The Panama Papers: Implications for Financial Crimes Compliance Professionals

FinCEN Sanctions

A group of international news outlets published a series of articles this week regarding the so-called “Panama Papers;” 11.5 million documents leaked from a Panamanian law firm specializing in creating offshore companies. Offshore companies form a well-recognized component of tax planning, but have come under increased scrutiny recently. According to the reporting, the Panama Papers reveal that a large number of foreign politicians, celebrities and other high net worth individuals used opaque structures, such as limited liability companies (LLCs), personal investment companies (PICs) and trusts, to hold (and as implied in the reporting, hide) wealth offshore. Other reporting depicts the use of the offshore PICs, trusts and/or LLCs to conduct business with sanctions targets in Iran, North Korea, and Syria. A number of international foreign financial institutions providing trust administration and wealth management services held thousands of accounts for offshore companies identified in the Panama Papers, according to the reporting.

The information in the Panama Papers has a number of immediate implications for U.S. and foreign financial institutions:

• First, financial institutions should anticipate that any dealings with the Panamanian law firm at issue will be the subject of regulatory scrutiny. Indeed, it has already been reported that the U.S. Department of Justice is reviewing the documents for evidence of corruption that can be prosecuted in the United States, and the United Kingdom’s Financial Conduct Authority has directed as many as 20 banks to provide details of accounts handled by the firm by April 15, 2016. It would not be unexpected if FinCEN and/or US regulatory authorities followed suit. Therefore, those dealings, including whether they are a customer or involved in transactions with customers, should be identified and reviewed.
• Second, banks would be well served to review press reporting for information regarding clients involved in transactions with the Panamanian law firm, and reassess risks posed by those clients based on the information. As the press reporting is evolving daily, banks should establish a process for monitoring new information and incorporating that new information into their reviews. Additionally, in early May, the International Consortium of Investigative Journalists, which investigated the Panama Papers, plans to publish the names of the more than 214,000 offshore entities incorporated by the Panamanian law firm and the people connected to them as beneficiaries, shareholders, or directors. Once published, this information should be included in banks’ reviews.
• Third, the reporting calls public attention to a number of important financial crime risk issues. These include the importance of understanding beneficial ownership, especially when dealing with LLCs, trusts, and/or PICs or other potentially opaque structures, understanding the sources of a customer’s wealth (and the source of wealth of any beneficial owner(s)), conducting thorough due diligence and, in high risk areas such as high net worth individuals and politically exposed persons (PEPs), enhanced due diligence. As reported by a New York-based newspaper company on April 6, 2016, FinCEN’s Proposed Rule regarding Customer Due Diligence (see our prior analysis of this) is expected to be published within a few months.
• Fourth, Delaware, Wyoming and Nevada provide a means to establish structures comparable to those established in Panama. Banks should evaluate whether a review of account relationships with LLCs, PICs, trusts, and other structures created in these jurisdictions may be warranted.
• Fifth, the Panama Papers highlight the reputational risk to banks of engaging with secrecy havens (domestic and international). While the reporting thus far does not appear to allege illegality on the part of the banks, they have been put on notice that their due diligence regimes will be scrutinized in light of the Panama Papers’ revelations.

In sum, the reporting once again highlights the potential legal and reputational risks of offering banking services (including depository and lending services, such as mortgages) to entities such as LLCs, trusts, PICs, PEPs and their close associates, and high net worth customers in the private banking context and the importance of monitoring their transactions and accounts for money laundering, tax reporting (FATCA), and corruption-related purposes.