Twelve national leaders are among 143 politicians, their families and close associates from around the world revealed to be using offshore tax havens
  • A $2bn trail leads directly to Russian President Vladimir Putin. The President’s best friend Sergei Roldugin is shown to be at the centre of a scheme in which money from Russian state banks is laundered to offshore financial havens
  • The families of at least eight current and former members of China’s supreme ruling body, the politburo, have been found to have hidden wealth offshore
  • In the UK, six members of the House of Lords, three former Conservative MPs and dozens of donors to British political parties have had offshore assets
  • One leaked memorandum from a partner of Mossack Fonseca said: “Ninety-five per cent of our work coincidentally consists in selling vehicles to avoid taxes”

These explosive leaks illustrate a persistent pattern of money laundering and tax evasion by the global political and financial elite. The leaks sparked a flurry of activity by governments worldwide including:

  • The offices of Mossack Fonsenca were raided by police in Panama and the co-founders Jürgen Mossack and Ramón Fonseca were arrested and charged for money laundering and spent months in jail
  • The leaks sparked investigations by authorities in at least 82 countries worldwide
  • In Germany, police raided the offices of Deutsche Bank in November 2018 as part of a money laundering probe. The investigation was focused on determining if the bank, Germany’s biggest, was helping clients set up offshore accounts to transfer money for criminal activities
  • A measly $1.2 billion has been recouped in 22 countries as a result of these investigations

Actors Gary Oldman and Antonio Banderas play Jürgen Mossack and Ramón Fonseca in the Netflix drama The Laundromat based on the Panama Papers scandal

The FinCEN files and Panama papers illustrate how the global financial system is flooded with dirty money and that banks are actively aiding and abetting money laundering. As Trajectory #20 noted, global anti-money laundering controls, in particular the SAR process, are broken and desperately in need of reform.

At the heart of global money laundering efforts are complex corporate structures. These structures often involve multiple shell companies across different jurisdictions including offshore financial hubs like the Cayman Islands. These shell companies and subsidiaries help obscure flows of money, but more importantly obscure who truly owns a company and where the money is ultimately flowing. Mossack Fonsenca was one of the global firms that specialized in enabling tax evasion via these complex corporate structures.

To truly strengthen global anti-money laundering efforts, authorities need to crackdown on offshore shell companies and complex corporate structures and tighten monitoring of these entities. The good news is that reforms aiming to achieve this are underway in much of the world. The question of who ultimately owns or controls a legal entity is known as “beneficial ownership.” Shell companies and offshore entities and the complexity they create help hide beneficial ownership information from the already overwhelmed financial crime regulators worldwide.

The Panama Papers sparked several countries to immediately strengthen their requirements around registering beneficial ownership. In 2016, the United Kingdom created a new beneficial ownership register and the European Union has directed all member nations to start putting similar registers in place before the end of 2020. However, the United States, the world’s most important financial hub, remains behind the curve on reforming beneficial ownership monitoring.

The US Treasury, the department that runs the Financial Crimes Enforcement Network (FinCEN), identified weak beneficial ownership monitoring as one of the nation’s biggest vulnerabilities in combating money laundering.

More than two million corporations and limited liability companies (LLCs) are formed in the United States every year. Domestic shell companies continue to present criminals with the opportunity to conceal assets and activities through the establishment of a seemingly legitimate U.S. businesses. The administrative ease and low-cost of company formation in the United States provide important advantages and should be preserved for legitimate investors and businesses. However, the current lack of disclosure requirements gives both U.S. and foreign criminals a method of obfuscation that they can and have repeatedly used, here and abroad, to carry out financial crimes.

There are numerous challenges for federal law enforcement when the true beneficiaries of illicit proceeds are concealed through shell or front companies. Money launderers and others involved in commercial activity intentionally conduct transactions through corporate structures in order to evade detection, and may layer such structures, much like Matryoshka dolls, across various secretive jurisdictions. In many instances, each time an investigator obtains ownership records for a domestic or foreign entity, the newly identified entity is yet another corporate entity, necessitating a repeat of the same process. While some federal law enforcement agencies may have the resources required to undertake complex (and costly) investigations, the same is often not true for state, local, and tribal law enforcement

– National Strategy to Counter Illicit Finance, US Department of Treasury

This vulnerability has caught the attention of the US Congress. In July the House of Representatives passed The Anti-Money Laundering Act of 2020, which mandated FinCEN to set up a beneficial ownership registry for all US entities. However, the House chose to attach this bill to the annual legislation that funds the Pentagon in order to make passing it seamless. However, the US Senate has rejected this approach which means negotiations on the bill are proceeding into the fall of 2020.

Congress should pass The Anti-Money Laundering Act of 2020 as soon as possible. A beneficial ownership registry will take time to set up and new and old companies will have to be vetted for sometime before the system is operating seamlessly. The bill has broad bi-partisan support, is supported by the US Chamber of Commerce, 42 state attorney generals and the Bank Policy Institute – which represents US banks – also supports the bill.

Tightening monitoring of beneficial ownership and strengthening anti-money laundering controls are a pressing issue which Congress should act on now. Every day that is wasted is millions of dollars of additional money laundering that is going undetected and unpunished.

If you haven’t already you can read Part 1 of this series on Anti-Money Laundering here.



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