Pandora Papers Show Firms Need To Be More Thorough In Their Due Diligence

The International Consortium of Investigative Journalists (ICIJ), a global network of journalists and media organisations, recently published its latest findings into how individuals can easily create complex corporate structures often using offshore and shell companies to shield money and other assets from the authorities.

Known as the Pandora Papers ¹, it is actually the latest in a long line of similar ‘revelations’ in recent years of which the most prominent until now were known as the Panama Papers in 2016.

What is more remarkable about the Pandora Papers is the scale and global reach of the investigations and astonishingly, the high number of global leaders and high-profile public officials named in the headlines almost daily.  As ICIJ points out these are the very advocates for greater transparency.

A few statistics underline the scale of the ICIJ operation and the huge amount of work required to carry out detailed investigations like this:

• The investigation is far reaching globally, involving 600 journalists across 117 countries
• 12 million documents were leaked from 14 different sources (by contrast Panama Papers were leaked from just one source, Panamanian Law Firm, Mossack Fonseca)
• Over 35 current and former world leaders and over 300 public officials were named

Often using the services of Law Firms and Trust and Company Service Providers to create such structures either complicity or unknowingly, the spotlight is on such ‘enablers’ to ensure their due diligence checks are sufficiently robust.

There are, of course, legitimate reasons as to why an individual might use offshore structures to protect assets from rogue governments or other threats, however, such structures are often exploited to avoid paying taxes or to hide money and assets obtained from criminal activities.

Either way, there is a serious issue of public interest at stake. According to the latest research by the Tax Justice Network ², an estimated US$21-32 trillion of private financial wealth is located, untaxed, or lightly taxed in secrecy jurisdictions around the world. The IMF (International Monetary Fund) estimates that tax havens cost governments up to $600 billion in lost taxes every year³ and money laundering accounts for a loss of between 2 and 5% in lost GDP annually according to estimates by UNODC (United Nations Office on Drugs and Crime)⁴. These are huge numbers that impact society and has led to a number of inter-governmental initiatives to tackle the problem including:

• G7 Pressure on offshore secrecy havens to publish details of company directors and shareholders and be more transparent.
• Enhanced rules around the use of shell companies.
• Recent regulatory changes included a commitment for all EU countries to publish and maintain national registers of beneficial owners.  
• Changes to corporate ownership instruments such as bearer shares and nominee shareholders that are widely used to disguise identity.

However, whilst some progress has been made in the last two years, the pace of change is slow and inconsistent and there are still far too many loopholes. For instance, in the UK it is still possible to buy and own property through offshore companies where the beneficial owner is hidden. A recent report from Transparency International called ‘Hidden in plain sight’ states that “huge numbers of UK companies are created without any due diligence on who is setting them up. 40 percent of incorporations last year were done directly through Companies House, which does not undertake background checks on customers”. Pointing to the fact that reforms proposed to improve the governance of Companies House data including identity checks on directors and shareholders, are yet to be put before Parliament.

Despite this prevarication, financial and professional services firms alike are subject to anti-money laundering regulations and are explicitly required to carry out due diligence checks on businesses and individuals either at onboarding or by the ongoing monitoring of their existing customers.

The risk-based approach is at the heart of the regulations and when properly implemented guides the organisation through a structured risk assessment process to determine what an appropriate level of due diligence should be undertaken relative to the potential risks for money laundering or terrorist financing. The regulations also ask firms to identify the ‘beneficial owner’ in certain situations⁵. This may be because someone else is acting on behalf of another person in a particular transaction, or it may be because the firm needs to establish the ownership structure of a company, partnership, or trust for example.

This gets to the heart of what is needed in response to the Pandora Papers revelations. Much more needs to be done by firms to understand who is ultimately behind an organisation and benefits from the businesses’ transactions and profits. However, this is far from easy as any senior compliance manager in a bank, wealth management firm, law firm or other regulated business will tell you.

Finding beneficial owners can be time-consuming, complex and frustrating, particularly when looking at complex corporate structures with overseas entities, shell companies, and offshore companies in the mix. Finding shareholders, calculating the percentage of ownership, and understanding who owns and controls is a very difficult and complex process. Someone who wants to shield themselves and their money or assets from prying eyes is not going to make it easy.

Compliance teams need to know the possible red flags to look out for, such as:

• Are there any offshore companies in the corporate structures of their business clients?
• Why are they there?
• Are there any direct or indirect links to organisations named in the papers?
• Is the organisation using nominee shareholders or bearer shares?

Every regulated entity needs to have well-defined policies and procedures for the thorough vetting of businesses they are providing financial or professional services to. For organisations enabling the creation of corporate structures involving offshore entities, it is especially important to understand the reasons this is being done and what their purpose is.

Working with high-quality business data is crucial in this process. Whilst official registry data can vary in quality and depth around the world, it is far better to be using primary source data rather than intermediary data which could well be incomplete and out of date. Kyckr⁶ provides immediate access to corporate registry data in over 180 registries across 120 countries and the ability to construct corporate structures, which identify ultimate beneficial owners accurately. Essential information in the fight against both tax evasion and money laundering.

Pandora Papers ‘lifts the lid’ off how individuals have easy access to all the tools and professional services needed to hide their assets. Compliance teams will need to ensure their staff are trained and have the right data and technology to identify and detect suspicious activity early on and avoid possible penalties, or even prosecution.

1. https://www.icij.org/investigations/pandora-papers/
2. https://fsi.taxjustice.net/
3. https://www.imf.org/Publications/fandd/issues/2019/09/tackling-global-tax-havens-shaxon
4. https://www.unodc.org/unodc/en/money-laundering/overview.html
5. https://www.gov.uk/guidance/money-laundering-regulations-risk-assessments
6. https://www.kyckr.com/products/ubo-verify