‘Panama Papers’ leak highlights the need for firms to review compliance structures and client relations

By: Anna Sayre, reporter SanctionsAlert.com 
Date: June 8, 2016

On April 3, 2016, an unprecedented 11.5m files were leaked from the database of one of the world’s biggest offshore law firms based in Panama: Mossack Fonseca. These documents were quickly named the Panama Papers and expose a myriad of secretive offshore structures used by individuals and companies worldwide. Reporters at the International Consortium of Investigative Journalists (ICIJ), the news team to which the papers were leaked, found that some of Mossack Fonseca’s shell corporations were used for purposes such as apparent fraud and tax evasion, as well as conducting implicating numerous international economic sanctions regimes.

These recent events have raised a number of questions about the future of compliance systems as well as whether any of this conduct was actually unlawful and, practically speaking, will or can be prosecuted. In a recent webinar at sanctionsalert.com, Peter E. Jeydel, an attorney at Steptoe & Johnson LLP in Washington D.C. and Charles Intriago, a former U.S. federal prosecutor for the state of Florida, discussed the possible legal ramifications of the Panama Papers leak on Mossack Fonseca as well as its impact on the future of compliance structures and due diligence in the US and abroad.

Sanctioned entities on the Mossack Fonseca books

Mossack Fonseca had several sanctioned entities as clients:

Example 1: Syrian/UAE-based company that was listed as Specially Designated National (SDN) by OFAC for reportedly supplying fuel to Syrian President Assad. Mossack Fonseca had helped this company in the past to incorporate in the Seychelles. After the designation was announced, Mossack Fonseca continued basic work related to offshore structures. Eventually, Mossack Fonseca realized the client was sanctioned, reported this to the Seychelles authorities and ended the relationship. Mr. Jeydel mentioned that this case was a bit “muddy.” Even though there was no indication of any voluntary self-disclosure to OFAC or other agency in the US government by Mossack Fonseca or its client, the firm did appear to have some form of compliance structure and it was “not a clear picture of an egregious, continuing violation of US sanctions.”

Example 2: Mossack Fonseca helped an Iranian oil sector entity incorporate an affiliate in the BVI, and also helped them raise money. Again, it looks like Mossack Fonseca terminated the relationship pretty soon after the sanctions were announced. The Panama Papers revealed communications in the firm about internal due diligence failures. Again, we see a mixed picture, says Jeydel. On the one hand, they were dealing with an entity in a heavily sanctioned sector; on the other hand there was some apparent attention to compliance. But we are only seeing the tip of the iceberg here: more facts may start coming out and this is just Panama, one law firm.

Role of US attorneys, bank and others

This is not a drama that plays out only in Panama. A question that should weigh on the minds of all compliance officers and attorneys is how these clients got to Mossack Fonseca in the first place. If a US lawyer, or a bank, referred a client to this law firm in Panama, or any other law firm or corporate formation company in any other secrecy haven in the world, with the knowledge that the client  was seeking to launder money, evade taxes, or evade sanctions, that referring entity may potentially be exposed to charges under the US criminal code, such as conspiracy. Mr. Jeydel added that a key point to keep in mind is that US sanctions laws on the civil side are strict liability, so there is no need to prove knowledge or any kind of intent. With a referral, you can be exposed to the “facilitation” prohibition under OFAC’s regulations.

Developing drama: OFAC sanctions the Waked organization

In the wake of the Panama Papers leak, on May 5, 2016, OFAC imposed sanctions on a large money laundering organization in Panama led by Mr. Waked. This designation is going to raise serious questions about the reliability of Panama from a financial integrity standpoint. The Waked organization involved significant entities in Panama, including a hotel, a law firm (not Mossack Fonseca) and a bank. This may put more pressure on the Panamanian authorities to cooperate in the investigations that appear to be commencing based on the Panama Papers.

Can Mossack Fonseca be subject to US law?

Mr. Jeydel states that the leak from Mossack Fonseca not only has implications for financial crime and money laundering, but also whether the current legal landscape is adequate to address this conduct.

The US government currently imposes two types of sanctions, broadly speaking: primary and secondary sanctions. Primary sanctions relate to US persons/entities, wherever they are in the world, and secondary sanctions apply when there is no jurisdictional link to the US. These secondary sanctions put designated non-US entities or persons “in a corner” in terms of business and transactions with the US, which as Mr. Jeydel comments, can be a death sentence for an international business. Secondary sanctions were used in the case of the Waked designation, and may also come into play in the Panama Papers scandal, because Mossack Fonseca is a foreign entity, located in Panama.

Any US person that materially supports an SDN, facilitates a deceptive transaction, conspires knowingly in illegal conduct, or “causes” a violation can be at risk of harsh penalties under US law.

Non-US persons can also be at risk. As Mr. Intriago points out, the long-arm of US law casts a very wide net. Title 18 U.S. Code, Section 1956(f), states that, “there is extraterritorial jurisdiction over the conduct prohibited by this section if— the conduct is by a United States citizen or, in the case of a non-United States citizen, the conduct occurs in part in the United States”. This provision includes any transaction in which a US person is engaged, whether that means the firm employed a US person or the transaction was done through a US bank. In short, all US financial or non-financial institutions or persons, even minimally involved in the transaction, could make Mossack Fonseca or any other firm susceptible to US federal law.

What does this mean for compliance going forward?

The Panama Papers leak has already had an impact on compliance activity. 71% of the attendees of the sanctionsalert.com webinar surveyed say they have already searched for data in the Panama Papers database relating to clients. Another 21% say they plan to do so in the near future.

As Mr. Jeydel rightly states, it is inevitable that every company’s compliance structure contains a few flaws. What is important is that these flaws do not amount to systematic failures. If nothing else, the recent leak highlights the need for a comprehensive review of compliance structures and client relationships.

It is important to take pre-emptive action so that, in the event a US regulator comes knocking, a company is able to show that it has already taken steps to rectify any potential faults in its compliance systems. This can mean anything from a complete or partial revamp of compliance structures, to termination of some unreliable client relationships, or even full disclosure to the relevant regulator. Though this seems a simple solution, Mr. Jeydel believes that this may take a fair amount of weighing of the risks and, for many companies, the right path forward will not usually be an easy decision.

The Big Picture

Though offshore structures raise compliance risks, perhaps now more than ever, it is important to remember that they are not automatically a violation of sanction regulations. Instead, there is simply a need for greater due diligence and compliance checks in relation to both individuals and entities, especially those with offshore shell companies.

Furthermore, these offshore structures have had the effect of complicating compliance procedures so much that sometimes they are near impossible to complete in a satisfactory way. Mr. Jeydel thinks this could potentially have the effect of lowering the bar of “reasonableness” in relation to due diligence expectations.

Also, the realities and complications of obtaining cross-border evidence as well as jurisdictional issues will inevitably have an effect on how past and future violators are dealt with by the US government and regulators around the world.

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