Anti-money laundering rules need to get serious about offshore secrecy

Title photo: © dronepicr

The Panama Papers have shed some light on the dark world of money laundering and offshore secrecy. We have previously written about the fight against these practices. The need for improved rules has been underlined in almost all hearings that the PANA inquiry has held so far. Those include the journalists that revealed the Panama Papers, law enforcement agencies, the European Commission, and renowned experts like Nobel laureate Joseph Stiglitz.

A new attempt to reform rules for the offshore business

Existing rules are unlikely to put an end to practices of tax havens and secrecy jurisdictions which are used to obscure the real owners of assets, bank accounts and corporations. Sometimes this is “just” to escape the tax man, sometimes to hide and launder the proceeds of more hideous criminal acts. In any case, the result is an enormous toll for society and us all.

In the wake of the Panama Papers and terrorist attacks in Belgium and France, the European Commission released a new proposal amending the current rules against money laundering and terrorist financing in July 2016. In response, the European Parliament has recently published its own draft report on the matter. As GUE/NGL, we will be actively negotiating this new set of rules, trying to plug existing loopholes and pushing back against new ones.

These negotiations will be a lengthy process. It will involve parallel negotiations in the European Parliament and in the Council of EU Member States, followed by a final “showdown” between all three institutions – including the European Commission – before Member States have to translate new EU rules into their own law in order for them to be actually applicable. This can well last several years. But time is not the only impediment to better rules against financial crime.

Despite much talk after scandals like the Panama Papers, there is still a lack of political will (or courage) to propose the set of bold reforms that would be needed to rein in the excesses of the likes of Mossack Fonseca – the company from which the Panama Papers data was leaked – and large swaths of the financial sector.

The idea behind anti-money laundering rules

Before shedding light on the gap of where we stand and where we should be, let’s recap how anti-money laundering rules work and what they are meant to do.

As the BBC puts it: “If you are a wealthy business owner in Germany who has decided to evade tax, an international drugs dealer or the head of a brutal regime, the methods [to use offshore secrecy jurisdictions] are all pretty similar.”

Most of the time, someone who wants to hide money or its origin receives help from a financial institution in order to contact a specialised service provider like Mossack Fonseca who then sets up the offshore structures with the requested secrecy. As a consequence, authorities have no way of looking through an often endless chain of legal constructs built to preserve anonymity. While holding assets offshore is not in principle illegal, it is hard to fathom many legal reasons why individuals would crave secrecy.

In order to break this chain, anti-money laundering rules oblige banks, law firms and others to check their clients when doing business with them or on their behalf. Such checks include identifying the so-called beneficial owner (i.e. the natural person) behind a company or trust or other legal arrangement as well as understanding the nature of the business the client is engaged in. Vis-à-vis so-called high risk third countries, i.e. jurisdictions outside the EU that are considered risky in terms of money laundering, even more thorough and comprehensive checks need to be applied by obliged entities (that’s the name for those who have to apply anti-money laundering rules to their customers).

If the obliged entity finds anything suspicious while doing their customer checks, they have to report this to a specific public institution called Financial Intelligence Unit. Those are, depending on the country, attached to the tax administration, the police, or some other public agency. Their role is to analyse reports on potential money laundering from obliged entities in order to filter out those cases where law enforcement needs to step in.

A system that lacks teeth

There are multiple ways for those seeking secrecy to fall through the cracks of this system of checks and controls:

  • Current rules allow for two major loopholes with respect to the recording of the actual owners of offshore companies and other arrangements. First, registration of the beneficial owner can in practice quite simply be substituted with a so-called nominee director. The rules allow for registration of a senior manager instead of the beneficial owner and any person with no links to the actual business can be named as running a company on paper. Second, a beneficial owner of a company is only considered as such when he or she owns more than 25% of that company. Simple maths thus tells us that if one acts in a group of five close associates, nobody will be on record individually.
  • Even if a person is recorded as the owner of an offshore company, banks and legal service providers often collude with customers in order not to provide information about tax and other crimes to public authorities. They earn good money with this business and have little incentive to play game. Part of the silence by obliged entities can in fact be legal as tax crimes are in many countries not even classified as actual crimes even if they involve the theft of large sums from the public. Tax evasion obviously isn’t legal anywhere but it is mostly not covered by criminal law and not very severely punished. This is why managing undeclared money does not oblige banks and others to trigger a money laundering suspicion – an obviously outdated concept.
  • As the Panama Papers and other revelations have shown, even in areas that are in all likelihood strictly illegal, assistance with tax crimes and money laundering is widespread in the financial sector and among legal service providers. Potential profits are simply higher than much too soft penalties in case of breach of anti-money laundering rules. In addition, those in the public sector who are supposed to check on banks and others in this context often enforce existing rules too timidly and half-heartedly. Underlying this are real constraints in austerity-drained public services but also the infamous revolving door which connects public officials directly with those they are meant to supervise.
  • Lastly, a problem specific to the EU’s multi-tiered system of law making is the lack of proper implementation and enforcement of EU rules in Member States. A summary made available by the European Commission to the Panama Papers Committee of Inquiry shows the scale of the problem where several Member States still have not fully and satisfactorily implemented the 3rd directive against money laundering agreed more than 10 years ago in 2005.

We have proposed a range of improvements for tougher rules, more transparency and better accountability. While some of those find resonance in the European Parliament, Member State governments to date continue to oppose any meaningful reforms.

How to crack open the offshore world

Our approach to ending abusive offshore secrecy is based on some clear principles:

  • Tax evasion should be a predicate offence for money laundering, i.e. it should trigger anti-money laundering provisions, in the same way as other criminal acts. As criminal law is a competence of Member States, we propose a wider definition of predicate offences in the anti-money laundering directive so that tax crimes would be captured independently of their legal classification at national level.
  • The real owners of all corporations and other legal entities as well as trusts and similar legal arrangements need to be transparent, no matter how many layers of shell or letterbox companies are created to hide them. Limited liability and other protections offered by law for legal entities and arrangements are a privilege and in turn society has a right to transparency in order to prevent abuse.
  • The central registers of beneficial owners of all entities and other legal arrangements should be fully accessible by the public in order to provide unhindered access to data to a critical mass of independent researchers, journalists and activists. All of them play a vital role in holding public authorities accountable and in complementing their work by analysing and pointing to potentially dubious or murky constructs.
  • If basic information, such as the beneficial owner, is not available for an entity or arrangement, they should not be allowed to do business in the EU. This can be easily enforced through anti-money laundering rules by obliging banks and others to terminate relationships with such entities. No business set up for reasons other than creating complex layers of secrecy should have a problem with such a requirement.
  • Countries outside the EU, with their own anti-money laundering rules, should be regularly assessed and those not fulfilling strong standards should be considered high risk which means that obliged entities have to perform additional checks before doing business in such jurisdictions. Financial flows in and out of such jurisdiction should by default be subject to scrutiny by competent authorities.
  • No rule has any impact without adequate enforcement and sanctioning of breaches. Those provisions are currently too lenient and one of the major causes why financial crimes continue to thrive. We advocate for corporate liability (as in the US and several EU Member States) in addition to criminal liability of individuals in a company. Serious, repeated or systematic breaches need to be sanctioned by particularly strong penalties such as revoking the business licences of a bank or other service provider.

As said above, while other groups in the European Parliament and, to a lesser extent, the European Commission, have come some way towards supporting the kind of reforms that are necessary, several Member State governments are very far from accepting that we need to get serious about stopping the cancer of offshore secrecy from metastasising. The latest compromise text in the Council where Member States currently negotiate foresees effectively no change with respect to transparency provisions. None of the registers for beneficial owners would be publicly accessible and the problematic loopholes allowing to circumvent the registration of the real, natural persons behind letterbox companies would also remain in place.