Panama, Paradise, Pandora Leaks Expose Financial Risks

Ted Sausen, Subject Matter Expert, NICE Actimize AML Line of Business
Panama, Paradise, Pandora Leaks Expose Financial Risks

A bombshell investigative report was released recently that exposed how the world’s wealthiest and powerful were able to use a hidden financial system to their benefit. It was no surprise that this report was released by the International Consortium of Investigate Journalists (ICIJ), a non-profit newsroom comprised of investigators that work with a global network of nearly 300 reporters and 100 media organizations in more than 100 countries. This group revealed profound investigations that exposed questionable activities, and many times, flat-out illicit activities by some of the most powerful people and organizations in the world.

Five years ago, in April of 2016, the ICIJ was involved in releasing the Panama Papers. The Panama Papers exposed a network of more than 215,000 offshore entities involving people and entities from 200 different nations. Financial services organizations (FSOs) quickly rushed to identify if they had any exposure to these individuals. It’s essential to understand that offshore businesses are legal, and many of the transactions exposed were legitimate. It’s also important to understand that tax avoidance is also completely legal. It’s the process of reducing your tax liability to lessen the amount of tax owed to government agencies. Government agencies allow for this type of activity through certain accepted deductions such as mortgage interest on houses, claims for childcare expenses and a variety of other permissible deductions. What is not legal is tax evasion, or the process of deliberate underpayment of taxes or refraining from paying taxes entirely. In the case of the Panama Papers, many entities were set up as tax havens to hide funds and other fraudulent activities. This led to the prosecution of several individuals, including the two founders of the law firm that facilitated the establishment of these entities.

A year and a half after the release of the Panama Papers came the release of the Paradise Papers in November of 2017. These documents were accessed via an illegal computer attack and acquired by the same German newspaper that acquired the Panama Papers. The data breach exposed 13.4 million documents, nearly 2 million more than the Panama Papers. The documents exposed offshore corporations established for numerous individuals and institutions. Even respected household names like Nike or Apple and heads of state were among those called out.

Fast forward to October of 2021, the Paradise Papers were released to the public, where it was revealed that almost 12 million documents were leaked, slightly more than the Panama Papers five years earlier. The documents recorded illicit activities such as tax evasion and money laundering by some of the world’s most powerful. More than 600 journalists from over 100 countries contributed to the production of these documents. The political exposure was overwhelming -thirty-five national leaders, both former and current, were identified with nearly 400 other officials from 100 countries. Abdullah II bin Al-Hussein seems to be the most prevalent in the documents. Abdullah II is the King of Jordan and has been in power since 1999. The documents show he has investment properties across the United States and the United Kingdom in excess of $100 million. The Jordanian government responded that the claims were “distorted,” and King Adbullah II called it a “campaign against Jordan.” Other reactions were those of denial or a commitment to pursue a full investigation.

The documents, just as in the Panama and Paradise Papers, were not limited to individuals. The United States Department of State has committed to reviewing the documents as the report included trusts in several states. These trusts were established for offshore clients totaling $1 billion.

For years, government agencies have been trying to get a handle on tax evasion among other crimes. Going back to 2010, the United States implemented the Foreign Account Tax Compliance Act (FATCA), requiring non-US FSOs to report assets for customers connected to the United States. FATCA also requires that those individuals report their financial assets held outside the United States. In 2017, the UK took it a step further. Part 3 of the Criminal Finances Act of 2017 made it an offense not to put in appropriate controls to prevent employees from facilitating tax evasion. Tax evasion has always been illegal in the UK, however, these measures make it a criminal offense for those who help facilitate the process.

So, what does this mean for the financial industry? FSOs are already pulling down the lists and rapidly looking for potential exposure with their customer base. As evidenced above, this is not a one-and-done report, and we will continue to see additional reports like these in the upcoming years. Screening solutions, if they don’t have the capability already, will make it much easier for FSOs to be able to do on-demand screening against ad-hoc lists. You will see these same FSOs stepping up even more, with many already embedding tax evasion content into their yearly mandated training. Tighter controls will also be put in place to ensure red flags are trapped and reported. No organization wants the publicity of their involvement in the establishment of these entities for purposes of wrongdoing, nor do they want the liability it brings.

How much money is out there? It’s hard to tell. We don’t know what we don’t know, however, ICIJ estimates money being held offshore could be as high as $32 trillion. As with other leaks, new details will continue to unfold as investigations continue. And what we do know for certain, these recent revelations will have an impact on how we view anti-money laundering processes and standards for years to come.

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