Anti-Bribery & Anti-Corruption (ABAC), Anti- (AML) and Asset Tracing One (1) Year Post

Prepared By: Fernando Herrera Miami June 21, 2017

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 1 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers Agenda

Anti-Corruption, AML & Asset Tracing One Year Post Panama Papers

1. Preliminary Remarks – What has happened?

1.1 Financial Secrecy Index (FSI)

1.2 Carruyo Case in “Panama Papers – El Caso Venezuela”

2. “Areas of Opportunity” & Challenges for Compliance

3. Gatekeepers

4. Regulatory Framework & Transparency

5. Convergence of ABAC, AML, Sanctions an CIP

6. Suggested Takeaways

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 2 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers Preliminary remarks

American Conference Institute (ACI) - 4th Miami Forum Anti-Corruption – June 21-22, 2017 3 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers Preliminary remarks –What has happened? (Short 4-minutes Video from ICIJ via YouTube)

https://youtu.be/fiu-vWLTqWs

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 4 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers Financial Secrecy Index (FSI)

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 5 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers Preliminary remarks – What has happened?

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 6 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers Preliminary Remarks – What has happened?

1) 2017 Pulitzer Prize Finalist in International Reporting & More . The Panama Papers leak exposed the harm caused by anonymous companies and spurred global reform efforts. . For their work “The International Consortium of Investigative Journalists” (ICIJ), “The McClatchy Washington Bureau”, and “The Miami Herald” were awarded a prestigious Pulitzer Prize. . Yet hidden within the 2.6 terabyte trove of data known as the Panama Papers leak of 11 million documents from the Mossack Fonseca (“MF”) law firm in Panama that showed how easy it is for corrupt public officials, money launderers, drug and/or human traffickers and other criminals to hide behind anonymous companies and access the global financial system.

2) Panama & the Organization for Economic Co-operation and Development (OECD) . Despite the arrests in MF, progress in Panama appears to remain somehow elusive; the government appointed two (2) international experts, Mark Pieth and Joseph Stiglitz, to investigate the use of anonymous offshore companies. . Nonetheless, Messrs. Pieth and Stiglitzt quit soon thereafter because of alleged government interference and then published their own report. . In October 2016, Panama signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters with the OECD, making it the 105th jurisdiction to join the world’s leading instrument for boosting transparency and combating cross-border . . The signing shows that Panama is now implementing its commitment to fully cooperate with the international community on transparency. . The Multilateral Convention is global, and is seen as a critical instrument for swift implementation of the new Standard for Automatic Exchange of Financial Account Information in Tax Matters (AEFI) developed by the OECD and G20 countries and slated to go into effect from 2017. . The AEFI will also be critical for implementation of automatic exchange of country by country reports under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, and is a powerful tool in the fight against illicit financial flows.

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 7 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers Preliminary Remarks – What has happened? – Part 2

3) Global Public Outcry . Panamanian authorities arrested the two (2) principal partners of MF for their alleged connection to Brazil's (Lava Jato) investigation. . The business dealings of Odebrecht, a Brazil-based construction conglomerate, has been a focus of the Lava Jato investigation. . In December 2016, Odebrecht pleaded guilty in the U.S. and reached settlements with authorities in and Brazil over allegations that it paid millions of Dollars in bribes to government officials on three (3) continents. . Founders of Panama Papers Law Firm Arrested on Money Laundering Charges; . Panama’s Attorney General, released a statement that said evidence gathered by her office indicated that MF was a potential “criminal organization” that concealed and removed evidence related to “illegal activity.”. . The Prime Minister of Iceland resigned and several more political figures around the world are under investigation. . According to the ICIJ, investigations or inquiries have been launched into the activities of 6,520 companies and individuals in 79 countries. . Reform shouldn’t be driven by scandals and leaks; the lesson from the Panama Papers is that the gaps and loopholes that allow anonymous actors to abuse the system need to be terminated; . For example, in the U.S. this means requiring gatekeepers (i.e. attorneys, accountants, the real estate industry, etc.) to carry out adequate background checks (due diligence) to determine where the money used to purchase luxury property comes from and to identify the individual(s) with the ultimate beneficial interest in the property.

4) Existence of shared databases . The ICIJ launched a searchable database that used the Panama Papers, the Offshore Leaks, and the Bahama Leaks to index almost 500,000 offshore companies, foundations, and trusts and the people behind them. . Leading transparency NGOs, including Transparency International (TI), launched the world’s first public, open data, global database of company ownership information which provides information about who owns 1.9 million companies in 24 countries, across all sectors (including construction, legal, real estate, and extractives).

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 8 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers

“… [E]stimates from the United Nations Office on Drugs and Crime (UNDOC), which put the scale of global money laundering at US$ 2.1 trillion on a yearly basis…” United Nations Office on Drugs & Organized Crimes (UNDOC-2011)

“The Panama Papers and other similar leaks provide a wealth of information on how legal entities created in tax havens are used to commit crimes and launder the proceeds.”

Transparency International - Australia

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 9 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers Venezuelan state-owned “Petroleos de Venezuela, S.A.” (PdVSA) and parent company of U.S. based CITGO

Eudomario Carruyo (“EC”); former Vice-President of Finance in PdVSA & former board member of U.S.-based CITGO . May 2005: Eudo Carruyo, son of EC, crashed in Key Biscayne, Florida, a 2004 Lamborghini (valued at US$ 200,000.00). The accident that claimed the life of the passenger while allegedly driving under the influence of alcohol, according to court records.. EC’s son skipped a US$ 100,000 bail and has been considered as a fugitive by the U.S. Marshals. . September 2005: the law firm of Mossack-Fonseca (“MF”) opened and registered Ozark Investment Corp. (“Ozark”), an off-shore company in the (B.V.I.), Switzerland and in Panama. Powers of Attorneys (PoAs) by Ozark were granted to Nancy Perozo (EC’s wife), Eudo Carruyo and former Planning Advisor in PdVSA, Carlos Carruyo (EC’s son) who worked as Internal Auditor in PdVSA. . May 2009: 4 years after having EC as a client of MF, the law firm “realized” that he was a Political Exposed Person (PEP), however MF continued having EC as client despite identified negative news in the media. . October 2009: MF grants POA to EC for Bistleigh Overseas Ltd. –BVI (Bistleigh) (the PoA was later transferred to an individual in Azerbaijan). . September 2011: EC was linked to the Ponzi scheme by the financial advisor of Francisco Illaramendi (See U.S. v. Francisco Illaremendi) . . In a letter sent to the National Assembly in Venezuela, EC declared that there was no wrong-doing in the case of Mr. Illaramendi against PdVSA. 15 days later, President Chavez fired EC from PdVSA . EC has been related with Diego Salazar (cousin of former President of PdVSA, Rafael Ramirez). Mr. Ramirez joined the board of Venezuelan state-owned petroleum company PdVSA in 2002 and served as company president from 2004 to 2014. Rafael Ramirez was the longest-serving cabinet member under President Hugo Chávez. In 2014, he briefly served as Minister of Foreign Affairs for Venezuela, and has subsequently served as Venezuela's Permanent Representative to the United Nations in New York . January 2015: both Messrs. Salazar and Ramirez have been mentioned in the Banca Privada D’ Andorra (BPA) case. . February 2015: Francisco Illaramendi was sentenced to 13 years in prison for running what U.S. prosecutors called a Ponzi scheme in Connecticut that caused US$382.2 million of losses, including for PdVSA. . December 2016: whereabouts of EC are unknown -according to ICIJ, he currently lives in Dominican Republic in a yacht registered to one of his sons.

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 10 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers “Areas of Opportunity”, Challenges & Considerations for Compliance

1) Corruption & Greed . Lack of transparency in Offshore Tax / Privacy Havens; - Ultimate beneficial ownership (UBO) - Existence of nominees acting as principals of companies . Gatekeepers (a.k.a. “enablers”) - Attorneys, Accountants, Real Estate Broker, Trust & Company Service Providers, etc.

2) Risk identification & correspondent mitigation . Demand transparency (i.e. conduct effective due diligence & where applicable enhanced due diligence) . Conduct periodic assessments (i.e. jurisdictions, sources of income/wealth, products, etc.)

3) Ramification to Financial Institutions (FIs) . Due Diligence v. Willful Blindness (i.e. thread of e-mails exchanged at Mossack-Fonseca (MF)) . Schemes designed to avoid detection in PEPs (see Carruyo in Panama Papers – El Caso Venezuela) . FIs should conduct “look back” (ensure lessons learned) and periodic “look forward” (re-assessing risk appetite; PEP v. PEP like)

4) Data Security & Possible Future . Alleged source: “Turndown” – “”. . Intelligence Agencies (i.e. NSA, CIA, Secret Intelligence Service (SIS) aka MI-6, the Foreign Intelligence Service of the Russian Federation (SVR RF) etc.) ? . Rogue MF former employee vs. Whistleblower expecting no bounty/award (i.e. altruistic behavior) ? . Certified Ethical Hacker (CEH) via ‘The Onion Route’ (TOR) or the ‘Invisible Internet Project (I2P) in the DarkWeb/DarkNet? . Panama Papers, the Offshore Leaks, the Bahama Leaks, is there more to come ?

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 11 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers Gatekeepers

1) Gatekeepers (a.k.a. enablers) . Provide services that can obscure ultimate beneficial ownership and facilitate laundering of illicit proceeds. . Key Types – > Attorneys, Accountants, Real Estate Broker, Trust & Company Service Providers, etc. that: . Create legal entities, open bank accounts, and purchase property, . Legal entities created in offshore jurisdictions and may never involve home country of the Ultimate Beneficial Owner (“UBO”), . Often involve complicated structure, layering entities created in multiple jurisdictions.

2) Unlike the UBO, the gatekeepers may not be involved in the crimes that generate illicit proceeds (yet they play a crucial role in successfully hiding a/o laundering those illicit proceeds) . Jurisdictional weaknesses (i.e. regulations, enforcement actions). . May even be aware of the specific crime generating illicit proceeds, with often participation during all stages of the money laundering cycle (Placement, Layering and Integration (PLI). . Service(s) can be related to a myriad of Financial Crimes (i.e. drug trafficking, tax evasion, corruption, embezzlement, bribery, cyber crimes, human trafficking, extortion, organized crimes, etc.).

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 12 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers Regulatory Framework & Transparency 1) Regulation . The U.S. Department of Treasury – Financial Crimes Enforcement Network (FinCEN) finalized the “Customer Due Diligence Rules for Financial Institutions” 81 Fed. Reg. 29298 et. Seq. (May 11, 2016) with effective date on May 11, 2018 which aims to further enhancing transparency by requiring financial institutions to identify those who own the companies that use their services. - Requiring development of a “customer risk profile”, – Expectation on-going monitoring to identify transactions with respect to whether the risk profile has been followed and to facilitate the filing of Suspicious Activity Report (SARs).

. FinCEN issued and renewed Geographic Targeting Orders (GTOs) that temporarily require U.S. title insurance companies to identify the natural persons behind shell companies that pay “all cash” for high-end residential real estate in six (6) major metropolitan areas. - FinCEN found that about thirty percent (30%) of the transactions covered by the GTOs involve a beneficial owner or purchaser representative that is also the subject of a previous suspicious activity report.

. In December 2016, the global anti-money laundering body known as the Financial Action Task Force (FATF) issued a report on the U.S.. - While the report had a number of positive findings, it also highlighted significant weaknesses, with the most important one related to gaps in access to information on the ultimate owners of companies (beneficial owners). - FATF criticized the weak oversight & limited AML program requirements for gatekeepers such as company service providers and the real estate sector.

2) Public Registry of Beneficial Ownership– New requirements to the registration of REAL owners . The (UK) published the world’s first fully open register of beneficial ownership (also committed to introducing by April 2018 a register of overseas companies that own UK property). . The European Union (EU) member states are moving towards central registers listing information on the UBOs of corporate and other legal entities (incl. trust). . Several governments -- including Denmark (most recent 23MAY2017) Norway, Netherlands, France, Afghanistan, Ghana, and several others -- have committed to set up public registers of the real, beneficial owners of companies.

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 13 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers Convergence

ABAC

CIP

AML Sanctions

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 14 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers Possible Next Steps?

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 15 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers Suggested Takeaways 1) Status Quo . Less transparent company formation centers will continue to pose clear & present challenges (hence Financial Institutions (FI) should factor this into their client risk rating and CIP Programs). . Gatekeepers are often witting/complicit. CCD/EDD and investigations should involve also for KTG (“Know-The-Gatekeeper”). . While the future rules on U.S. beneficial ownership become effective are indeed a significant step towards corporate transparency, the U.S. will continue to be subject to public criticism until it is no longer considered an entity haven (remember case of State of Nevada and Lava Jato).

2) Implementation of an effective Program . Introduce new anti-money laundering (AML), anti-bribery/anti-corruption (ABAC) and sanctions policies & procedures, setting standards well beyond local laws. . Implement effective Customer Due Diligence (CDD) to assess customers for financial crime risk (i.e. because of constant/fluid changes, increase pace of CDD/EDD reviews). . Embedding of a formal process which will entail Customer Selection & Exit Management. . Optimize existing IT architecture (crucial) by running new sophisticated system enabling the institution to screen customers and monitor effectively their transactions (thus ensuring appropriate investigations). . (If possible) build a Team with a significant increase in the size & capability of subject matter experts (SMEs) in the field. . Collectively, employees going & participating through significant hours of training (secret sauce) to identity spot the signs a/o trends of financial crime.

3) It is a new brave new world for the FI’s - general message to internal stakeholders . Show appreciation to all involved stakeholders in the FI for the hard work and collaboration effort (it is not an easy task). . Healthy debates between 1LoD and 2LoD should be welcome for an effective collaboration. . Policies & Procedures are “living & breathing” documents (periodic updates and buy-in from stakeholders) . Use tools and processes effectively. . Empower employees to exercise good judgment, not just processes (speak up and be on constant vigilance).

American Conference Institute (ACI) - 4th Miami Forum on Anti-Corruption – June 21-22, 2017 16 Anti-Corruption, AML and Asset Tracing 1 Year Post Panama Papers Sources

 https://panamapapers.icij.org  https://www.fincen.gov/resources/statutes-regulations/guidance/frequently-asked-questions-regarding-customer-due-diligence  www.fcpablog.com  http://www.vcrisis.com  www.fx-mm.com  www.bsanewsnow.com  http://www.financialsecrecyindex.com/PDF/FSI-Rankings-2015.pdf  http://www.oecd.org/tax/panama-joins-international-efforts-against-tax-evasion-and-avoidance.htm  www.featurepics.com  “Panama Papers – El Caso Venezuela ” [Panama Papers – The Case of Venezuela]: Batiz,Cesar, Boon Lisseth, Castro Maolis, Deniz Roberto, Figueroa Ahiana, Gacia-Tellez Luisa, Hernandez Alicia, Meza Alfredo, Pennacchio Katherine, Poliszuk Joseph, Prieto Hugo, Risquez Ronna, Scharfenberg, Weffer-Cifuentes Laura, Zerpa Fabiola; Armando.Info Editores, Primera Edicion, Cyngular Asesoria 357, C.A., 2016 Caracas, Venezuela

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