The Panama Papers continue to shine a new light on the hidden world of money laundering,
providing important details on how
overseas shell corporations can be
used to make dirty money look clean.
Each new revelation gives federal
agencies more ammunition in their fight
against this brand of financial fraud.
Armed with these new disclosures on
money laundering, U.S. companies
should be looking beyond the headlines.
They should be digging into their own
operations, focusing on areas that might
trigger an investigation by any of a
half-dozen different federal agencies,
including the Internal Revenue Service,
the U.S. Drug Enforcement Agency, the
Federal Bureau of Investigation, and the
Department of Homeland Security.
Corporate leaders, however, often
understand neither the mechanics
of money laundering nor the kind of
compliance required by Uncle Sam.
One reason: The money laundering
process is staggeringly complex, the
scope is large, and operations are limited
only by the launderer’s imagination.
The Panama Papers are a collection
of 11. 5 million documents leaked
from a Panama-based law firm by
an anonymous tipster to German
newspaper Süddeutsche Zeitung.
For a year, the material was secretly
and collaboratively analyzed by more
than 370 journalists from more than
40 countries. By agreement, they
published their initial findings on
the same day, April 3, 2016. Since
then, new revelations have appeared
as analysis of the data continues.
This leak disclosed the identity of
the “true” owners of approximately
214,000 shell companies and billions of
dollars of assets. And those disclosures
barely scratch the surface. Mossack
Fonseca, the Panamanian law firm that
is the source of the Panama Papers,
is just one firm in a single country. It
has spent the past 40 years creating
shell companies, but there are similar
firms doing the same thing in dozens
of countries around the world.
By providing names of the real owners
of these entities—ranging from close
associates of Russian President
Vladimir Putin to members of China’s
elite to U.S. business executives—
the disclosures are expected to help
authorities catch terrorists, tax cheats,
corrupt politicians, and drug lords. The
information also reveals the intricacy
of these money laundering schemes.
Even in the most complex arrangement,
each scheme has three basic stages.
In the placement stage, “dirty”
money is deposited into a legitimate
financial institution, such as a bank
or a brokerage firm. Next the money
is “layered” by wiring it to accounts
owned by shell companies, with
transactions taking place over a period
of time. Because these companies
are based in countries with weak
or nonexistent disclosure rules, the
original money becomes impossible
to trace. At the integration stage, the
money re-enters the mainstream
economy through legitimate-looking
transactions, such as an investment
in a local business or the purchase of
goods at highly inflated prices from a
company owned by the launderer.
There is nothing inherently illegal about
a transaction involving a Panamanian
company, or any offshore entity, that
holds assets. The account owner simply
has to embrace transparency and
comply with government disclosure
requirements. But companies that
fail to impose safeguards—by hiring
staff trained to spot problems and
enacting control procedures, for
example—may find seemingly legitimate
transactions are anything but.
Strict controls are an absolute necessity.
One example is the case of a New
Hampshire racetrack owner. He and
his partners appeared to be making far
more money than seemed plausible. Still,
the feds couldn’t pinpoint the problem
until they arrested a major drug dealer
who was placing large bets at the track.
The managing partner, fearful of a full-
fledged investigation, avoided criminal
prosecution by explaining how the
racetrack earned its seemingly outsized
profits. Using the track’s parimutuel
betting operations, the owners had
been able to provide patrons with large
kickbacks. In parimutuel operations,
bettors bet against each other instead of
the track, and a portion of all bets is given
to the house. Regardless, the federal
government seized the track in a civil
forfeiture proceeding because the drug
dealer had used it to launder his money.
Many money laundering stories seem
to involve innocuous transactions
such as buying racehorses, yachts, or
condominiums, all of which seem far
removed from the corporate world. But
companies need to realize that there are
lots of ways that money launderers can
penetrate even buttoned-up corporate
environments, whether through a
computer parts supplier, a real estate
company from which it leases offices, or
the golf club where executives mingle.
One scheme that became the focus of a
congressional investigation was known
as the Toys for Drugs Black Market
Peso Exchange Scheme. The owners
of Los Angeles-based toy wholesaler
Woody Toys Inc. received millions in
cash payments from Colombian drug
traffickers through small deposits into the
company’s bank accounts. The company
used these deposits to buy toys from
manufacturers in China, and the toys
were shipped to Colombia. The proceeds
from toy sales in Colombia were then
used to pay back the drug traffickers.
Moreover, the federal government
doesn’t need a high level of proof to
charge a company with conspiracy
and seize goods. All that’s required is
probable cause. The company then has a
short time to challenge the seizure. This
kind of seizure is one reason that big
pharma companies have adopted their
own anti-money laundering protocols.
Another case involved Arthur Budovsky,
who was recently sentenced to 20
years in prison after pleading guilty to
running a money laundering operation.
His virtual currency company, Liberty
Reserve, allowed users to register and
transfer money by supplying only a
name, email address, and birth date. It
operated much like bitcoin trading sites.
According to the U.S. Department of
Justice, Liberty acted as a “shadow
banking system” for criminals, and