What You Need to Know About the Paradise Papers

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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.

Unmasking Corporate Owners in Canada

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Lincoln Caylor
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!

What You Need to Know About the U.K.’s Criminal Finances Act

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Jordan Underhill, J.D.
Research Specialist

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.

Tax Evasion
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:

1. Failure to prevent the facilitation of U.K. tax evasion offenses
2. 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:

1. 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.
2. 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.
3. 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.

How One Man Exposed His Fellow FBI Agent as a Russian Spy

FROM THE PRESIDENT

James D. Ratley, CFE
ACFE President

Here’s the situation. You’re a new FBI undercover field operative. But the bureau has called you into headquarters, put a suit and tie on you, and ordered you to take a desk job as the assistant to a longtime FBI special agent and computer systems expert. You’ll be locked in a soundproof, two-office vault to do one thing: covertly surveil this man suspected of being a master spy for the Russians.

That’s where Eric O’Neill found himself in 2001. He became a loyal assistant to Robert Hanssen — an intimidating, demanding and suspicious boss. The FBI had its eye on Hanssen, but they just needed a smoking gun.

O’Neill, who will be a keynote speaker at the 28th Annual ACFE Global Fraud Conference, June 18-23 in Nashville, watched Hanssen for months, but couldn’t find anything incriminating.

Finally, O’Neill was able to get to Hanssen’s Palm Pilot. O’Neill rushed it to the FBI techies on another floor who decrypted it and found Hanssen’s drop date and location of classified material to the Russians. They had him.

Hanssen was arrested on Feb. 18, 2001, at Foxstone Park, near his home in Vienna, Virginia, where he’d made his last drop. He was charged with selling U.S. secrets to the Soviet Union and then the Russian Federation for more than $1.4 million in cash and diamonds in 22 years.

He pleaded guilty to 15 counts of espionage and was sentenced to 15 life terms without the possibility of parole. The U.S. Department of Justice described his spying as “possibly the worst intelligence disaster in U.S. history.”

I’m impressed that O’Neill was able to gather information on Hanssen, who prided himself on being able to detect any hint of deception.

The story was so dramatic that Hollywood transformed it into the 2007 movie, “Breach,” starring Ryan Phillipe as O’Neill, Chris Cooper as Hanssen and Laura Linney as “Kate Burroughs,” O’Neill’s handler. O’Neill was an onsite advisor for the film.

During the 28th Annual ACFE Global Fraud Conference, O’Neill — who now runs an investigative and security consulting firm, and works for a security protection software company — will be addressing recent changes in fraud and cyberespionage through the eyes of sophisticated attackers.

“I will use elements of the Hanssen investigation as a framework and also to tell an entertaining story,” O’Neill says. “The audience will understand why I say that there are no hackers; there are only spies.”

Clare Rewcastle Brown to Discuss Money-Laundering Controls Learned from 1MDB Scandal

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Sarah Hofmann
ACFE Public Information Officer

“I think this whole offshore financial structure that’s been allowed to grow like a canker … the whole thing’s got out of control,” said investigative journalist Clare Rewcastle Brown in an interview with the Association of Certified Fraud Examiners (ACFE). 

Rewcastle Brown founded The Sarawak Report and Radio Free Sarawak in 2010 to disseminate news that concerned the Sarawak region of Malaysia and eventually, news surrounding the emerging 1MDB (1Malaysia Development Bhd) scandal. In August 2015, a warrant for her arrest was issued by a Malaysian court for "activities detrimental to parliamentary democracy" and the "dissemination of false reports."

“I think we’re seeing a swing of the pendulum and I think 1MDB’s just kind of cropped up perhaps at the right place at the right time … governments across the world have started to realize that they’ve lost control and populations have lost patience,” she said.

Rewcastle Brown will address anti-fraud professionals from across Europe at the 2017 ACFE Fraud Conference Europe in London, March 19-21. Despite having an arrest warrant issued for her by a Malaysian court, Brown remains optimistic that corruption on a global scale can be defeated. She said, “I do think we’re seeing a lashback and 1MDB is going to be just one example of enforcement agencies hitting back.”

Despite not being able to attend the 2016 ACFE Fraud Conference Asia-Pacific last November in Singapore due to safety concerns, she is committed to speaking in-person at the conference in London. She plans to lay out the intricate timeline of the 1MDB scandal that allegedly began in 2009 and runs through present day.

1MDB is currently being investigated by Swiss, Singh and U.S. authorities. In a question-and-answer session after her prepared remarks in Singapore, Rewcastle Brown addressed what controls she thought could help prevent this type of large-scale money laundering. “I think this case is really an opportunity to hold banks and players in these actions seriously to account. And to make the actors who have broken the rules pay the penalty, seriously. [They should be] absolutely exposed, shamed and embarrassed because we need to put off future, potential situations like this arising again,” she said. “I think that’s the best we can hope to come out of this. By showing at last, that the financial regulators have teeth and that they’re catching up to the global criminal element who have been using our offshore system and far-too compliant financial organizations. If we can get ahead of them, maybe that’s the best way to deal with this particular problem.”

Find out more about the upcoming 2017 ACFE Fraud Conference Europe, and register by February 17 for early registration discounts, at FraudConference.com/Europe.