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Compliance Corner
The Panama Papers

by Karen Bannon | August 11, 2016

If you’re not familiar with the Panama Papers – the Panama Papers are a global investigation into the secretive industry of offshore companies based on an unprecedented leak of over 11 million documents from Panamanian law firm Mossack Fonseca. The leak exposed the inner workings of how individuals utilize complex corporate structures to secretly move money throughout the world for purposes such as bribery, corruption, tax evasion and other financial crime.

National leaders such as the Presidents of China, Russia and Ukraine and the Prime Ministers of Iceland and Pakistan are among those found to have been using offshore tax havens. Even individuals with sanctions imposed on them for supporting regimes in Iran, North Korea and Syria were able to use Mossack Fonseca to evade those sanctions by anonymously hiding behind corporate structures.

The leak has prompted governments to begin investigations into the misuse of offshore companies and financial institutions should follow suit. On May 9, the International Consortium of Investigative Journalists published a searchable database containing the names and addresses of over 200,000 offshore entities, as well as individuals linked to the entities. Financial institutions should conduct internal investigations into any links to shell companies, particularly those offshore entities named in the Panama Papers.

The Panama Papers put a spotlight on the ways in which criminals and money launderers can take advantage of anonymous corporate structures, but in many cases using complex offshore corporate structures is entirely legal. This puts pressure on governments to update laws, and the United States and other nations have promised tighter controls over corporate formation.

A top priority of the US Department of the Treasury, which estimates that more than $300 billion dollars of illicit proceeds are generated in the US annually, is enhancing financial transparency and preventing the misuse of companies to engage in illicit activity, such as money laundering or tax evasion. In January FinCEN issued geographic targeting orders requiring US title insurance companies to identify beneficial ownership behind companies involved in cash purchases of luxury real estate in Manhattan and Miami based on concerns such purchases may be conducted by individuals attempting to hide their assets or identity.

In addition, FinCEN has proposed legislation to Congress that would require companies formed within the United States to file beneficial ownership information with the Treasury Department at the time of a company’s creation. Making corporate ownership fully transparent and available to financial institutions would greatly assist Compliance Officers responsible for performing due diligence on customers.

Finally, after initially proposing the rule years ago, FinCEN issued a Customer Due Diligence (CDD) Final Rule on May 11. The rule amends the AML requirements of the Bank Secrecy Act to clarify and strengthen customer due diligence requirements for financial institutions. The rule includes a new requirement to identify and verify the identity of beneficial owners of legal entity customers.

There are four core elements of customer due diligence required for an effective AML program:

1. Customer identification and verification

2. Beneficial ownership identification and verification

3. Understanding the nature and purpose of customer relationships to develop customer risk profiles

4. Ongoing monitoring to maintain and update customer information and to identify and report           suspicious transactions

The first, third and fourth elements are already requirements of the Bank Secrecy Act. FinCEN’s CDD Final Rule makes the second element, beneficial ownership identification, and verification, a new requirement.

Financial institutions will have to identify and verify the identity of any individual who owns 25 percent or more of a legal entity as well as an individual who exercises significant managerial control over the legal entity. FinCEN is providing a standard certification form that can be used to obtain the required information, or financial institutions can choose to use another means to obtain the information. Compliance with this rule is mandatory by May 11, 2018.

Identifying beneficial ownership of legal entity customers increases transparency by addressing a weakness highlighted by the Panama Papers that allows criminals to access the financial system anonymously. This also helps facilitate compliance with sanctions programs and makes available information that will assist law enforcement investigations. The recent actions by the Treasury Department are a welcome step in enhancing transparency and customer due diligence requirements to combat the exploitation of the financial system by individuals using legal entities to disguise their involvement in illicit activity.

Please feel free to review the following articles further discussing the impact of the Panama Papers and the US Treasury’s Customer Due Diligence Final Rule:

What are the Panama Papers? A guide to history’s biggest data leak

Panama Papers Show How Rich United States Clients Hid Millions Abroad

Are Your Company’s Legal, Due-Diligence, De-risking, or Compliance Obligations Impacted by the “Panama Papers”?

Panama Papers Fallout: A Push for Transparency and Regulatory Reform

Panama Papers Leak to Spur Governmental Inquiries

ICIJ Releases Database Revealing Thousands of Secret Offshore Companies

US Treasury Finalizes Beneficial Ownership Rule, Also Adds Fifth Prong of Customer Monitoring to AML Programs

Leveraging Analytics to Identify Concealed Beneficial Owners and Fortify AML

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