The FinCEN Files revealed money laundering to be a systemic problem, but the Pandora Papers and the recent resignation by the Financial Action Taskforce (FATF) chief, David Lewis, suggest a much more broken system, where regulators are barely tipping the iceberg in the fight against financial crime. The Papers also reveal a much higher power at play here – Governments; the real custodians of the financial system with the authority to drive change from the top. The industry in its entirety is failing to stop criminals from exploiting the same loopholes as those mentioned in the Pandora Papers and from continuing to cause serious social and economic harm by allowing them hide illicit gains in property.
One of the gaping holes that the Pandora Papers highlight is that the facilitators involved in the property deals – law firms, real estate, accountants, professional services firms – are not subject to the same regulatory scrutiny as financial institutions when it comes to anti-money laundering (AML) compliance. They are effectively unregulated and don’t have processes in place to prevent criminals from exploiting the same tax loopholes as the prominent figures named in the Pandora Papers.
Change in Regulations
The regulatory landscape is evolving to hold such firms to account. For example the UK intends to introduce a publicly available beneficial ownership register for UK properties owned by overseas companies and legal entities in 2021. In the US the Corporate Transparency Act aims to close a gap in the current regulatory regime, whereby individuals can form corporations and shell companies to obscure sources of wealth. The Financial Crimes Enforcement Network (FinCEN) has also just taken its first step towards writing new rules that will bring antique dealers into scope of AML laws and regulations. But will these firms have the necessary expertise, systems and controls in place to effectively detect and prevent financial crime?
Intercepting money laundering at the source
Whilst the structures and offshore activity mentioned in the Pandora Papers may be legal, it creates a significant burden for financial institutions that must separate the legitimate wealth from the illicit wealth in order to comply with their regulatory obligations. More must be done by holding governments, politicians and the firms facilitating money laundering transactions accountable for financial crime. By introducing legislation across the board to perform enhanced customer due diligence, anti-bribery, and corruption measures for know your customer (KYC) and anti-money laundering (AML) compliance, the industry will have better oversight of the high-net-worth individuals and politically exposed persons (PEPs) who are behind the offshore firms purchasing property. This will enable them to intercept before the money enters the financial system.
Accountability is key
Without accountability there is no incentive to stop financial crime, especially where there are financial gains to be made in mature economies. If we don’t act now and drive change from the top down, the wider repercussions will impact every one of us as criminals continue to launder proceeds made from serious crimes, such as human trafficking and cyber-attacks.