Their comments came in response to ongoing investigative news reports based the Pandora Papers, a massive data leak that publicly exposed confidential information about the hidden wealth of hundreds of current and former government officials and high-profile rich people. The information was exposed by The International Consortium of Investigative Journalists (ICIJ), a Washington, D.C.-based network of reporters and media organizations.
Instead of fixating on any salacious details, financial institutions should pay heed to the information, and the revelations “need to be taken in stride,” said Lauren Kohr, a veteran compliance officer who now serves as senior director of AML for the Americas with the Association of Certified Anti-Money Laundering Specialists (ACAMS).
“There is a lot to consider, and we do not want to send our AML officers on an ineffective and inefficient wild goose chase for every data point leaked and how that may impact their AFC [anti-financial crime] compliance program,” Kohr stated. “Given that it is so early in the leaks and assuming this will go on for days, weeks, and months, AML officers should not have a knee-jerk reaction.”
Instead, Kohr recommended AML professionals “methodically step back and evaluate the effectiveness of their overall risk-based AFC program.” Specifically, she suggested compliance professionals evaluate the effectiveness of their firms’ customer due diligence (CDD), enhanced due diligence (EDD), and beneficial ownership regimes. Institutions should also monitor their high-risk customers, products, services, geographies, and transactions, Kohr said.
“Ask yourself, ‘Would your program identify the risks exposed in the Pandora Papers leaks?’ If not, adjust your program to be more effective in detecting the threats posed,” she explained. “Then determine what specific steps you should take to address particular customer risks that may be posed by the individual data points leaked.”
Domestic legal entity risks
The ICIJ report on the Pandora Papers leaks, based on records from 14 “offshore services” firms around the world, involve about 35 current and former national leaders, and more than 330 politicians and public officials in 91 countries and territories. Among the findings is that during the past decade, South Dakota, Nevada, and more than a dozen other U.S. states “have transformed themselves into leaders in the business of peddling financial secrecy.”
The report added that this increasing “secrecy-haven” role played by U.S. states came as the United States and other powerful nations were focused on raising the veil of secrecy offered by “‘traditional’ offshore havens such as the Bahamas, the Caymans, and other island paradises.”
Yet, year after year in South Dakota, state lawmakers approved legislation drafted by trust industry insiders, providing more and more protections and other benefits for trust customers in the U.S. and abroad. Customer assets in South Dakota trusts have more than quadrupled over the past decade to $360 billion, the ICIJ report stated.
The Pandora Papers reports from the ICIJ “highlight for those of us in the industry that gatekeepers — lawyers, accountants, etc. — are really missing the same scrutiny and oversight as traditional financial institutions,” said Sarah Beth Felix, who runs Palmera Consulting LLC, an AML consulting firm.
In terms of what steps bank AML units should be taking in response to the Pandora Papers, “some of the information is applicable to a financial institution’s CDD/EDD department, and some information is not,” Felix noted. “Before financial institutions start to screen all of the names — individuals, businesses, and trust companies — through their system, they need to know what they are looking for. Screening those names without any additional context will add false positives and inefficiencies.”
Felix offered some things to keep in mind, such as that offshore companies and avoiding the payment of taxes using legal means is not illegal. “Unethical? Most likely. Duplicitous? Yes. But illegal in some instances? No,” Felix added.
ACAMS’ Kohr agreed, noting that “there is nothing wrong with offshore PICs [property investment companies] and trusts themselves; however, they are vulnerable and expose threats to money laundering and other illicit activity. The focus should be the misuse of legal persons.”
Pandora Papers not ‘anything new’
Rob Rowe, a lawyer with the American Bankers Association, a trade group, stated that the issues highlighted by the Pandora Papers are not “anything new,” and reflect longstanding concerns. He noted that in 2016 the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a CDD rule that came into force two years later and requires banks to collect information about the true, or “beneficial” owners of legal entities.
Further, FinCEN is currently working to create a registry of legal entity beneficial owners, implementing the Corporate Transparency Act enacted along with the Anti-Money Laundering Act of 2020.
“Fundamentally, it’s a question of beneficial ownership, and so banks are already doing what they need to be doing, such as collecting and verifying the information from their customers under the CDD rule,” Rowe said. “Right now, the next step lies with FinCEN as they continue working on the creation of the beneficial ownership registry.”
Still, the global AML standard-setting Financial Action Task Force (FATF) has long criticized the United States for failing to issue rules requiring gatekeepers such as company formation agents and accountants to take steps to detect and report potential illicit activity. To date, the U.S. government has taken no steps to enact rules for such professionals.
“Until our regulatory partners establish effective frameworks around beneficial ownership and (gatekeepers) and truly address the unintended consequences of the exclusions or loopholes within the existing framework or legislation, leaks such as this will continue to transpire and the conduits to exploit the financial system by illicit actors will remain,” Kohr said.