Following a Supreme Court decision on May 14 that will allow states to determine the legality of sports gambling within their jurisdictions, more questions than answers emerged about the ruling’s implications across the country. As individual states determine whether or how they will accommodate sports gambling, fraud risks related to the industry should be at or near the top of the list of considerations for all involved.Read More
Mason Wilder, CFE
ACFE Research Specialist
Massive data leak leads to newspaper reports uncovering shady offshore financial dealings. Sound familiar? It should.
Once again, the International Consortium of Investigative Journalists (ICIJ) managed to get its hands on a treasure trove of financial and legal documents that outline the mechanisms used to help some individuals and corporations move money to reduce their tax burdens and obscure asset ownership. This time, the leak and accompanying stories have been coined the “Paradise Papers,” in a follow-up to 2016’s “Panama Papers.”
The two leaks share many similarities, but how are they different?
First off, and perhaps most importantly, this year’s Paradise Papers feature a main player (Appleby – a Bermuda-based legal services firm) that was seemingly more selective about its client list than the star of last year’s Panama Papers. Mossack Fonseca, a Panama-based law firm, showed no qualms dealing with individuals and entities potentially tied to illegal activities, including several heads of state and/or their families and associates. The leaks led to the Mossack Fonseca’s dissolution, the arrests of the founders, the resignation of Iceland’s PM, the removal of Pakistan’s Prime Minister, and investigations targeting more than 6,000 individuals and corporations throughout the world.
The Paradise Papers have not yet linked the subjects of the data leak to criminal culpability – and aren’t necessarily expected to – but they do feature a much more eye-catching list of names associated with almost 25,000 shell companies in more than 30 offshore jurisdictions. British royals Queen Victoria and Prince Charles, rock star Bono, Formula 1 superstar Lewis Hamilton, U.S. Secretary of Commerce Wilbur Ross, Twitter, Facebook, Apple, American pop stars Madonna and Justin Timberlake, and Russian oligarchs. These are only some of the high-profile figures and companies connected to offshore financial dealings through the Paradise Papers. It’s worth mentioning again that none of these people have faced allegations of criminal wrongdoing thus far, just questions about whether their financial dealings are “bad optics.”
Secondly, while the Paradise Papers certainly qualify as a bombshell data leak, the Panama Papers have them beat in terms of size, setting the record for largest known data leak at 2.6 terabytes (TB). There’s a good chance that much of the data from the Panama Papers still hasn’t even been seen by human eyes yet. The Paradise Papers, on the other hand, reportedly feature only 1.4 TB of data, or 13.4 million documents ranging from 1950-2016. Additionally, the Panama Papers’ documents came in formats much easier to process compared to the Paradise Papers. It may be a while before all the implications of the Paradise Papers can get sorted out and relayed to the public.
What can fraud examiners learn from this latest leak in the meantime?
It isn’t exactly a revelation that potential targets of fraud examinations or investigations can go to great and convoluted lengths to obscure asset ownership and complete pictures of their finances. By studying the stories borne out of the Paradise Papers, fraud examiners can gain a better understanding of how the thin line between tax avoidance and tax evasion, or the line between unethical and illegal, can be blurred or skirted. Fraud examiners can also learn red flags to look for and places to look for them in due diligence or compliance investigations, asset searches and more. They can also gain insight into tactics for moving and hiding assets internationally. Most importantly, much of the data from the Paradise Papers has been added to the searchable database of the ICIJ, almost all of which is publicly available on their website for use in any number of investigative or research tasks. Happy hunting!
To learn more about what fraud examiners should know about the Panama Papers leak, read "Shell Shocked" from Fraud Magazine.
Litigator focusing on high-stakes, cross-border financial crime disputes
Bennett Jones LLP
Most large-scale fraud, corruption, taxation and other economic crimes have a common characteristic: complex webs of corporations and trusts used to perpetuate schemes and to launder funds. While the “corporate veil” establishes the separate legal identity of corporations for legitimate reasons, it can also aid in the concealment of money and the identities behind it.
By permitting corporate ownership to remain secret, governments facilitate money laundering. Secret corporate ownership occurs when a corporation hides the identities of their true beneficial owners. The Panama Papers serve as the most recent example of the need for transparency of this beneficial ownership. However, it is not a new concern.
In addition to places like Panama, Canada is also an attractive jurisdiction for those looking to keep corporate ownership secret because of its lack of ownership disclosure requirements. But the issue in approaching a solution is not a lack of awareness – Canada is well known to be a hub for these white-collar crimes, facing criticism from nations who have created successful transparency schemes such as the U.K. and the British Virgin Islands (BVI). Bringing the country into compliance with international norms and increasing beneficial ownership transparency has been a recent budget agenda item of the Canadian government, but several factors are continuously highlighted as standing in the way of formal commitment. For example, only 10% of Canadian companies are federally registered, making it difficult to create a national strategy to close loopholes without the cooperation of the provinces.
Despite barriers to prompt resolution of this issue, elements of a successful government approach to monitoring corporate ownership are clear:
- Strong leadership from the Financial Action Task Force, the G-20 and the U.K.;
- Coordination with the provinces and foreign governments;
- A public registry of beneficial corporate owners;
- Mechanisms to ensure a balance between privacy and social interests; and
- Successful models to strive toward, such as those in the U.K. and BVI.
Canada is currently a safe harbor for laundered money, but it doesn’t have it to be. This infographic and the steps it lays out give Canadians the steps needed to make progress in the transparency of corporate ownership.
Are you interested in learning more about the latest fraud-related topics and trends that impact Canada? Attend the upcoming 2017 ACFE Fraud Conference Canada in Toronto, October 29-November 1. Register at FraudConference.com/Canada by September 29 and save CAD 100!
Jordan Underhill, J.D.
On April 27, the U.K. officially passed the Criminal Finances Act 2017. This law represents the most significant development in U.K. corporate criminal liability since the passage of the Bribery Act in 2010. The Act also strengthens the government’s ability to combat money laundering, terrorist financing and tax evasion. The various provisions of the Act are expected to come into force later this year and will affect both U.K.-based firms and foreign firms conducting business in the U.K.
One of the most important sections of the Act expands corporate criminal liability for tax evasion. This expansion represents the U.K.’s latest effort to combat domestic and global tax evasion and to increase its coordination with foreign governments. The Act creates two new strict liability criminal offenses:
- Failure to prevent the facilitation of U.K. tax evasion offenses
- Failure to prevent the facilitation of foreign tax evasion offenses
These new offenses are modeled after Section 7 of the Bribery Act, which created a strict liability offense for the failure of commercial organizations to prevent bribery on their behalf. Like Section 7, these new “failure to prevent” offenses have potentially broad applications because no intent is required. A corporation can be held liable for the actions of employees who, in their professional capacity, encourage or assist the tax evasion of others. This is true regardless of whether upper management had knowledge of or directed the actions of the facilitator.
However, the Act does provide a defense for firms that have reasonable prevention measures in place. To successfully assert this defense, the corporation must show that, at the time of the offense, it had reasonable prevention procedures in place to prevent employees from facilitating tax evasion. Alternatively, the corporation can show that it was not reasonable in all circumstances to expect the corporation to have any prevention procedures in place.
Unexplained Wealth Orders
Chapter 1 of the Act creates the “unexplained wealth order” (UWO), which is a new investigatory tool that authorities can use to expose corruption, tax evasion and other illicit activities. UWOs require individuals to explain the origin of funds that appear disproportionate to their reported income. These orders can be issued by a High Court at the request of an enforcement authority to a “politically exposed person” (e.g. public official) or a respondent that the court has reasonable grounds to suspect is involved in a serious crime or is associated with someone involved in a serious crime.
A UWO can be issued to someone not based in the U.K. and may relate to property outside of the U.K. If an individual makes false or misleading statements in response to a UWO, they can be convicted of a criminal offense that carries a maximum penalty of two years’ imprisonment.
Anti-Money Laundering and Terrorist Financing
The Act also enhances the abilities of law enforcement to investigate suspected money laundering and terrorist financing in three key ways:
- The Act empowers law enforcement to issue disclosure orders during money laundering investigations. These orders compel individuals that authorities suspect may have relevant information to answer questions and disclose documents. Individuals who fail to comply with disclosure orders can be fined up to £5,000.
- The Act allows for information sharing between various firms when there is suspicion of money laundering. This includes the ability for firms to submit joint suspicious activity reports (rather than a single report for each firm), which combines information from each firm into a single, cohesive document to create a more streamlined investigation for authorities.
- The Act gives the National Crime Agency (NCA) more time to investigate suspicious activity reports. Ordinarily, when a business submits a suspicious activity report, it requests consent from the NCA to proceed with the reported transaction or activity. The NCA can deny consent, creating a 31-day moratorium period during which investigators can gather evidence on the reported activity and determine if further action is required. However, this window is often too short for a thorough investigation. The Act allows the NCA to petition a court for up to six 31-day extensions to the moratorium period, providing more time for a careful analysis of the suspicious activity.
The Criminal Finances Act represents another step in the fight against fraud. Affected businesses should conduct risk assessments to ensure that they are in compliance with the Act before it comes into force later this year. In particular, special attention should be paid to procedures designed to prevent employees from facilitating tax evasion. Likewise, employees should be educated about the Act and any changes in internal policies.
LETTER FROM THE PRESIDENT
James D. Ratley, CFE
Successful criminals often have a common problem. After they steal the cash, they can’t spend it. They must first wash it.
They search for discreet laundromats. But financial institutions — spurred by federal laws, loss of reputation and a heightened sense of ethics — are cracking down on crooks who want to make their cash squeaky clean.
Jennifer Shasky Calvery has been fighting money laundering and other crimes for years — first at the U.S. federal government and now as the Global Head of Financial Crime Threat Mitigation at HSBC Bank. Before joining HSBC in 2016, she was director of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) for four years after a 15-year career at the U.S. Department of Justice. She’ll be receiving the ACFE Cressey Award at the 28th Annual ACFE Global Fraud Conference.
“While I was at the Treasury Department, FinCEN analysts made major strides to enhance deployment of advanced analytics tools to make sense of the ocean-sized data they had at their disposal from SAR [Suspicious Activity Report] filings and other sources of information,” Calvery says in the cover article of the May/June issue of Fraud Magazine. “These tools were essential to FinCEN’s ability to mine data and spot trends, and I knew that I would also need to leverage these tools at an international bank like HSBC.”
Calvery believes that fraud fighters should seize the opportunity to strengthen money laundering information sharing between the public and private sectors.
However, she says that banks are constrained by what they can share with industry peers and to governments. And banks and governments are restricted in what they can exchange cross-border. Regardless, Calvery can act as a mediator among the players because of her anti-money laundering credentials.
“In my role ... at HSBC, I’m focused on deploying innovative solutions that increase the effectiveness and efficiency of our ability to detect, deter and combat financial crime,” says Calvery. “In jurisdictions around the world, governments are adopting ‘sandbox approaches,’ allowing industry latitude to be creative in finding internal solutions to address risks in a way that encourages innovation while providing appropriate safeguards.”
More power to Jennifer Shasky Calvery. I’m looking forward to hearing her keynote at the 28th Annual ACFE Global Fraud Conference, June 18-23 in Nashville. See you there!