Pandora Papers: The Effect on AML Compliance Teams

What are the Pandora Papers?

You may be wondering, what are the Pandora Papers? Why is this such an unprecedented event, and what exactly did the investigation expose? Before we dive into the details of the Pandora Papers and begin to understand what they mean, it is helpful to review the history of journalistic investigations into similar topics.

For example, the Paradise Papers were published in 2017. This expose identified countries that hid the identities of ultimate beneficial owners or UBOs. It also described the methods that billionaires were using to exploit shell companies and similar structures. There was another report called the FinCen files, which leaked the names of many banks and other financial institutions that were involved with moving trillions of dollars of illegal funds.

So, how are the Pandora Papers different? The key aspect that makes this investigation unique is the sheer scale and mass cooperation. Almost 12 million confidential files were leaked as evidence, and more than 150 media organizations participated in the efforts to collect the data.

It was led by the International Consortium of Investigative Journalists - or the ICIJ - and major players like BBC and The Guardian were involved. This is not the first time that the ICIJ has impacted anti-money laundering regulations and the related political landscape. However, the Pandora Papers represent the largest coordinated effort on the topic.

It took these organizations and journalists more than two years to track down the documents, analyze them, compare them to court records, and research other public data from various countries – and the results were worth it.

In other words, this is the biggest leak of offshore data in history, and the implications for AML and KYC regulations will likely be significant. Not only do the Pandora Papers identify world leaders, wealthy individuals, and politicians that have hidden fortunes, they also brought to light the network of shell companies that are being used to get around anti-money laundering regulations.

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Understanding Offshore Accounts

An offshore account refers to assets held outside of the country where they were earned or where the owner resides. Many offshore providers will help their clients set up shell companies or trusts that allow them to control the funds while making them appear like they do not.

Fees can range based on the complexity of the arrangements and the layers created to shield assets from law enforcement, creditors, and even family members – but the more you play, the more protection and secrecy the client will receive.

Even though it is not illegal to have a shell company that conducts business in a foreign country or to have assets offshore, they cannot be used to avoid taxes or launder illicit funds. Most offshore accounts are used to shift business profits from a high-tax country to a jurisdiction with lower rates, while also creating a layer of anonymity for the owner of the assets. They are also used by criminals to shift illegal funds and conduct other unlawful activities.

While most people imagine that offshore accounts are mainly held in certain islands, the Pandora Papers revealed that the shadow economy driving offshore money is present in every corner of the world – including the U.S and other major democracies. Elite institutions like multinational banks and law firms were also involved, indicating that the issue is more prevalent than most would imagine.

Data Leaked Through the Pandora Papers

Now that you have a little bit of background on the Pandora Papers, it is time to dive into the details of what they uncovered. The millions of leaked documents exposed the details of over 330 politicians across 91 countries, 35 former and current world leaders, and countless fugitives, criminals, and other con artists.

Most of the data came from 14 different offshore services firms located across the globe. These businesses set up shell companies for their clients that aimed to conceal information about their financial activities and wealth while circumventing many of the AML regulations established in the EU and other areas.

Specifically, they focused on the almost 4,000 offshore companies that were set up with the help of the Panamanian law firm Alcogal, which is owned by a former U.S. ambassador. Over 300 of these companies were set up in the British Virgin Islands for clients of Morgan Stanley, and the details get even more incriminating from there.

With these records, lawmakers can identify the power players and could ultimately end the offshore system. Here are a few of the most notable findings:

King of Jordan

Several of the records identified the King of Jordan and his assets stashed in beachfront mansions in Malibu, California. These homes were purchased for almost $70 million through offshore companies. In the same year, the people of Jorden were filling the streets to protest corruption and joblessness.

He secretly purchased a total of 14 luxury homes which cost him more than $106 million. Through the help of his legal team, he created over 36 shell companies to facilitate these purchases. By stashing his assets in properties in the U.S., he can likely evade certain anti-money laundering measures and avoid taxes in his home country.

Baker McKenzie

Many were surprised to see Baker McKenzie, the leading law firm in the United States, named throughout the Pandora Papers. The leaks highlighted the measures that Baker McKenzie used to create the current shadow economy and offshore system – and how they profit from it.

For instance, their lobbyists have spent countless dollars working to shape financial regulations around the world. Their revenues were boosted by helping people who had known ties to corruption and fraud, like the Ukrainian oligarch Ihor Kolomoisky – a money launderer charged with moving $5.5 billion in illegal money through shell companies, properties, and more in the U.S.

Baker McKenzie also supported a fugitive named Jho Low, who is wanted for embezzling $4.5 billion through a Malaysian economic development fund. Their lawyers facilitated the creation of many companies across the U.S., Hong Kong, and Malaysia so that he could shift money from their financial crimes and make the funds appear legitimate.

A spokesperson for the law firm said that they aim to ensure that all laws and best practices were followed when supporting their clients, but they did not directly address the questions about the offshore economy they helped to create.

Mobster Raffaele Amato

Raffaele Amato, a known mobster, was also named in the Pandora Papers. This violent criminal is tied to over a dozen murders and has a movie based on him titled “Gomorrah.” The leak identifies a shell company that he owns that is registered in the U.K. – it was used to buy land in Spain and served to hide ownership of his assets.

The Prime Minister of the Czech Republic

Another person implicated in the Pandora Papers is the Prime Minister of the Czech Republic. Although he is a billionaire that claims to support the end of corruption carried out by political elites, his actions demonstrated that he is just as entrenched in the offshore economy.

His $22 million property located in the French Riviera includes two swimming pools, a theater, and more – and it’s the perfect way to hide assets outside of his home country through shell companies and layers of transactions.

Additional Findings

The Pandora Papers also linked transactions to Vladimir Putin and many rich individuals living in Russia but abusing the offshore financial system. Similarly, the documents revealed information about star cricket player Sachin Tendulkar, supermodel Claudia Schiffer, and singer Shakira – and the list goes on.

There were at least 26 Swiss firms that appeared in the Pandora Papers.  This only confirms the fears that many had about loopholes that were present in their anti-money laundering regulations. Ultimately, many of the clients that used these firms committed financial crimes through offshore companies.

Implications for the Future

The Pandora Papers present us with an unprecedented look into the inner workings of the offshore economy, high-level politicians, billionaires, and more. Simply put, it paints a clear picture of how power and money operate in the modern financial world – as well as how rules and regulations are bent and circumvented by the wealthy.

The yachts, secret bank accounts, mansions, artwork, and private jets identified in the Pandora Papers are located all around the world. With this information, regulators and law enforcement agencies can help combat financial crime and improve their efforts on cleaning up the offshore economy.

So, what does this mean for the future of the offshore economy? And what should AML compliance teams be on the lookout for?

Take the Findings One Step at a Time

It can be easy for AML professionals to feel overwhelmed by the data leaked through the Pandora Papers. There are millions of documents to comb through and the findings make it clear that secretive finance has infiltrated politics and economies on a global scale – so where do you start?

The key is to take the data in stride and focus on the overarching issues that the Pandora Papers brought to light. Don’t fixate on all the details and try to understand everything at once – instead, identify key takeaways that you can apply to your business and AML process.

AML officers should also avoid making rash decisions or taking impulsive action. It is still too soon after the initial leak to do this, and there will likely be further developments over the coming months.

Reassess Client Risk Levels

The Pandora Papers will likely require most AML teams to reassess the risk level of some – or all – of their clients. Consider taking steps to understand the exposures outlined in the leaked documents and determine if it makes sense to revisit the risk level of certain clients because of your findings.

Adverse media screenings, for example, can help you search for changes in financial crime risks – especially considering that many of those files were leaked and are now accessible to the public.

The same goes for Sanctions & PEP screenings, as they are a crucial part of any KYC process. Your team may need to spend time developing a contingency plan in case you need to respond to new laws or regulatory changes.

Similarly, AML compliance teams must scrutinize the client list and enhance their due diligence where relevant. For example, your team must increase the level of scrutiny on clients that use shell corporations, trusts, corporate service providers, or operate in jurisdictions mentioned in the Pandora Papers.

Understanding Beneficial Ownership   

The need to understand beneficial ownership is one of the crucial impacts that the Pandora Papers will have on AML compliance and KYC measures. The U.K. parliament spoke on this issue directly, stating that their financial system attracts money launderers and other criminals because many authorities are unable to identify who ultimately owns the assets.

As a result, the government in the U.K. for example already raised their money laundering risk from medium to high. That means that anti-money laundering teams must keep that in mind when working with similar clients.

Identifying the ultimate beneficial owner will be one of the focus areas for governments in the future. Tackling this is a very big challenge as beneficial ownership registers are available in only a few countries with mostly incomplete data.

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Link to the ICIJ Investigation "Pandora Papers"

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