By Zafar I. ANJUM, MSc, CFE, CIS, MICA, Int. Dip. (Fin. Crime), CII, MIPI
Group Chief Executive Officer
Corporate Research and Investigations LLC
The leak of a set of confidential documents providing detailed information about hundreds of offshore companies listed by the Panamian corporate service provider Mossack Fonseca has resulted in the scandalous release of the identities of owners, shareholders and directors of several offshore companies.
The documents, which were first made available in 2015 by an anonymous source, were analyzed and investigated by the International Consortium of Investigative Journalists. In the past week, this enormous leak has revealed several wealthy individuals, including public office holders and celebrities, to be the Ultimate Beneficial Owners of the offshore companies. It has been intimated that the dealings of these individuals with Mossack Fonseca were part of a bid to carry out illegal activities such as tax evasion, fraud, bribery and corruption.
Financial institutions are typically required to carry out an Enhanced Due Diligence (EDD) procedure to find out the Ultimate Beneficial Owner of an offshore company seeking to do business with them. The EDD is carried out to reduce high risk situations, such as money laundering and financing terrorism, that may be associated with dealing with an individual or company. The EDD involves the gathering of additional information to verify the identity of customers, as well as their source of income. An EDD is also especially required where the customer is not available in person, or the customer is a politically exposed person.
However, the Enhanced Due Diligence process may become a tedious task with a corporate service provider, such as Mossack Fonseca, operating out of Panama. Panama provides a constitutionally guaranteed privacy for both citizens and foreigners under its jurisdiction, thus allowing Mossack Fonseca to be protected by Panama privacy laws that provide complete anonymous ownership of business interest and ventures.
Article 29 of its constitution specifically prohibits the violation of private documents and correspondence and states that these documents may not be held or examined by a third party except for legal or judicial purposes. Also, Law 6 (2002) of the Panama privacy codes establishes that personal information can only be shown to an interested party, and makes it a crime if the confidentiality is violated. These laws allow Mossack Fonseca to choose not to make public the Ultimate Beneficial Owners of the offshore companies it controls, and thus making the EDD process difficult.
Furthermore, Mossack Fonseca operates in such a way that they stand in or provide stand-ins to serve as the owner(s) of a company. They register the company, open bank accounts and even provide directors to sit on the company’s board. They also provide several layers of ownership in a bid to hide the Ultimate Beneficial Owner, so that an individual listed or found to be the legal owner of the offshore company may simply be holding the position for another individual who prefers anonymity.
Thus it is important that a thorough Enhanced Due Diligence process, along with Forensic Analysis, be carried out even after the identity of a stated Ultimate Beneficial Owner has been discovered. For instance, EDD and Forensic Analysis should be used to find out if the stated individual has a financial profile which corresponds with the activities of the offshore account, and/or if the individual is related to or is an associate of a wealthy or famous individual, or a politically exposed person.