How do you find a politically exposed person (PEP) hidden behind an offshore corporate entity? This is one of the primary questions thrown up by the publication of the Pandora Papers which presented multiple instances of PEPs purchasing high-value real estate in major cities around the world.
There were 336 senior public officials and politicians from 90 jurisdictions, tied to 956 corporate entities which featured in the Papers, including heads of state and monarchs. It is estimated politicians from a single country have purchased £700 million of real estate in London. At the time the properties were purchased and before the publication of the Papers, the connections to the PEPs were unknown and commonly undisclosed.
In the first week of 2022, Indian authorities announced a series of investigations focused upon a number of citizens named in the Papers. Previously, within other leaks from the International Consortium of Investigative Journalists (ICIJ), the same authorities identified $2.7billion of foreign assets held by Indian Nationals.
More recently, the ICIJ has published a Russian-specific report which presents data regarding 800 Russians who feature in the Pandora Papers.
Help is at hand
Professional enablers including lawyers, company formation, and management agents helped the PEPs and their representatives to incorporate offshore companies in jurisdictions such as the British Virgin Islands (BVI), Belize, Panama, Seychelles, and interestingly the state of Wyoming in the United States.
You can do it in the U.K. too
It is important to remember the U.K. is offshore to Europe and all other countries. Consequently, U.K. incorporated companies, as well as partnerships, often feature in money laundering investigations and allegations. Limited companies and partnerships incorporated in the U.K. have consistently featured in Laundromat investigations undertaken by the Organised Crime & Corruption Reporting Project (OCCRP).
There are multiple regulated businesses offering the sale of companies and partnerships incorporated in the U.K., supported by a range of services. Services include the management of bank accounts and the provision of nominee parties and acting as directors and shareholders (owners). The marketing upon one website of such a regulated U.K. company management and formation agent states-
“The nominee shareholder service is usually combined with the nominee director service. With the help of nominal shareholders, you can completely exclude your presence in England, even when dealing with banks.”
This service appears to suggest an individual’s connection to, and ownership of a company can be withheld, even hidden, from a bank. Of course, this service is available to PEPs as well as other business people.
The real deal
Within the real estate transactions, the vendors, and their connected parties, including lawyers and bankers are often unaware the buyer or seller is ultimately a PEP. All of this means the interconnected parties may unknowingly become involved in laundering the proceeds of grand corruption, funds stolen from countries by despots and their associates. Of course, anti-money laundering and financial crime professionals can play a role here and stop their banks or firms from being used to facilitate these crimes.
More recently, the US government has introduced legislation that specifically targets the risks posed by PEPs and those who seek to hide their identities, ownership, and control of assets, funds, or securities. The Anti-Money Laundering Act 2020 (AMLA) has created specific criminal offences, which target professionals and others who hide or disguise PEP participation, ownership, and control of assets, accounts, and transactions. This includes falsifying or misrepresenting a material fact from a financial institution.
The Department of Justice (DoJ) and the Federal Bureau of Investigations (FBI) have worked in partnership to pursue cases against senior foreign political figures and the combined kleptocracy unit. Jointly they pursued the corruption allegations against FIFA and its executives, as well as PEPs from other jurisdictions, including Ukraine and Russia. These new laws will be used against professional enablers, including lawyers who use fraud and deceit to help PEPs steal money and launder the same in the U.S.
The longer arm of US law
All USD transactions are cleared in the state of New York and as such, they are subject to both U.S. federal laws and New York state laws. Consequently, USD transactions initiated anywhere in the world can fall under the jurisdiction of criminal laws in the U.S. and New York. This gives U.S. law enforcement a long arm, but AMLA has now made this a little longer. AMLA now has given U.S. law enforcement the legal right to subpoena records, including account records for any correspondent bank maintaining a USD clearing relationship in the U.S. This new legal tool will enable U.S. law enforcement agencies to request a court issue a subpoena for records related to transactions cleared through the USD respondent account.
Some financial service professionals will mistakenly perceive they and their customers are not subject to U.S. laws if they do not physically execute transactions in the U.S. Pointedly, banks and parties operating outside of the U.S. are not compelled to transact using USD, but if they chose to do so, they will make themselves subject to applicable U.S. laws. The USD is a piece of sovereign U.S. property, it is a representation of the U.S.
Governance of the risks
PEPs who transact using USD will be subject to AMLA, as will other regulated firms and banks who facilitate such transactions. Thus, there is a need for financial crime compliance professionals to manage the risks presented by PEPs who hide and those who hide them. Below are some of the risk factors which may be present when a PEP is hiding within a transaction:
Offshore company – in particular from countries, states, and jurisdictions which have featured in prior money laundering cases and leaks.
The use of accommodation addresses.
The presence of corporate shareholders.
Newly incorporated companies.
The presence of nominee parties, including partners, directors, and owners.
A chain of professionals involved in a transaction, including lawyers, accountants, and consultants.
Requests for the signing of additional confidentiality agreements, above and beyond standard terms and conditions.
The use of non-corporate email addresses, such as Hotmail, Gmail, and Yahoo.
The use of mobile phone numbers which use international dialing codes for countries that do not appear in the transaction.
Customers who refuse to answer questions about the source of funds, source of wealth, and the reasons for using offshore corporate entities.
Customers who complain at being asked to answer ‘intrusive’ questions.
Always remember, you are in charge of anti-money laundering, you set the anti-money launder, and know your customers’ terms of business for a customer or a transaction.
The Pandora Papers, the Panama Leaks, and many more investigations reference the presence of professional, commonly regulated enablers assisting PEPs to launder their money. Lawyers and accountants, have historically assisted PEPs to pay school fees, buy properties, make investments, and even purchase private planes. Thus, when a firm or bank becomes part of a transaction to facilitate the purchase of property or a plane, undertaken using an offshore company, it will be prudent to ask questions and request formal attestations.
Smart financial crime compliance professionals will likely design a questionnaire and attestation document which seeks to establish the presence, participation, control, or ownership of a PEP or a number of PEPs. When the answers to questions propose there are no PEPs involved, other professionals including regulated counterparties should be asked to attest and personally sign, confirming they as an individual with due authority have analysed a transaction, customer data, and other relevant records and have no knowledge of the presence, control, participation or ownership by a PEP or PEPs.
Such attestations and certifications will help firms to demonstrate an endeavour to comply with AMLA and other applicable laws/regulations, while simultaneously demonstrating responsiveness to the issues and trends presented within the Pandora Papers, Panama Leaks, etc…
When concerns remain
There will be instances when financial crime compliance professionals will have exhausted all available, internal, and open-source due diligence resources, but will remain concerned about a prospective customer or proposed high-value transaction. In some instances, it will be both wise and necessary to engage a third-party due diligence provider in order to address any concerns and seek to ensure there are no PEPs hiding within a transaction or prospective relationship.
Nowadays, there is an increasing need for certainty within high-risk, high-value customer relationships and transactions, thus transparency should be obtained or provided by others.
Martin Woods – June 2022
Contributor to Square Facts, Martin Woods, industry expert.