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‘Paradise Papers’ leak reveals how the rich, politicos, hide offshore wealth, clashes with AML rules

Thursday, November 9, 2017   (1 Comments)
Posted by: Brian Monroe
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Picture courtesy ICIJ

By Brian Monroe
November 9, 2017

A new leak of millions of records tied to exclusive offshore services firm Appleby used by the rich, famous and politically-connected has uncovered the secret tactics of the world’s elite to hide their ownership interests and shield their wealth from the prying eyes of tax authorities.

In all, the 13.4 million records in the “Paradise Papers,” released by a consortium of journalists starting Sunday, reveals new details on more than 120,000 people, including 120 politicians and many of the largest companies in the world, like Apple, Nike and Uber, describing how the offshore services sector uses anonymous corporate ownership structures to safeguard an estimated $9 trillion.

The latest leak comes against the backdrop of greater global focus on the risks of anonymous corporate ownership structures – ostensibly legal vehicles that have been used for illegal ends, including tax evasion, corruption, money laundering and terrorist financing – and growing momentum in countries like the United Kingdom, Europe and, to a lesser degree, the United States, to end such practices.

The stories and documents also focus on the anti-money laundering rules in place in the various jurisdictions where Appleby operated, and the company's haphazard, ad hoc approach to following them.

Leaked emails and messages portray a running tension between compliance officers screaming – literally in some cases writing in capital letters – about the risks of non-compliance, and staffers foiling those efforts, through seemingly purposeful negligence or simply a desire to appease the customer more than the compliance officer.

“Appleby has shown on paper that it is aware of its requirements to conduct thorough and honest customer due diligence with potential and existing clients, but the leaked files seem to show that it’s rarely putting this into practice,” said GFI Legal Counsel and Director of Government Affairs, Heather Lowe.

“Law firms and other Designated Non-Financial Businesses and Professions cannot continue to be left to police themselves—jurisdictions need to require and publish public beneficial ownership information,” she said in a statement.

GFI research estimates that “opacity in the global financial system, thanks to tax haven secrecy, anonymous companies, trade-based money laundering, and lax financial crime enforcement, churns illicit financial flows (IFFs) in and out of developing countries worth at least 14.1 to 24.0 percent of developing country trade," on average annually.

“This global shadow financial system bleeds the world’s poorest economies and propels crime, corruption, and tax evasion,” according to GFI.

Spurred by the Paradise Papers – coming on the heels of last year’s “Panama Papers” leak exposing the moves by offshore law firm Mossack Fonseca – European finance ministers this week moved to create a tax haven blacklist as early as next month, but were divided on whether sanctions would be created for the named jurisdictions.

To read ACFCS coverage of the Panama Papers leak, please click here.

The documents and ICIJ stories are replete with examples of corporate offshoring creativity, including creating a designated room for a company to be able to park its assets there, shipping intellectual property to another jurisdiction with a no tax stance on profits and hiding ownership details behind hollow shell companies that only exist on paper.

To see an animated explanation of how firms like Appleby can “Hide the Secret Sauce and Save Millions,” for corporates, please click here.

Big names in the data, from U.S. to the U.K and beyond

Appleby’s clientele is a veritable who’s who of the world’s most powerful and influential, including current and former prime ministers, royals and Hollywood stars, but also strewn with oligarchs, kleptocrats, criminals and fraudsters trying to use secrecy to further illicit activities. 

Some of the highlights of the data trove include ties between “Russia and U.S. President Donald Trump’s billionaire commerce secretary, the secret dealings of Canadian Prime Minister Justin Trudeau’s chief fundraiser and the offshore interests of the queen of England,” a global effort covering more than 180 countries.

The data and records, reportedly obtained from a cyber breach, were leaked to German newspaper Süddeutsche Zeitung, which shared the information with the International Consortium of Investigative Journalists (ICIJ). To read the ICIJ coverage of the leak, please click here.

The records originate from offshore law firm Appleby, corporate services providers Estera and Asiaciti Trust, and business registries in 19 tax jurisdictions.

Appleby, headquartered in Bermuda, also has offices in other jurisdictions considered secrecy havens, including the British Virgin Islands (BVI), Cayman Islands, Jersey, Mauritius and Seychelles.

“The Paradise Papers give new meaning to the old cliché ‘treasure trove,’” said Ross Delston, an attorney and anti-money laundering expert in Washington, DC.

“And speaking of treasures, the wealth that is disclosed by the Paradise Papers is over a trillion dollars and includes investments and companies owned by everyone from the Queen of England, to rock star Bono to assorted PEPS, from places like Nigeria, India, Japan the USA,” he said.

"So what does this augur for greater transparency in beneficial ownership of companies in the US? Not much,” Delston said.

“Presidents and members of Congress have shown a decided reluctance to take this issue on since it touches a trifecta of politically impossible targets: High net worth individuals, known in Washington, DC as the ‘donor class,’ politically exposed persons in the US and abroad, and ties not just to Russia but as well to other regimes that are not known for democratic values and human rights,” he said.

The documents reveal that in some cases for instance, Appleby knew and acknowledged anti-money laundering (AML) obligations, including customer due diligence (CDD), know-your-customer (KYC) and even capturing beneficial ownership details – even if they were never planning to actually capture, record or release them.

The series of stories in the Paradise Papers also reveals that the nearly 120-year old Appleby, considered an “offshore magic circle law firm” for its ability to evade major, high-profile legal scrapes, has still struggled to implement AML controls, just as Bermuda has been inconsistent in its enforcement approach.

Laws on the books don’t always mean enforcement effectiveness

On paper, Bermuda’s AML regulations are more stringent than the United States, requiring legal professionals, trust and company service providers to have financial crime compliance programs, look for suspicious activity, and capture the beneficial ownership of corporate customers down to the 25 percent threshold.

As well, just to use Bermuda as an example, the jurisdiction has signed up to be part of the U.S.  Foreign Account Tax Compliance Act (Fatca), has signed more than two dozen tax information exchange agreements (TIEAs) with large and small countries alike and has signed a mutual legal assistance treaty (MLAT), also with the United States.

But there are weaknesses in the fine print.

For instance, to get information from Bermuda under a TIEA, the requesting jurisdiction must already have the name of the person, proof of their residency and a description of the evidence against them – a tall order as those details are likely hidden behind impenetrable ownership structures.

As a point of context, many jurisdictions considered as tax havens in the early 2000s were required to sign TIEAs to get off of a global watchdog blacklist, but many just signed these sharing agreements with each other with no real plans or desires to request or share information.

Likewise, in the U.S. MLAT, though it allows for a broad range of serious crimes to be covered in the treaty – defined as criminal acts resulting in more than a year in prison – the country “indicated during the negotiations that tax crimes are one example of conduct for which search and seizure are not available in Bermuda.”

Compliance conundrum: Controls vs. profits, or ‘steaming turds’

When it comes to AML compliance, according to the ICIJ, there is a disconnect between the effectiveness of those laws, from the perspective of offshore law firms and regulators, including: 

·         Despite screening controls, internal Appleby records provide details of clients who entered the system unnoticed, including those suspected of corruption.

·         Between 2005 and 2015, more than a dozen internal and regulatory examinations of Appleby’s offices found flaws.

·         In 2015, Appleby set aside a $500,000 for a fine imposed by Bermuda’s regulators that was later settled in secret. To read the full story from the ICIJ on the compliance issues, please click here.

The coverage details specific instances, including in 2006 when a new compliance manager, Robert Woods, came on board at Appleby’s Cayman Islands office, eventually finding that more than 600 current clients were deemed “non-compliant.”

The meaning: they had no current contact or other details to ensure Appleby was not creating shell companies for organized criminal groups or corrupt oligarchs, according to the ICIJ.

“The law firm must be cognisant of the fact that whilst they may be ‘raking in the fees,’ the Trust company carries the significant risk in administering the subsequent structure,” Woods wrote in an email to colleagues, according to the ICIJ. “The Trust Co. must be aware that at the end of the day, if it all goes wrong, they will be left holding the ‘steaming turd!’ (It is Friday and Holding the Bag did not sound strong enough!)”

In 2011, when Woods became the compliance director, he detailed more failures in a 44-page PowerPoint presentation, attempting to use humor to get the company’s attention by weaving in moments from HBO’s mafia masterpiece, “The Sopranos.”

Under a slide titled “Terrorist Financing Offences,” the notes read: “We have a current case where we are sitting on about 400K that is definitely tainted and it is not easy to deal with,” according to the ICIJ.

In another instance, Appleby set up a trust for a client to buy property in London and took the money “without question,” and without doing required customer due diligence, though the firm did have access to politically-exposed person (PEP) database WorldCheck and is required by internal policies and external regulations to risk rate clients.

Appleby later found out that the trust was in reality owned by a former Pakistani government official who had been charged with embezzling public money and had “infiltrated allegedly corrupt funds into our business,” according to Woods, in his presentation.

“Appleby’s internal files show, however, that that even when offshore law firms invest large amounts of money and effort to stay compliant and reputable, the secrecy and the lure of financial gain at the heart of the shadow economy make it difficult for offshore operatives to avoid doing business with criminals, corrupt politicians and other questionable clients,” according to the ICIJ.

“MONEY LAUNDERING IS A DIRTY CRIME,” screamed the notes to Woods’ 2011 PowerPoint presentation, appearing in all caps for emphasis, noted the ICIJ report. “THERE IS USUALLY ALWAYS A VICTIM AT THE BOTTOM OF THE PILE AND A RICH PERSON AT THE TOP.”

In some cases, Appleby did turn away business due to risk, corruption or terror fears, particularly when risks were layered on top of risks, such as a PEP from a war-torn country known for graft or radical splinter groups, according to a BBC Paradise Papers piece.

In one instance, in February 2012, Appleby chose not to open an account for passports of the “world government of world citizens,” because staffers had never heard of the jurisdiction.

In another, in April of that year, Appleby denied creating a “shelf” company in Mauritius or BVI for the daughter of then Angolan President, Jose Eduardo dos Santos, because both were PEPs and had “adverse findings” in a WorldCheck search and due to details from a U.S. Congressional report on foreign corruption. Another red flag: a request for bearer shares.

Multi-jurisdictional regulatory concerns lead to secret penalty

For more than a decade, between 2005 and 2015, “more than a dozen internal and regulatory examinations of Appleby’s offices in the Isle of Man, the Cayman Islands, the British Virgin Islands, Bermuda and London found flaws that could have involved Appleby in litigation and had financial and reputation implications,” according to the ICIJ.

After a 2005 review, the Bermuda Monetary Authority ordered Appleby’s trust company to improve nearly two dozen compliance issues and update customer records and source of wealth details.

Even after the upgrades, Appleby’s head of compliance at the time, Ian Patrick, wrote, “I still believe that a huge effort will be required before we can be considered to be an offshore leader from a compliance perspective,” according to the ICIJ.

The problems were not limited to Bermuda.

Just a year later, when Patrick reviewed practices at the BVI office, out of 45 client files, he found that “only one of them met Appleby’s standards,” according to the ICIJ. Of the five Appleby offices reviewed around that time, Patrick reported that only the Hong Kong office kept its documents “in good order.”

In addition, an internal review of the Cayman Islands’ trust office in 2008 “found the risk of breaking laws and Appleby’s own protocols to be ‘high’ in more than half of all the categories under review,” according to the Paradise Papers reports.

The audit report even highlighted a chance of potential fraudulent activities, adding wryly that Appleby “may not be complying” with the law.

These failures were not completely glossed over by regulators.

In 2012, BVI regulators uncovered critical gaps in how Appleby handled high-risk politicians and associates, while in 2015, examiners in the Isle of Man found further issues around lax customer risk assessments and monitoring, including “one offshore company, co-owned by a Palestinian official, for which Appleby’s lacked detailed information about an $11.2 million loan.”

The failures culminated in a scathing assessment in Appleby’s home jurisdiction, Bermuda.

In October 2014, the Bermuda Monetary Authority chastised an Appleby subsidiary in a report for “key or highly significant” weaknesses in nine areas of AML compliance, according to the ICIJ.

Nearly half of the files reviewed by the agency “lacked information on the origin of the money Appleby managed for its clients,” according to the report.

More concerning, there was “no evidence” that Appleby reviewed for potential risks of money laundering and terrorism financing, the agency said, adding that recommendations to improve customer risk ranking, compliance monitoring and suspicious activity reporting processes from prior regulatory audits had also been blown off.

“These omissions have heightened the Authority’s concern about the firm’s regulatory compliance and control environment,” the agency said, according to the ICIJ report, with the matter apparently rising to the level of a formal monetary penalty for longstanding and uncorrected compliance failures.

But if that penalty was ever handed down by the Bermuda regulator, or if Appleby ever paid the tabulated figure, is unclear.

In October 2015, an Appleby director “disclosed in a confidential document to government regulators in the British Virgin Islands that the Bermuda office had ‘settled’ a fine imposed by Bermuda regulators” for AML-related compliance failures.

“Appleby’s internal records even show that the firm set aside $500,000 for the fine, but its existence has never been publicly disclosed,” according to the ICIJ. There was “no public censure,” the director wrote, adding that Bermuda’s regulators “agreed to keep the matter entirely private.”

Even in face of tightening ownership opacity noose, bravado or blindness?

The regulator has since changed its policies to make penalties public.

Global banks are also likely to take a harder look at Appleby and review any ties to the companies and individuals in the data, said Chris Focacci, the chief information officer for compliance technology firm TransparINT, and a former compliance officer.

“In general, from the perspective of an FI, it is always good practice to review published information on any of your clients, or to figure out if there is risk exposure from any of the information published,” he said. “It's never good to be caught in a situation where a client's activity is a surprise, especially if it has the possibility to cause a reputational risk to the bank.”

Even so, the prior Appleby PowerPoint presentation seems prescient, appearing to foreshadow the tightening noose from regulators, investigators and civil society groups aimed at cracking open bastions of corporate secrecy to promote tax fairness and illumine criminal dark corners.

The warning in that presentation: “Every new investigation that reveals an offshore trustee as a puppet on strings controlled by a criminal” will be another “nail in the industry’s coffin,” according to the ICIJ coverage.

In a statement to the ICIJ, Appleby said it “found no evidence of wrongdoing.” To read the full statement, please click here.

But even with such dire warnings from internal compliance forces, moves by the United Kingdom and European Union to capture and publish corporate beneficial ownership data and leaks like the Panama Papers, and now the Paradise Papers, Appleby still seems to think financial crime compliance is not high on the priority list, according to a recent statement.  

“Days after last year’s publication of the Panama Papers, Appleby turned down an offer from a risk consulting firm of a ‘refresher’ training course on preventing money laundering,” according to the ICIJ. The law firm politely declined, explaining that it believes it has “extremely robust” compliance controls in place. “We don’t have the need for your sessions this time round.”


Joann Alicea, CFCI, CHTI says...
Posted Monday, November 13, 2017
Excellent article. This is so very true...“MONEY LAUNDERING IS A DIRTY CRIME,” screamed the notes to Woods’ 2011 PowerPoint presentation, appearing in all caps for emphasis, noted the ICIJ report. “THERE IS USUALLY ALWAYS A VICTIM AT THE BOTTOM OF THE PILE AND A RICH PERSON AT THE TOP.”

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