Panama Papers: Prosecutors Launch Investigations
When a scandal hits the media like the Panama Papers leak of 11.5 million confidential legal records, we all know what to expect. Criminal investigations, regulatory responses, and of course, congressional hearings of some sort so that everyone gets a piece of the scandal pie.
The International Consortium of Investigative Journalists (“ICIJ”) reported the leak of 11.5 million confidential legal records designed to expose shell companies and offshore bank accounts. The Swiss banking industry breathed a sigh of relief because they were not directly implicated in this scandal and they have had enough problems over the years.
The fallout from the Panama Papers scandal will cut across a number of institutions. So far, there have ben 140 politicians and public officials linked to these accounts but remember only a small fraction of the records have been publicly released from a total of 500 banks and nearly 15,000 shell companies.
The ICIJ plans to launch a database of searchable companies and individuals on May 9, 2016. The database will include numerous entities tied to offshore companies.
In this tornado of scandal, it is important to remember a few things. There is nothing illegal in creating an offshore entity. But it certainly begs an important question – what is the purpose of the entity (if not for some nefarious reason)?
Let’s start with a few easy examples. An offshore account can be used for the most common purpose – to hide income and evade taxes. We have seen a cottage industry built up by federal prosecutors who have prosecuted Swiss banks and encouraged tax evaders to submit to an incentivized voluntary disclosure program. We are likely to see a very similar enforcement push against tax evaders, some from the US and others from other countries.
In anticipation or as a preliminary step to lay claim to potential misconduct, the US Attorney’s Office for the Southern District of New York and the New York Department of Financial Services have opened investigations into potential tax, fraud and money laundering issues. Financial institutions will face a huge/yuge threat from this data. Federal prosecutors and regulators will be looking for evidence of financial transactions with tax evasion, corruption, money laundering and sanctions risks.
The Justice Department will gain access to a database with over 200,000 offshore entities incorporated by the Panama law firm of Mossack Fonesca and all the directors, shareholders, officers and beneficiaries connected to them. If any of these entities were involved in moving funds relating to terrorist financing, you can expect aggressive prosecutions of all involved.
The Treasury Department will rely on the data to promote greater transparency in the financial system in order to counter money laundering and terrorism financing. Press conferences and anecdotal evidence of criminal conduct will become a public relations launching pad for the government’s regulatory agenda.
As I have noted in a prior posting, you can expect FinCEN’s beneficial ownership regulations to come out with much fanfare and promise to address some of the illegal schemes carried out in the Panama Papers.
Foreign financial regulators are also getting into the act – the UK, France, India, the Netherlands, Norway, Mexico and others have launched their own investigations. Global financial institutions will be facing a mounting number of inquiries and subpoenas. The UK Financial Conduct Authority already issued letters to 20 global financial companies, requesting information about connections of Mossack Fonesca. The FCA is promising to issue additional inquiries of financial institutions.
Individual directors, officers and beneficial owners are going to be targeted for prosecution along with major global financial institutions. The focus of the inquiries against banks and their directors and officers will be on how compliance was carried out, and what specific efforts were made to identify risks associated with offshore transactions. Compliance officers may be targeted if they turned a blind eye or were somehow negligent in their efforts.
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