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Paradise Papers: Implication for Banks in the US and Abroad

On November 5th, 2017, 13.4 million confidential electronic documents were leaked by the International Consortium of Investigative Journalists (ICIJ). These documents, dubbed the Paradise Papers, illustrate various complex structures used by some of the world’s wealthiest individuals and organizations to keep their finances private. The majority originated from Appleby, a prestigious law firm renowned for its work in offshore legal services, who reported a data security breach sometime last year. The publication of the Papers triggered a deluge of reports on implicated prominent public figures, the responses of policy makers, and public outrage. More importantly for the financial sector, however, the documents suggest a widespread and institutional practice of financial opacity amongst their clients. This raises questions about current due diligence measures, especially regarding their adequacy in giving banks the tools needed to properly protect themselves from implication in an increasingly severe regulatory environment. 

Appleby: Who they are and why it matters

The Paradise Papers are, for the most part, very similar to the earlier Panama Papers. They are both enormous sets of documents containing private financial details of the world’s wealthy, notably their use of convoluted offshore structures to hide masses of wealth that most of the world did not know existed. A key distinction, however, is the type of firm from which these documents were obtained.

Mossack Fonseca, the focal point of the Panama Papers, had previously been a relatively unknown firm specializing in offshore financial services. Although the majority of their dealings only involved creative accounting to legally provide their clients with favorable tax rates and financial regulations, a few of their accounts were found guilty of money laundering, and others were even traced back to terrorist organizations. As a result, many dismissed the Panama Papers as wrongdoings of a rogue firm who would take any client.

Appleby, by contrast, is one of the world’s most renowned firms in its field. It has a 120 year long history, and represents many of the world’s most prestigious banks, as well as 2 of the Big 4 consulting firms. Legal directories list it as a “Band 1” firm, and Legal 500 UK named it the offshore firm of the year in 2015. Finally, unlike Mossack Fonseca, Appleby boasts very lengthy and rigorous compliance procedures, including for handling Politically Exposed Persons (PEPs).

While Appleby may have a more complete reputation than Mossack Fonseca, their record is not unblemished. Even before the Paradise Papers, a presentation to its staff in Bermuda in 2012 appears to acknowledge that the company may have taken on some risky business, referring to concerns around “non-compliance” to its regulatory obligations, including anti-money laundering (AML) policies. Multiple regulators, including the Bermuda Monetary Authority, raised concerns about their client checks, especially regarding to AML and anti-terrorist financing.

While they admit to having had a few non-compliance concerns, they maintain that they have procedures for identifying and addressing potential issues and reporting them to the relevant authorities. After reviewing their share of the Paradise Papers, they issued a statement expressing their “disappointment” at the media’s handling of this matter and ensuring the legitimacy and legality of all of their work. With that said however, Appleby’s work in offshore finance is primarily legal and legitimate, and therefore not easily dismissible.

Public Pressure

Due to the very public nature of these leaks, it is very likely they will lead to some level of public outrage, as they have in the past. Corporations and Financial institutions implicated in the papers risk damages to their reputation. US banks are exceptionally vulnerable in this most recent release, as the United States has by far the most individuals and organizations listed in Appleby’s registry. Moreover, several US banks are themselves listed, including Goldman Sachs, Citibank, and JPMorgan. Even though the contents of the documents themselves will likely result in very few legal repercussions, offshore accounts are often associated with money laundering and tax avoidance. Being linked to such accounts are likely to invite public scrutiny, which financial institutions must address with time consuming media statements and internal reviews. Furthermore, public pressure is likely to lead to pressure on regulators, which in turn lead to further and more difficult challenges for financial institutions.

Regulatory Pressure

With increasing pressure to reduce money laundering and tax evasion, governments and regulators around the world are likely to become more aggressive towards non-compliance related to offshore entities. Even Bermuda, a famed tax haven, has vowed to take measures to curb the abuse of financial regulations within their jurisdiction in an effort to protect their international reputation. As a result, banks must be prepared to address more frequent inquiries, which regulators are likely to carry out more thoroughly and with more severe punishments in an effort to further curb risky behavior. Taking the defensive measures necessary will require thorough reviews as well as adjustments to risk assessment procedures, where the opaque nature of offshore finance will likely pose difficulties.

Finally, as Appleby’s involvement has shown the abuse of offshore financial structures to be a largely institutional issue, it is likely that the revelations on these structures’ near banality will draw harsh responses from policy makers. While precautionary reviews and investigations have been launched around the world, the EU has been particularly aggressive in their response. Tax Commissioner Pierre Moscivici has called for a Union-wide blacklist of tax havens with potential punitive sanctions, a big step up from the existing national lists, which vary from country to country in content and strictness. There have also been talks of compulsory publication of company profits and taxes paid in every state in which they operate, as well as a public registry describing the true ownership of companies. As international financial policies often require global support, it is likely that other countries will be pressured to follow suite. Banks must anticipate the coming changes, and make sure they and their clients are prepared and able make the appropriate changes to their risk assessment and due diligence procedures.

Parting Thoughts

The contents of the Paradise Papers pose many challenges for financial institutions in the US and abroad. Even while legal, offshore accounts are often associated with money laundering and tax evasion, making them unpopular among the public and regulators. As a result, any connections may lead to reputational damage and increased scrutiny. Furthermore, what is clear from the Paradise Papers is that many individuals and corporations are going to great lengths to obscure their finances. This can be worrisome for banks, as opaque financial and ownership records make it difficult to conduct the proper due diligence.

The Paradise Papers let us peak a little further into the world of offshore finance. Government and regulators will push to get further transparency from that world, and will expect banks and other financial institutions to support them in that effort. With that I mind, banks and other financial institutions should ensure that their KYC and AML procedures are compliant and effective, and that they maintain a clear understanding and visibility of their clients who maintain complex ownership structures and/or offshore accounts.


Sia Partners


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