Lexis Nexis Risk Solutions
Lexis Nexis Risk Solutions,

October 26, 2021

News of the “Pandora Papers” – a leak of almost 12 million documents – broke in early October, detailing the hidden financial affairs of some of the world’s wealthiest individuals. Daniel Wager, Vice President, Global Financial Crime Compliance Strategy at LexisNexis® Risk Solutions looks at the implications and whether an exposé like this can drive positive change through greater transparency in the global financial system.

Opaque Financial Flows Facilitate Illicit Activity

The Pandora Papers leak raises concerns around the use of offshore jurisdictions and shell companies to hide potentially unethical or criminal behavior. This is the latest example of a series of leaks (including the Panama Papers and Paradise Papers) calling for global improvements in financial transparency.

These incidents have revealed how offshore companies can be used to hide sources of wealth and reduce or evade tax obligations in their home domicile. While there may be legitimate uses of non-transparent jurisdictions and corporate structures, these investigations reveal that they are still the vehicles of choice for illicit actors.

Governments have a responsibility to stop illicit financial activities such as tax evasion and money laundering, which are often facilitated via offshore financial centers, while also ensuring the fair taxation of citizens and corporations. These points of pressure should compel politicians to increase the transparency of the global financial system – yet progress has been slow.

Improving Financial Transparency

Thorough know your customer (KYC) due diligence, facilitated by screening tools and data on politically exposed persons (PEPs) and adverse media, as well as beneficial ownership registers, can help identify the often-complex relationships between those in positions of power, criminals and offshore companies.

Financial institutions are increasingly well-regulated in this area, with regulations such as the EU Anti-Money Laundering Directives requiring them to form a risk-based approach based on identifying PEPs and beneficial owners and taking into account high-risk countries and clients’ sources of wealth.

However, certain “designated non-financial businesses and professions” (DNFBPs) seem to be a weak link in today’s anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations. A small but significant number of DNFBPs such as legal professionals, trust and company service providers and real estate companies play a key role in obfuscating asset ownership.

According to the Financial Action Task Force (FATF) these professions should be subject to AML/CFT requirements, but in reality they are often unregulated and poorly supervised. As a result, many are not applying robust customer due diligence measures.

Since the Pandora Papers story broke, a group of bipartisan United States lawmakers has proposed a new law, known as the Enablers Act, which would amend the 51-year-old Bank Secrecy Act, by requiring the Treasury Department to create basic due-diligence rules for American gatekeepers who facilitate the flow of foreign assets into the United States.

Rationale for Transparency

In response to the Panama Papers scandal of 2016 the EU agreed regulations mandating the publication of beneficial ownership registers. Even in those member states that have set up such registers, hurdles such as requiring the public to pay, use a national identity number or know the tax identification number of the company they are searching for make it difficult to access the data.

Aside from the ethical debate over offshore structures and their uses, the clear benefit arising from improved transparency is that it reduces friction in transaction chains. The greater the access to information about individuals and corporate identities, the easier it becomes for financial institutions and DNFBPs to facilitate legitimate business and business that fits with those organizations’ risk and governance standards. As well as posing harm to the public interest, obfuscation may damage productivity in the financial services industry in the long term.

Increased transparency would also help improve trust in financial services, something that is critical to an industry which relies on public confidence for its social license to operate. Progressive approaches to transparency will yield better outcomes for all stakeholders in the long term compared to potential reactionary responses that threaten repeat scandals and revelations of opaque activity.