Within the discipline of ESG, there are many people who assert corruption is one of the biggest risks and threats. Our economies rely upon raw materials, in particular fuels, timber, metals and of course foods. All of these are extracted from land, often with a significant cost to the environment. In many countries there are laws and regulations which seek to protect the environment and restrict/limit the negative impact of extraction projects. All too often these are breached and compromised, because corrupt payments are made to politicians and public officials.
Politics, money, commodities and corruption
The Nigerian government is currently litigating JP Morgan in London, alleging the bank facilitated corrupt payments, made by oil companies to Nigerian Officials. The government alleges the money, circa $900 million should have been paid to them (the government). The bank denies the allegation, but at the time of the transactions did file suspicious activity reports (SARs) to the UK authorities. The SARs articulated the bank’s own suspicions about the money and the government officials. A trial date has been set for February next year, when the Nigerian government seek to prove JP Morgan was negligent and therefore liable to repay the $900 million, plus interest.
The case highlights the risks presented when dealing with politically exposed persons (PEPs) and commodities such as oil. Add to this, a high-risk country, high value transactions and offshore companies, there is an incredibly high risk of corruption. All of which requires a lot of data, due diligence and analysis. These high value transactions also bring pressure upon anti-money laundering (AML) and anti-bribery/corruption (ABC) practitioners, who need to stay strong and act with confidence. When staff at JP Morgan agreed to execute these transactions in 2013, they could never have imagined their thinking would subsequently be cross-examined in the courts in London nine years later.
License to spill
In other instances, corrupt politicians provide permits and licences to parties with inadequate or no policies and procedures to comply with requirements to protect the environment and dispose of waste safely. All of this contributes to further erosion of forests, degradation of local landscapes and yet more global warming.
Politicians and public officials are targeted and corrupted in order to ensure rogue companies can operate at reduced costs, absent to environmental concerns. Chemicals used in extraction are dumped illegally, killing local wildlife and contaminating local water supplies. These chemical catastrophes harm communities and threaten lives, which is why their disposal is regulated.
The ingredients of corruption
Added to the above, are bank accounts, from which bribes are sent and into which bribes are paid. Central to all of this is the bank account for the overseas PEP. Sometimes this is in the form of an offshore company and funds are paid for consultancy services. Funds may originate from major, established international companies, but this does not mean the funds are clean and the status of the major company can be relied upon. There have been multiple instances of major international companies paying penalties within prosecutions and deferred prosecutions related to allegations of bribery with politicians and public officials.
There has to be logic, to all transactions, as well as; an overseas PEP opening a bank account in a foreign country; the incorporation of an offshore company; the provision of legitimate consultancy services, without any apparent or obvious conflict of interests; the payment of funds to the PEP/offshore company and the relationship between the PEP and a major international company.
SBM Offshore and corruption
All of the above ingredients of corruption came together when Anthony Mace, the former CEO of SBM Offshore N.V. (a publicly traded Dutch company with American Depository Receipts (ADRs) listed upon the New York stock exchange) was sent t prison for breaches of the Foreign Corrupt Practices Act. Prosecutors allege Mae was at the centre of an international bribery scheme. Mace pleaded guilty to a single charge of conspiring to bribe government officials in Brazil, Angola and Equatorial Guinea. He was sentenced to 36 months in prison and SBM Offshore subsequently paid a penalty of $238 million within a deferred prosecution agreement. The investigation established SBM Offshore employees paid as much as $180 million in bribes over a fifteen year period.
The case references a total failure in governance and the pursuit of policies which simultaneously showed no regard for the environment and the social impact of systemically paying bribes to government officials. Importantly the prosecutors prosecuted the individual with accountability and responsibility, the CEO. It serves as a lesson to all executives and managers who contemplate or engage in paying bribes to government officials.
Other corruption cases
Earlier this year the former President of France, Nicolas Sarkozy was sentenced to prison for offences of corruption. Meanwhile in China, a former executive of an asset management company was sentenced to death for taking bribes. All of this highlights the dangers and risks when undertaking business with PEPs and within supply chains where other businesses undertake business with and may pay bribes to PEPs.
In 2020, Airbus reached a global settlement with multiple law enforcement agencies and agreed to pay penalties totalling US$4 bullion. It was alleged the company systemically bribed foreign officials over a number of years, to gain lucrative contracts to supply aircraft to governments and national airline carriers.
There are other areas of business which draw suppliers into contact and engagement with government officials, one such area is security printing for bank notes and official documents, such as passports. In 2016 the Serious Fraud office in the UK convicted the security printer Smith and Ouzman Limited for making corrupt payments to government officials in Kenya and Mauritania in order to secure lucrative contracts.
Presently the Belgium security printing company Semlex is being investigated in relation to allegations of bribery and money laundering in a number of African countries, including Democratic Republic of Congo and Madagascar, The bottom line is, security printing involves undertaking business with PEPs, often in high risk jurisdictions and it presents a high level of risk. Always beware of payments made to third party consultants and offshore entities when undertaking business with or facilitating business for security printing companies.
Hide and seek
Commonly, corrupt PEPs seek to hide their identity as well as the ownership and controls of accounts, funds and companies, behind proxies, nominees and even layers of other corporate entities. When faced with such issues and challenges, firms/banks may need to engage external third parties to undertake due diligence and establish the authenticity of offshore corporate entities, their owners, controllers addresses and connected parties.
Third party due diligence providers develop familiarity with corporate service providers, accommodation addresses, company management agents and nominee/proxy parties. They develop a sixth sense for the structure, ownership and management of offshore corporate entities. They recognise addresses, they understand and also recognise the difference between a company operating as an authentic business and others merely existing to receive fictitious payments.
In 2021, with client change at the very top of the agenda for the United Nations, national governments, multi-national corporations and many citizens all of whom expect and demand better from companies and executives. Now is not the time to undertake business blind to risks, including PEP ownership of offshore companies. Firms and banks need to know answers to know customers.
Absence can be a red flag
In 2021, how do international businesses, including consultancies operate without a website and an internet presence. A website is used to showcase a business, thus does an international business without a website have something to hide or no story to tell? There is a distinction between a personal investment company and a company that purports to be providing consultancy services to others, including multinational businesses.
Conversely, a consultancy company without an office, an operating address is likely to struggle to meet with and correspond with customers and prospective customers. Combine the two, no website and no operating address, how does such a business function?
The presence of a nominee owner, suggests the real owner is absent, hidden and he/she could be a PEP. Nominees seldom provide services to only one corporate entity, they commonly act as owners, directors or partners for multiple entities, often in more than one jurisdiction. Whenever a firm/bank identifies a nominee within a corporate customer, they must establish upon behalf of whom they are acting, after all, it is necessary to know customers and this extends to ownership
What qualifies a PEP or an offshore company to provide consultancy services? It is a vague business, but when processing funds for the provision of such services, banks/firms needs to establish the validity of such payments. It is necessary for bank/firms to determine whether a PEP is qualified to provide specific consultancy services and in doing so they should remove any vagueness.
Where necessary firms/banks should seek consent from their customer to discuss the consultancy services with the paying party. Correspondence should be used to confirm the precise nature and value of any services provided. All the while keeping upper most in mind, PEPs, money, commodities, offshore companies, consultancy services and nominee parties are very high risk and often form the base ingredients for corrupt payments to be made.
Spending the proceeds of corruption
Earlier this year it was reported that politicians from an African country owned 800 properties in London and Dubai with a value in excess of $400 million. One has to assume the same politicians simultaneously work and live in the African country, where many will also own properties. The salary and allowances for cabinet ministers in this African country is equal to approximately $37,000/annum.
Of course, in all countries, many politicians are wealthy people and enter politics to serve their countries and constituents, thus there are additional and often substantial sources of funding. Nonetheless there have been many instances of foreign PEPs seeking to launder money outside of the country where they reside and work. Moreover, some PEPs seek to hide their wealth and privacy, hence they use offshore corporate entities when purchasing property overseas.
Real estate in major cities, such as London, Dubai and Paris is seen as both a good investment and a stable asset for parties seeking to hedge risks and invest money. Hence, the flow of foreign funds into the property sector within these cities.
Source of funds, wealth and corruption
None of this operates in isolation, as referenced in a prior article there are supply chains, one of which is the source of funds/wealth a PEP seeks to spend with or through a firm/bank, when purchasing properties, goods, services and legal advice. Whilst this information can be provided by a customer, a PEP or parties acting on behalf of a PEP, it is often difficult to independently verify such information. Here once again, it is wise and may sometimes be necessary to engage the expert services of a third-party due diligence provider.
Using extensive international networks in conjunction with substantial data sets which track PEPs, their businesses, their wealth, their families associates and salaries, they are often better equipped to help firms/banks to make a determination as to the true origins of a PEPs source or wealth/funds. These due diligence providers can provide evidence of the salaries of politicians and public workers within countries, in articular high risk countries.
Within the recent United Nations climate change report, emphasis was put upon the need for immediate action to save the planet from a climate change disaster and that we could all make a difference. Well AML and ABC practitioners need to identify this as a rallying call. We have a role to play here, we can make a difference. We need to deal in certainty and sometimes this will mean we say no to customers, transactions, colleagues and even managers. It is easier to say no and remain steadfast when we have obtained the data which proposes a PEP may be trying to launder the proceeds of bribery through our firm/bank.
We can stop bribes being paid and connected environmental damage when we demonstrate that suspicious funds from PEPs are not welcome in our firms/banks. All of this supports our ESG policies, whilst simultaneously complying with applicable laws, protecting shareholders, meeting regulatory expectations and maybe, just maybe, fighting climate change. We can make a difference, but we need to act now.
Martin Woods, Director of AMLWoods
Martin Woods is a seasoned anti-money laundering practitioner, financial crime fighter and strategist. He has been fighting money launderers and financial criminals for over thirty years, as both a detective and a leader within a diverse range of financial service businesses in the UK and overseas. He is internationally recognized as a leader, outstanding speaker and first-class trainer, who has previously worked with and provided training to regulators, central banks, law enforcement agencies and the United Nations.
He is an innovator who thinks like a money launderer and in doing so he seeks to deter, detect, frustrate and ultimately stop money launderers. He joins the dots between dirty money, crime and the suffering inflicted upon communities where criminals operate and intimidate those who oppose them. He has played an active role in a number of major international money laundering investigations, which allows him to provide advice and guidance based upon unique, hands on, real life, real crime insights and case studies.
He asserts financial crime is a major component of a firm’s ESG policy, strategy and business development. Arguing environmental crime impacts all of us and unchecked will have a devasting impact upon our children and our grandchildren. Thus, he believes our collective actions can and will make a difference. Along with many others he has lobbied for more transparency in the ownership of corporate entities, behind which too many criminals seek to hide.