It wasn’t without some irony that General Noriega, Panama’s infamous dictator, holed himself up in the Vatican embassy when the US Army came knocking in 1989. On Christmas Day, in a bid to end the despot’s decade of money laundering and drug trafficking, the army crunched their way to the gates of the embassy. Noriega surrendered nine days later following a repeated barrage of Guns N’ Roses’ Welcome to the Jungle.
The windfall of 11.2m leaked documents last week was an early Christmas present for transparency campaigners around the world. While the revelations surprised no-one, the Panama Papers have shifted the game by increasing the focus on gatekeepers – lawyers, accountants and agents.
Let’s put things in context though. It is worth noting how moral standards have shifted. Consider how attitudes towards smoking, smacking children and, more recently, sugar have moved over the past 30 years.
While standards have changed, the law has not necessarily kept up. A lot of the media scrutiny around the Panama Papers has related to actions that aren’t considered kosher, but are not (yet) illegal.
This leads to the other key point: when it comes to dealing with people on sanctions lists or helping somebody to circumvent anti-money laundering controls, that assistance is most definitely illegal.
Over the past six months, Addleshaw Goddard has been interviewing investors around levels of due diligence and compliance. The aim is to benchmark how regulated investors comply with anti-money laundering regulations and sanctions. Our findings, available in June, could not be more timely.
With so much investment not channeled through FCA-regulated funds, the task of ascertaining the “beneficial owner” – legal jargon for the ultimate individual beneficiary of an asset held in another’s name – is challenging. As a lawyer, I can be far more comfortable with someone who is FCA-regulated. However, despite the very stringent checks the FCA ensures, even it has its doubts over whether sufficient due diligence has been done. Hence the FCA giving UK banks until 15 April to check if they have links to Mossack Fonseca.
Yet, as gatekeepers in the eyes of regulators, the lawyers, agents and accountants could be the ones liable for not determining the beneficial owner.
Strictly speaking, if you deal with a sanctioned person, even indirectly, then under the sanctions regulations you are not permitted to transact. Likewise if you cannot identify the ultimate individual’s name at the end of a chain of ownership, then you could be liable under the anti-money laundering regulations.
More worrying will be those who have simply turned a blind eye or who may have actively assisted others to hide assets and evade tax or hide criminal property. In such cases they can be directly criminally liable for their actions.
HMRC, the FCA and others will be seeking to find any liable gatekeepers who have failed – for whatever reason – to identify people and stop the market being swamped with criminal property. Nothing will strike fear into the hearts of industry more than major firms being prosecuted for systematic failings in their customer and client due diligence, rather than for one-off lapses.
However, if a client has deliberately lied and tried to hide the ownership of a particular asset, it is less likely the gatekeeper will be liable.
The obvious result from this affair will be tighter enforcement and potentially more controls on money coming in. As well as cases against those who have tried to hide their assets – either the proceeds of tax evasion or other criminal conduct – there are likely to be a number of enforcement cases against gatekeepers as a result.
Companies of all shapes and sizes should ensure they have the right systems in place and the right checks against all relevant consultants. Firms should be looking now at what information they hold and whether it shows any links to Mossack Fonseca.
Whatever the short-term effects on the market, one safe bet is that, just as 27 years ago, Panama’s dodgy dealers will once again have to face the music.
Read more about the Panama Papers at wordpress.egi.co.uk/news/panama-papers
Nichola Peters is a partner at Addleshaw Goddard
