It was a very bad day for some of the world’s most powerful men and women and the banks they do business with. On April 3, once-hidden connections to the shadowy world of shell companies, offshore tax shelters, and secret trusts were laid bare.
Working from one of the most ambitious whistleblower tips of all time, the International Consortium of Investigative Journalists, German newspaper Süddeutsche Zeitung, and more than 370 journalists in 80 countries embarked on a year-long effort to parse through internal files of the Panama-headquartered law firm Mossack Fonseca that were leaked by a “confidential source.” The firm has branches in London, Beijing, Miami, Zurich, and 35 other global locations.
Those files—more than 11.5 million records dating back nearly 40 years—contain a level of connect-the-dots detail that would make even the most ardent conspiracy theorist’s head spin. They paint a picture of Mossack Fonseca as a go-to, one-stop shop for all the asset-shielding needs of the rich and powerful. The leaked data included information on 214,000 offshore companies, more than 500 banks that have worked with the firm, and an array of political figures, celebrities, sports figures, and criminals who sought its assistance.
Among the offshore holdings revealed are those of 140 politicians, public officials, and their families. On that list: the prime ministers of Iceland and Pakistan; the king of Saudi Arabia; Ukraine President Petro Poroshenko; $2 billion in transactions connected to associates of Russian President Vladimir Putin; and offshore companies linked to the family of Xi Jinping, general secretary of China’s Communist Party. In Brazil, the firm is entangled in “Operation Car Wash,” a bribery and money laundering scandal that has former president Luiz Inacio Lula da Silva under investigation and President Dilma Rousseff on the verge of being thrown out of office.
Dealings documented in the data leak include individuals and companies blacklisted by the U.S. government, including Mexican drug lords, terrorists, and the “rogue nations” of North Korea, Syria, and Iran.
Twenty-nine of the world’s 500 richest people are on the Mossack Fonseca client list. So is martial arts movie star Jackie Chan, although the investigative report says there is no evidence he used his companies for improper purposes. No such caveat is offered for soccer superstar Lionel Messi and a shell company that will likely become evidence in a tax evasion case brought against him in Spain.
FIFA, the governing body for international soccer, faces even more corruption and ethics woes with documents that detail business deals Juan Pedro Damiani, a member of its ethics committee, struck with Hugo and Mariano Jinkis, the father and son accused of paying bribes to win broadcast rights to Latin American soccer games.
Scandals connected to the law firm, as involved parties scrambled to shield assets from prying eyes, include perpetrators of the U.K.’s infamous Brink’s-Mat warehouse gold heist in 1983. There are also documented dealings with a convicted money launderer who claimed he arranged the illegal campaign contribution that paid burglars for the Watergate Hotel break-in, a scandal that brought down the Nixon administration.
Narratives culled from the files illustrate an almost comical lapse in fundamental compliance procedures. The firm regularly offered to backdate documents for clients, the ICIJ reports allege. It was apparently such a common practice that a 2007 e-mail exchange shows employees settling on a price: clients would pay $8.75 for each month back in time a corporate document was backdated.
“The governments of the U.S. and other major financial centers need to make corporate ownership information public through corporate registries. The Panama Papers investigation must be the nail in the coffin of anonymous companies.”
Liz Confalone, Policy Counsel, Global Financial Integrity
In the “Operation Car Wash” money laundering case, Brazilian prosecutors allege that Mossack Fonseca employees destroyed documents to hide the firm’s involvement. One employee, for example, allegedly sent an e-mail with the instructions: “Do not leave anything. I will save them in my car or at my house.” In another case, a U.S. citizen convicted of traveling to Russia to have sex with underage orphans signed papers for an offshore company that was facilitated by the firm while he was in prison.
Despite national laws and international agreements, firms facilitating shell companies and offshore accounts are supposed to screen for “politically exposed persons,” specifically government officials, their families, and associates. A 2015 internal audit, however, found that Mossack Fonseca identified the real owners of just 204 of the 14,086 companies it incorporated in Seychelles, a popular tax haven.
Mossack Fonseca responds
In a seven-page response to the allegations, authored by public relations director Carlos Sousa, the company struck a defiant tone. “If we detect suspicious activity or misconduct, we are quick to report it to the authorities,” he wrote. “For 40 years, Mossack Fonseca has operated beyond reproach in our home country and in other jurisdictions where we have operations.”
Key points raised in the response:
The firm’s services “are regulated on multiple levels, often by overlapping agencies,” and it has “a strong compliance record.”
The firm has “always complied with international protocols” including those of the Financial Action Task Force and U.S. Foreign Account Tax Compliance Act to ensure the companies it incorporates are not used for tax evasion, money-laundering, terrorist finance, or other illicit purposes.
Allegations that Mossack Fonseca provides shareholders with structures designed to hide the identity of the real owners, “are completely unsupported and false.”
It is not the firm’s policy “to hide or destroy documentation that may be of use in any ongoing investigation or proceeding.”
The firm “routinely resigns from client engagements” if a person or entity is not willing or able to provide appropriate documentation indicating who they are and from where their funds are derived.
“We conduct thorough due diligence on all new and prospective clients that often exceeds in stringency the existing rules and standards to which we, and others, are bound,” the letter adds. “Many of our clients come through established and reputable law firms and financial institutions across the world, including the major correspondent banks, which are also bound by international ‘know your client’ protocols and their own domestic regulations and laws.”
The letter concludes with a threat. “From the way you present your ‘facts,’ it appears that you have had unauthorized access to proprietary documents and information taken from our company and have presented and interpreted them out of context,” it says. “We trust that you are fully aware that using information/documentation unlawfully obtained is a crime, and we will not hesitate to pursue all available criminal and civil remedies.”
‘Nail in the coffin’
The leaked documents have reinvigorated anti-corruption advocates and amplified the voices of those critical of how some nations, including the United States, allow companies to shield beneficial ownership information—who really controls a company or related bank accounts, even if they do so behind the scenes through a proxy.
Homegrown shell companies also facilitate fraud
While names of Mossack Fonseca clients who were based in the United States may be forthcoming, it may not be as scandalous a list as what was already released. One reason: U.S. entities and persons may not have needed to trifle with the Panamanian law firm when they had homegrown solutions.
The dirty secret in the global effort to combat money laundering: despite the U.S. positioning itself as a leader in financial regulation, state incorporation laws here create a massive loophole that terrorists, tax evaders, and other nefarious figures can exploit. There is no federal law for business incorporation, leaving such matters in the hands of states. That has led to several states—notably Delaware, Nevada, Utah, and Wyoming—attracting the lion’s share of incorporations, thanks to their minimal legal requirements.
From a compliance standpoint, that can create holes when a state allows “beneficial ownership” information—that is, who really controls a company or related bank accounts, even if they do so behind the scenes through a proxy—to remain anonymous and unreported. Delaware, for example, is world renowned for its no-questions-asked incorporation process.
Already, details are emerging that Mossack Fonseca offices maintained branch offices in Nevada and Wyoming that were likely used to facilitate the creation of anonymous shell companies.
The advocacy group Global Witness has tallied a selection of cases that, although not part of the “Panama Papers,” share similarities to the business dealings exposed in that data leak:
Conspirators used 14 different anonymous shell companies, including at least one in Nevada, to steal more than $2 million from sub-contractors that they tricked into fulfilling U.S. federal contracts.
Two Texas lawyers used anonymous shell companies created in Nevada and Delaware to scam elderly victims out of more than $127 million in a sham investment scheme.
Three con artists calling themselves the Three Hebrew Boys used anonymous shell companies created in Nevada and South Carolina in an elaborate, religiously themed Ponzi scheme that targeted church goers and military personnel into investing more than $82 million in sham investment opportunities.
The kingpin of a crime syndicate tried to rob Medicare of more than $100 million by submitting fraudulent claims under at least 118 fake health clinics in around 25 states under the names of anonymous companies from eight states, including Nevada.
A telemarketer scammer set up two dozen anonymous shell companies, including in Wyoming, used in a scheme to cheat Americans with poor credit out of millions of dollars before he was caught.
A procurement manager for a New York-based machinery company used Wyoming shell companies created under an assumed name to pretend the business was minority-owned to get preferential treatment for government contracts. Awarded $1.6 million in contracts from the Pentagon, he then supplied knock off parts built in Turkey for military trucks deemed essential to operating personnel.
“The U.S. remains an attractive destination for tax evader, sanctions busters, terrorist financiers and money launders,” a statement from Global Witness says. “Unless Congress acts on bipartisan legislation before it that would help tackle the problem of American anonymous companies, we risk inviting even more of the world’s most corrupt and dangerous.”
Investigations into shell companies are becoming more common at government agencies like the Securities and Exchange Commission and Treasury Department. The latter has recently focused the efforts of its Financial Crimes Enforcement Network on the hidden owners of luxury real estate in New York and Miami.
The SEC, in March, charged a New York-based securities professional with defrauding two institutions he solicited to invest in a shell company he controlled. That company had a name the agency says was “deceptively similar to that of a legitimate private equity fund.”
According to the SEC complaint filed in federal district court in Manhattan, Andrew W.W. Caspersen, a New York City resident, solicited approximately $95 million from two institutional investors by offering promissory notes issued by Irving Place III SPV LLC. The complaint alleges that Irving Place III SPV LLC is a shell entity formed and controlled by Caspersen with no legitimate business operations, unlike the similarly named Irving Place Capital Partners III SPV, a legitimate private equity fund. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York initiated criminal charges against Caspersen.
The United States has no federal law for business incorporation, leaving each state to chart its own incorporation course as it sees fit. Over the years, that has led to several states—notably Delaware, Nevada, Utah, and Wyoming—attracting the lion’s share of incorporations, thanks to their minimal legal requirements. That loose approach to ownership disclosure can come into conflict with anti-money laundering efforts here and abroad.
“Banks and law firms routinely conspire to hide their clients’ money and fail to follow through on required customer due diligence checks,” says Liz Confalone, policy counsel for Global Financial Integrity a Washington, D.C.-based organization. “The governments of the U.S. and other major financial centers need to make corporate ownership information public through corporate registries. The Panama Papers investigation must be the nail in the coffin of anonymous companies.”
There were immediate repercussions from the document leaks. The Australian Taxation Office is investigating more than 800 high-wealth individuals for possible tax evasion because of their connections to Mossack Fonseca. On April 4, after thousands rallied to protest, Iceland’s prime minister, Sigmundur David Gunnlaugsson, resigned over dealings with the firm detailed in the reports.
As for the distinct lack of U.S. companies and persons in the data released thus far, those dealings will emerge in a second wave of reports promised by Süddeutsche Zeitung.
Even without those forthcoming names, the Mossack Fonseca leak will be a “gold mine” for the Department of Justice and other enforcement agencies, says Eric Berg, special counsel for law firm Foley & Lardner. “You had all the risk being placed on this one law firm, a single reference point, and now that they are exposed there is this treasure trove of information.”
There will be multiple steps as government agencies set to work. First, will be to separate illegal activity from legitimate deals. Then, agencies will seek to narrow the scope of their efforts for maximum efficiency. “They will look at the data points to figure out which are the most important to focus on,” Berg says. Expect some investigations to be multinational in scope, benefitting from the assistance of other nations.
Keep a close eye on the Department of Justice’s Kleptocracy Asset Recovery Initiative, which targets proceeds of foreign official corruption that have been laundered into, or through, the United States.
Berg, a former trial attorney at the Justice Department, conducted financial and real estate investigations connected to foreign corruption for that program, and he expects the DoJ will be heavily involved in forthcoming Panama Papers-related investigations.
“That office is dedicated to identifying the proceeds of foreign corruption in the U.S. and using asset forfeiture to seize the proceeds,” he says. “The Panama Papers are basically a cornucopia for that office and identifying those proceeds for them.”
“The low-hanging fruit are countries that are known for political corruption and money laundering,” Berg adds. “The U.S. will look to see if there is any intersection between the leadership in those countries and the Panama Papers and, if so, whether there are any assets located in the U.S. If there are, that begs the question of how those assets come to be acquired, what can be done to determine if they are legitimate, and if they are not legitimate how to use asset forfeiture to seize them.”
The Mossack Fonseca leak should be yet another reason for companies to make sure they take internal complaints and potential whistleblowers seriously. “My constant mantra is that companies need to commit to compliance,” says Greg Keating, chair of the whistleblower practice group at law firm Choate, Hall & Stewart. “They need to understand the value of having your own employees trust you to report internally. A small- or medium-sized problem can be dealt with, but when something gets to this scope and size—where somebody decided to leak 2.2 terabytes of information—you have a multibillion dollar problem.”
Mossack Fonseca’s letter in response to allegations once again raises serious questions about when a whistleblower crosses the blurry line between dropping a dime and perpetrating a criminal data breach.
“I often underscore the critical importance of being able to protect your data, because much of it includes legitimate trade secrets and confidential information,” Keating says. “Protecting that data is another reason why you want people who have a legitimate concern to bring it to you. You do not want them to distrust you and say, ‘I know I signed a confidentiality agreement, but I’m too scared of what they could do to me.’ That is apparently what happened here and it is happening more and more.”
“My hope,” Keating says, “is that the incident emboldens employers to commit even more deeply to compliance and creating a culture of transparency so problems can get caught early, rather than mushroom into something like this that is going to cost billions of dollars in litigation, investigation costs, penalties, and fines.”
Continue the conversation at Compliance Week Europe: 7-8 November at the Crowne Plaza Brussels. Join us as we look at changes in global anti-corruption regulations, slave labour risks in your supply chain, and how to detect fraud, to name just a few topics. Learn more