corpcounsel.com | June 30, 2016

What the Panama Papers Should Teach Companies about Money Laundering The release of the Panama Papers shines a light on dirty money overseas.

From the Experts Jon Barooshian

The Panama Papers are shin- ing light on the hidden world of money laundering, providing important details on how over- seas shell corporations are used to make dirty money look clean. Each new revelation—which recently have been coming almost weekly—gives federal agencies more ammunition in their fight against this brand of financial fraud. Armed with these new dis- closures on money laundering, U.S. companies should be look- ing beyond the headlines. They should be digging into their own operations, focusing on areas that might trigger an investigation Yuri Arcurs/iStock by any of a half-dozen different reason: The money laundering analyzed by more than 370 jour- federal agencies, including the process is staggeringly complex, nalists from over 40 countries. By Internal Revenue Service, the U.S. the scope is large and operations agreement, they published their Drug Enforcement Agency, the are limited only by the launderer's initial findings on the same day, Federal Bureau of Investigation imagination. April 3. Since then, new revela- and the Department of Homeland The Panama Papers are a col- tions have appeared as the data Security. lection of 11.5 million documents continues to be analyzed. Corporate leaders, however, leaked from a Panama-based law This leak disclosed the identity often understand neither the firm by an anonymous tipster to of the "true" owners of approxi- mechanics of money launder- German newspaper Süddeutsche mately 214,000 shell companies ing nor the kind of compliance Zeitung. For a year, the material and billions of dollars of assets. required by Uncle Sam. One was secretly and collaboratively And those disclosures barely June 30, 2016

scratch the surface. Mossack a Panamanian company, or any need to realize that there are lots Fonseca, the Panamanian law off-shore entity, that holds assets. of ways that money launderers firm that is the source of the The account owner simply has to can penetrate even buttoned-up Panama Papers, is just one firm in embrace transparency and com- corporate environments, wheth- a single country. It has spent the ply with government disclosure er through the computer parts past 40 years creating shell com- requirements. But companies that supplier, the real estate company panies, but there are similar firms fail to impose safeguards—hiring from which it leases offices or in dozens of countries around the staff trained to spot problems the golf club where executives world. and enacting control procedures, mingle. By providing names of the for example—may find seem- One scheme that became the real owners of these entities— ingly legitimate transactions are focus of a congressional investi- ranging from close associates of anything but. gation was known as the "Toys Russian President Vladimir Putin Strict controls are an abso- For Drugs Black Market Peso to members of China's elite— lute necessity. Consider the Exchange Scheme." The owners of the disclosures are expected to case of a New Hampshire race Los Angeles-based toy wholesaler help authorities catch terrorists, track owner. He and his partners Woody Toys Inc. received millions tax cheats, corrupt politicians seemed to be making far more in cash payments from Colombian and drug lords. The information money than seemed plausible. drug traffickers through small also reveals the intricacy of these Still, the feds couldn't pinpoint deposits into its bank accounts. money laundering schemes. the problem until they arrested The company used these depos- Even in the most complex a major drug dealer who was its to buy toys from manufactur- arrangement, each has three placing large bets at the track. ers in China, and the toys were basic stages. In the placement The managing partner, fearful shipped to Colombia. The pro- stage, "dirty" money is deposited of a full-fledged investigation, ceeds from toy sales in Colombia into a legitimate financial institu- avoided prosecution by explain- were then used to pay back the tion such as a bank or a brokerage ing how the racetrack earned its drug traffickers. firm. Next the money is "layered" seemingly outsize profits. Using Moreover, the federal govern- by wiring it to accounts owned the track's pari-mutuel betting ment doesn't need a high level of by shell companies, with transac- operations, the owners had been proof to charge a company with tions taking place over a period able to provide patrons with conspiracy and seize goods. All of time. Because these companies large kickbacks. In pari-mutuel that's required is probable cause. are based in countries with weak operations, bettors bet against The company then has a short or nonexistent disclosure rules, each other instead of the track, time to challenge the seizure. the original money becomes and a portion of all bets is given This kind of seizure is one reason impossible to trace. At the inte- to the house. Regardless, the that big pharma companies have gration stage, the money re- federal government seized the adopted their own anti-money enters the mainstream economy track in a civil forfeiture proceed- laundering protocols. through legitimate-looking trans- ing because the drug dealer had Take the case of Arthur actions such as an investment in used it to launder his money. Budovsky, who was recently a local business or the purchase Many money laundering stories sentenced to 20 years in prison of goods at highly inflated prices seem to involve innocuous trans- after pleading guilty to running a from a company owned by the actions such as buying racehors- money laundering operation. His launderer. es, yachts or condominiums, all of virtual currency company Liberty There is nothing inherently ille- which seem far removed from the Reserve allowed users to register gal about a transaction involving corporate world. But companies and transfer money by supplying June 30, 2016 only a name, email address and of $1.256 billion and adding a Papers disclosures and other birth date. It operated much like corporate monitor. money laundering cases. They bitcoin trading sites. According The main lesson from this pros- offer a crash course in spotting to the U.S. Department of Justice, ecution is the need for transpar- potential problems, including the Liberty acted as a "shadow bank- ency. A key consideration for the names and strategies of popular ing system" for criminals, and court in allowing the DPA was the laundering structures. the government seized its assets. change in HSBC's due diligence. As the Panama Papers' revela- With more than 5.5 million user Prior to the DPA, its policies pre- tions work their way through the accounts worldwide, including cluded due diligence on other system, U.S. legislators will be look- some 600,000 in the U.S., there HSBC affiliates. Its approach was ing for new ways to make it tough- were clearly many legitimate that HSBC "did not air the dirty er to launder money. Introduced users whose funds were seized as linen of one affiliate with anoth- in the House earlier this year, a result. To recover those funds, er." This willful blindness made the Incorporation Transparency users will have to satisfy the it impossible for HSBC USA to and Law Enforcement Assistance U.S. attorney that their money discover key deficiencies in HSBC Act would require companies to was the product of legitimate Mexico's AML program, which disclose their beneficial owners transactions. allowed hundreds of millions providing law enforcement with As companies revisit their of dollars of drug money to be information needed to fight cor- own protocols to protect against laundered in the U.S. ruption. This legislation, if passed, money laundering, they should When the government began would require the Treasury embrace transparency. The first its investigation, HSBC viewed its Department to step in to collect step is simply making sure that AML program as a cost center beneficial ownership informa- they disclose their income and file that it kept lean to increase prof- tion in cases where U.S. states are any required account statements its. The bank, for example, did failing to. in a proper and timely way. That not hire anyone to replace the But whether this or any other means reviewing what the gov- North American regional compli- legislation eventually passes, cor- ernment requires and identifying ance officer when he left the com- porate counsel should remember any problem areas. The criminal pany in 2007. Instead, it shifted that the U.S. government views it as prosecution of HSBC Bank USA his duties to the North American a business's obligation to make sure N.A. illustrated the importance of general counsel, who clearly was that it is operating within the law. following proper procedures. unable to do both jobs. DOJ accused HSBC of willfully Companies can also require Jon Barooshian failing to maintain an effective transparency on the part of their is a partner at the anti-money laundering program business partners, customers Massachusetts law and failing to conduct due dili- and clients. This will allow them firm of Bowditch & gence on bank accounts. HSBC trace the source of funds used Dewey. He is a white- cooperated throughout the to finance a purchase, pay a bill collar defense attor- four-year investigation and was or obtain goods offered for sale. ney with a specialty in tax evasion, allowed to enter into a deferred Companies may even want to do tax controversies, internal and gov- prosecution agreement. One fac- their own background checks to ernmental investigations and related tor the court considered was the make sure that they have a good criminal and civil litigation. 10-fold increase in AML staffing understanding of anyone with from 117 full-time employees and whom they do business. Reprinted with permission from the June 30, 2016 edition of Corporate Counsel © 2016 ALM Media Properties, LLC. consultants to 1,147. The terms of Corporate counsel should This article appears online only. All rights reserved. Further duplication without permission is prohibited. For information, the DPA also included forfeiting stay up to date on the Panama contact 877-257-3382 or [email protected]. # 016-07-16-01