Paradise for money launderers

Two offshore firms, 19 secrecy jurisdictions, 13.4 million files. The Paradise Papers follow the Panama Papers in the drive to expose the secrets of the global elite’s use of offshore tax havens and shell companies to avoid taxes and exploit anonymity.

The International Consortium of Investigative Journalists (ICIJ)and 95 media partners released the Paradise Papers, obtained by the German newspaper Süddeutsche Zeitung, exposing a combination of offshore service providers and the company registries of some of the world’s most secretive countries.

The documents include nearly “7 million loan agreements, financial statements, e-mails, trust deeds and other paperwork from nearly 50 years at Appleby, a leading offshore law firm with offices in Bermuda and beyond,” according to the ICIJ’s Website. In addition, files from a smaller, family-owned trust company, Asiaciti, and from company registries in 19 secrecy jurisdictions were also included in the cache. “The records range from complex, 100-page corporate transaction sheets and dollar-by-dollar payment ledgers to simple corporate registries of countries, such as Antigua & Barbuda, that do not publicly list names of company shareholders or directors,” said the ICIJ.

The key findings of the Paradise Papers:

“Countries in favour of greater transparency—including France, Spain and Portugal—have failed to speak out forcefully. By failing to act they are all complicit in this corrupt system.”
Rachel Owens, Head of EU Advocacy, Global Witness



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Reveal offshore interests and activities of more than 120 politicians and world leaders, including the Queen, as well as advisers, major donors and members of the U.S. president’s administration

Expose the tax avoidance activities of more than 100 multinational corporations, including Apple, Nike and Botox-maker Allergan

Shine a light on FTSE 100 company Glencore, the world’s largest commodity trader, and its activities in the Democratic Republic of the Congo to obtain the rights for mineral resources

Give details of how owners of jets and yachts used Britain’s Isle of Man tax-avoidance structures

The release brought swift reaction from EU leaders. Vice-President Valdis Dombrovskis, addressing the ECOFIN press conference in Brussels, on 7 November, said: “During this mandate, we have tabled many proposals. Together, they can change the current state of affairs. Several of those proposals have already been agreed. But some are still outstanding, pending agreement from Member States.”

First, he called on Member States to take forward the EC’s June proposal for transparency measures for so-called tax ‘intermediaries.’ He admitted that EU legislation “can be circumvented by clever schemes and structures put in place by advisers to avoid paying for example VAT.” And called for agreement on the proposal for public country by country reporting that will significantly increase tax transparency and “shine a spotlight on big corporations that embrace aggressive tax planning.”

At the ECOFIN conference, the commissioners also discussed the ongoing EU blacklist for non-cooperative tax jurisdictions. Agreement on the list by the 5 December ECOFIN meeting was called for, but also an agreement on countermeasures against those jurisdictions that will end up on the list.

But this list has been accused of being mere grandstanding by activists in the area. “This idea about the blacklist is just attention grabbing,” said Rachel Owens, Head of EU Advocacy at Global Witness, in an interview with Compliance Week. “It’s not going to tackle the issues that we are facing around corruption and anti-money laundering; a tax haven list is just a distraction. If they had the political will to address these tax havens which are often in Anglo-Saxon or European countries that would be more effective but that’s not going to happen.”

“The U.K. government has substantial power to legislate for the overseas territories, politically that may be more difficult but when you look at a scandal of this scale, you have to question whether the U.K. government is taking full responsibility for its role.”
Mark Hays, Anti-Money Laundering Campaign Leader, Global Witness

But while the EU has been sounding off on this issue, its progress has been deemed too slow and ineffective by NGOs working in the area. Even today, the EC failed to reach a decision on modifications to the its own Anti-Money Laundering Directive (AMLD); the failings of which were already apparent with the release of the Panama Papers. Owens said in a statement following the EC’s failure: “Countries in favour of greater transparency—including France, Spain and Portugal—have failed to speak out forcefully. By failing to act they are all complicit in this corrupt system.” Global Witness has been meeting with EU Parliament officials, as well as representatives from member states to try to persuade them to support changes to the current regulations. “Global Witness has been pushing the EU to create the public registers of beneficial owners of companies and trusts,” said Owens. But there are two sides to this negotiation: the EU parliament and the member states. On one side of this negotiation, the parliament is going for ‘full on transparency,’ whereas the member states’ governments are, particularly on the issue of trusts, blocking any progress.”

The amount of time it has taken to negotiate on the issue has also been remarked. “This will be the eighth negotiating round on the AMLD,” said Owens, “and a year and half after the Panama papers it is an opportunity to act. Ironically, following another big leak from the Paradise Papers, the member states appear to be putting their fingers in their ears, ignoring this leak, ignoring the public outcry, and ignoring this vivid picture of corruption and tax evasion in Europe. Eight negotiating rounds is a lot by EU standards; I’ve been here 10 years and that’s highly unusual.”

TI Recommendations

Recommendation 1: Allow only U.K. registered agents to set-up U.K. companies
To prevent U.K. companies from being created and used for money laundering schemes, the U.K.
Government should:
• Prohibit the incorporation of companies by TCSPs not carrying on business in the U.K.
• Make it possible to trace who is setting-up and administering U.K. companies
Recommendation 2: Encourage U.K. registered companies to open U.K. bank accounts
Recommendation 3: Know who is incorporating and selling U.K. companies
To combat the risk of Companies House incorporating legal entities directly for money launderers, the U.K. Government should empower Companies House to carry out obligatory due diligence on those seeking to incorporate new companies, just as is currently the case for regulated TCSPs.
Recommendation 4: Empower Companies House to take a more thorough approach to identifying suspicious activity.
To ensure the integrity of the register, the U.K. Government should provide Companies House sufficient resources build a capability to identify suspicious activity.
Recommendation 5: Identify and implement measures to verify beneficial ownership information submitted by offshore corporate partners
In order to ensure the integrity of the company and PSC registers, the U.K. Government should identify and implement measures that would provide a strong guarantee that the information being submitted is accurate and would reduce the risk of U.K. companies being used as shells for money laundering. This could include:
• requiring that there is a direct and auditable link between the beneficial owner data for corporate partners controlling U.K. companies and PSC information submitted to Companies House,
• prohibiting the use of corporate partners unless they are a relevant legal entity, or
• prohibiting the use of corporate partners in most circumstances
Recommendation 6: Explore options for verifying person of significant control data
Prohibit the registration of corporate PSCs that are not relevant legal entities by introducing a drop-down box function on its online forms. It could also introduce automated verification software to identify where relevant legal entities have circular ownership structures, and if a relevant legal entity is registered on a stock exchange. Where information is being submitted by an individual, there could be a new requirement to submit some form of official documentation to prove that the PSC is who they claim they are.
Recommendation 7: Publish a thematic review of TCSP AML supervision
The U.K. Government is currently in the process of setting-up the Office for Professional Body Anti-money laundering Supervision (OPBAS), which will have responsibility for overseeing the 22 non-public body AML supervisors for this sector. Under the current proposals, the Financial Conduct Authority (FCA) and HM Revenue and Customs (HMRC) will not be overseen by OPBAS. The review include analysis of how many firms are operating in the sector, whether supervisors are sufficiently resourced, the monitoring activities of supervisors, and whether enforcement in the sector is transparent and providing a credible deterrent
Recommendation 8: Ensure TCSP supervisors are transparent and accountable for their activities
It should be made a requirement in the U.K.’s money laundering regulations for professional body supervisors to meet the Macrory standards of transparency by requiring them to:
• publish an enforcement policy outlining the powers and sanctions they have, how they intend to apply them in practice and the process for making appeals and representations against decisions, and
• publish the details of individual cases of enforcement
Recommendation 9: Create a credible deterrent to prevent anti-money laundering failings
The U.K. Government should seek to apply the ‘failure to prevent’ approach originally introduced in the U.K. Bribery Act to other forms of economic crime such as money laundering. TCSPs would fall within range of this offence and increase the fines for non-compliance to aid in deterrence
Recommendation 10: Monitor patterns in the use of U.K. legal entities
To proactively identify money laundering risks, the U.K. Government should closely monitor trends in company activity, especially the incorporation of legal entities not within the scope of the persons of significant control (PSC) regime i.e. limited partnerships (LPs), private fund limited partnerships (PFLPs) and trusts.
Source: Hiding in Plain Sight: How UK companies are used to launder corrupt wealth




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“Supportive member states seem to be France, Spain, Portugal, and Italy,” said Mark Hays, Anti-Money Laundering Campaign Leader for Global Witness, “but they have said very little about the issues, so it’s difficult to tell. The obstructive states are Malta, Cyprus, Luxembourg, Ireland, and the U.K. It’s not hard to see why; most of these countries are states that benefit from the current status quo. They’re using the threat of “economic uncertainty” to push back on any changes.” Hays explained why even some of the progressive members of the EU are opposing the legislation: “Germany’s stated problems with the legislation are to do with their privacy laws, and they have a very complicated legal approach to some legal entities such as trusts, so it claims there are some concerns that the new provisions would adversely affect national regulations. But Germany’s strong economic position, and the presence of a large number of multinationals, might mean that the new directive is just getting too close to the bone.”

Owens confirmed Germany’s opposition. “We have heard that Germany is one of the main blockers of this legislation,” she said particularly in the area of trusts, while France is one of the champions, we’ve heard that the Spanish are also supportive. It is difficult to understand why Germany and the U.K. are hiding behind countries like Malta that are implicated in the Paradise Papers. Why are they insistent on keeping the bar low following another leak on almost same scale as the Panama papers?”

In a recent report on beneficial ownership, LexisNexis noted that France, Germany, Italy, Spain and the U.K. have committed to participating in a unified beneficial ownership register and are calling on the rest of the G20 nations to follow suit. I asked Owens how is it possible to these two positions? “One of the biggest sticking points,” she replied, “is about disclosing the beneficial owners of trusts and because this is holding up negotiations we still don’t even have a public registry of companies. So, they might be committed to having a beneficial ownership register of companies but they are blocking transparency regarding trusts. Also, lots of trusts are based in the U.K., and they don’t want to open them up.”

Germany’s position is less easy to understand. “We were surprised that countries like Germany,” Owens said “which only has a very small number of trusts that would be covered, is still blocking progress. Germany did come out, together with France, in favour of a public registry of companies, but then backtracked, while France actually started to make progress. So, the EU said, we have three of our largest countries disagreeing on this issue, we need to take a position.” Unfortunately, it has failed to do any such thing.

At the same time as blocking progress on proper disclosure, the U.K. has been singled out following the release of the documents for being a significant enabler of money laundering and tax avoidance. Prime Minister Theresa May has taken no action to enforce proper disclosure and reporting in the Crown Territories and appears to be blocking legislation that would open up these offshore tax havens to scrutiny. Global Witness revealed that the top five jurisdictions for hidden deals are all U.K. Overseas Territories or Crown Dependencies. “The U.K., instead of responding with a plan to crack down on activities in Crown Dependencies and Overseas Territories, haven’t even followed through on their ambitions at the time of the Panama Papers to make sure that they would open the books to reveal the beneficial owners,” said Hays.

There has been speculation that because the Brexit negotiations are not going well and the U.K. doesn’t want to seem as if it’s a country that is “tough on business,” it is delaying implementing regulations until after the Brexit has been accomplished so it can have a better negotiating position. Something like: “you give me a great trade deal, and we’ll crack down on the British Virgin Islands.”

“One of the tricky things,” added Hays, “is that a lot of the overseas territories claim they are taking responsibility for their role in this. For example, a number of them have said they are developing private registers of beneficial ownership or similar systems. But when you dig deeper into these, they fall far short of a public registry and it’s difficult to understand how they even function as private registers. In some cases, the information is not even held centrally. There was a statement from the Bermudan Authorities that they had a public registry but that’s patently not true. When you hear pushback from the territories that they are taking steps or they are making changes, you have to compare these to the standards established by the U.K. government shortly after the release of the Panama Papers.”

Changes to the way the overseas territories operate are extremely unlikely to happen voluntarily, but there is another way forward. “The U.K. government has substantial power to legislate for the overseas territories,” said Hays; “politically that may be more difficult but when you look at a scandal of this scale, and it is not the first time this kind of systemic concern has been raised, you have to question whether the U.K. government is taking full responsibility for its role, and is simply unwilling to push the overseas territories.” But he did indicate that some of the countries closer to the centre were at least trying to take steps. “There are a number of overseas territories that already have a special relationship with the EU, for example Gibraltar, which are trying to stay in step of the EU on AMLD, but most are not making such efforts.”

A report by the U.K. branch of Transparency International (TI), published hours after the release of the Panama Papers, joined in criticism of the U.K., noting that: “It is also one of the easiest places in the world to start a company, making it attractive to legitimate and illegitimate business alike. Costing as little as £12 and taking around 15 minutes to complete the forms, UK companies can be created on a large scale for a fraction of the price of those registered in other financial centres.” It published a number of recommendations to combat this complicity, these are given in the box to the left. It also accused the U.K. of giving companies “a veneer of legitimacy due to the country’s well established global status.” And noted that the U.K.’s company formation industry “offers a variety of services, from so-called “nominee directors” and mailing addresses—giving companies a layer of secrecy—to offshore bank accounts allowing access to the global financial system.” And no one can see “who sold companies which then go on to be misused.”

What is a TCSP

Under the MLR 2017 a TCSP is any company or sole practitioner whose business is to:
form companies or other legal persons
provide a registered office, business address, correspondence address, or administrative address for a company, partnership, and other legal person or arrangement
act or arrange for another person to act as a:director or secretary of a company
partner (or in a similar position) for other legal persons
trustee of an express trust or similar legal arrangement
nominee shareholder for another person - unless the other person is a company listed on a regulated market which is subject to acceptable disclosure requirements

Some of the problems it identified are:

Insufficient controls on company formation: there are few barriers to U.K. companies being incorporated by money launderers and no way of tracing their use after they have been established.

Lack of checks on the U.K. company register: Companies House is not resourced sufficiently to ensure the integrity of the U.K. company register.

Inadequate anti-money laundering (AML) supervision: the U.K.’s patchwork of six or more AML supervisors is failing to deter money launderers, and allowing poor levels of compliance within the Trust and Company Service Provider (TCSP) sector that is covered by the country’s Money Laundering Regulations (MLR).

Little or no AML supervision of overseas professionals setting-up and managing U.K. companies.

That said, some progress has been made. In April 2016, the U.K. Government introduced requirements most U.K. companies to disclose their true owners—the persons of significant control (PSC) register—which is published by Companies House. But there remained gaps in the register requirement, and it was only in June 2017 that Scottish limited partnerships (SLPs) were covered by the PSC register. Limited Partnerships (LPs) in the rest of the U.K. remain covered. And under the Money Laundering Regulations 2017 (MLR 2017), express trusts with tax consequences in the U.K. are required to maintain registers of beneficiaries with HM Revenue and Customs (HMRC).

Problems still abound:

Formation of U.K. companies costs as little as £12 and takes a matter of minutes to complete the forms.

This compares to costs of around £1,000 and several days to set up a company in the BVI.

U.K. LLPs form only a fraction (1.58 percent) of the companies incorporated in the U.K., but TI revealed that over 50 percent (388) of LLP corporate vehicles were involved in large scale money laundering.

These 388 LLPs, used as anonymous offshore vehicles with U.K. addresses, “were controlled by 239 members over the course of their use—82 percent (198) of these were companies, with 77 percent (183) registered in secrecy havens.

SLPs make up an even smaller proportion of entities in the U.K.—0.32 percent of businesses registered at Companies House as of March 2016, but they made up 22 percent (161) of global money launderers.

96 partners controlled these 161 SLPs, of whom 96 per cent (92) were anonymous companies registered in secrecy havens.

Despite the release of the Panama Papers, or perhaps because of it, in the same way that gun sales spike in the U.S. when Congress begins to discuss revising laws on gun ownership after the latest mass shooting, there has been a huge number of new companies registered in Companies House. As of the end of March 2017, over 640,000 of the 3.8 million companies registered were registered in 2016 and the first three months of 2017 alone. TI said that almost two fifths of these companies “were formed directly through Companies House’s online platform,” while the remainder were formed by TCSPs. As of July 2017, HMRC supervised 2,775 businesses carrying out TCSP services.

The documents from the Paradise Papers cover decades of abuse in the past, but unless progress is made on implementing proper disclosure and transparency, there will be decades to come of the misuse of wealth, laundering money, funding corruption, terrorism, modern slavery.