LA Review of Books #Interview

I'm thrilled to be interviewed recently by Don Franzen at the LA Review of Books. We chatted about my global thriller BIG: Beginnings, the writing process, and where the novel's characters are headed in the next book of the series.  Check it out!

#LARB, #Legal, #GlobalThriller, #Writing

Truth Trumps Fiction in Azerbaijan #trump

As the author of a thriller series of novels set in the world of international corporate espionage where corruption is rampant and most deals are high risk, I read the recent articles on the Azerbaijani business of the Trump Organization with a fascination bordering on disbelief.

Never would the most aggressive of my fictional dealmakers seem to pay so little attention to the legal and reputational risks of operating in a high-risk emerging market like Azerbaijan. If the reports in Newsweek, the Washington Post and the Associated Press, are accurate, then truth has indeed trumped fiction.

Although construction on the Trump International Hotel & Tower in Baku stopped in 2015 when Azerbaijan’s petro economy cratered due to the fall in oil prices, the Trump Organization has reportedly made millions by licensing in 2012 the right to use Donald Trump’s name and from management fees. Just another shrewd, low-risk, high-reward business deal I thought initially. However, when I read that the local partner was a young billionaire, Anar Mammadov, I began to wonder. The articles reported that Mammadov owed much of his fortune to construction contracts awarded through the Transportation Ministry run by Ziya Mammadov, Anar’s father, a longtime confidant of President Ilham Aliyev and a man according to the Associated Press article “suspected by U.S. diplomats of laundering money for Iran’s military and described as ‘notoriously corrupt.’”

While none of the articles alleges that the Trump Organization violated any laws, the question remains why it would choose to partner with someone whose background raised so many red flags. Trump’s General Counsel reportedly told the Associated Press that a third party investigative firm was used to conduct due diligence on Anar but not on Ziya Mammadov because the father was not a party to the deal. And the Washington Post reported that the General Counsel was unaware at the time the deal was signed of the rumored source of Anar’s business success.

While the father may not have technically been a party to the deal, my experience is that an investigative firm of any quality would certainly inform its client of a potential partner’s relationship with a politically exposed father. Moreover, it is difficult to believe that a sophisticated international company would not want answers to basic business questions concerning a potential partner, such as: how did the prospective partner build such a successful business so quickly and what evidence is there that the partner would be able to complete the Trump Tower project on time and with the quality that the Trump name demands?

 

A failure to probe beyond the surface poses real risks to a U.S. company. Congressional reports to the Foreign Corrupt Practices Act make it clear that a U.S. business is liable when it has knowledge that a third party, such as a partner, will pay bribes and that “knowledge” includes a situation when the U.S. business consciously disregards circumstances - such as a rumors of past corrupt dealings, a relationship with a high-ranking official, etc. - that present a high probability that the bribes will be paid.

Moreover, the apparent lack of a sophisticated investigation into the Azerbaijani partner cannot be ascribed to ignorance of U.S. anti-bribery laws. In a CNBC SquawkBox interview with Donald Trump on May 15, 2012 (at around minute 14) concerning a Wal-Mart bribery scandal. Trump called the Foreign Corrupt Practices Act a “horrible law” that “should be changed,” a law that puts U.S. business at a “huge disadvantage,” and that the “U.S. should not be the policeman of the world.” If the head of the Trump Organization was aware of the broad scope of the FCPA in 2012, then one can safely assume that his legal team was as well.

In my series of novels, the protagonist, Duncan Luke, is an expert in the gathering of business intelligence to help clients eliminate risks or obtain competitive advantage. Luke would never have allowed his client to go into a partnership with Anar Mammadov without detailed intelligence not just on him but on his family, business associates and business record. Likewise, Duncan Luke would not have allowed his client to just assume that the politically exposed father was not part of the deal; he would have demanded detailed representations of fact and binding commitments to insure the son kept their partnership’s business completely walled off from the father and managed that business with sound internal controls and accurate accounting. And then he would have asked his client whether, under those circumstances, the partnership with Anar Mammadov still made business sense.

But, of course, that’s fiction.

#Trump, #Congress, #Corruption, #Azerbaijan

Learn more about my novel: BIG: BEGINNINGS >>

Be Aware and Be Safe #businessintelligence

The Internet is jammed with terms like KYC (“Know Your Customer”), customer due diligence, enhanced due diligence, risk assessment, risk management, business informatics, competitive intelligence, and corporate espionage. All such concepts fall into what I call the field of business intelligence (I realize that term is also used to refer to a variety of software applications used to mine, analyze and report an organization’s raw data to improve decision-making, but I’m old school. Intelligence connotes for me a broader process involving more human judgment than software design. I think business informatics is a better term for an IT-driven process.)

The goals of the business intelligence function can be short-term or more strategic but in either case they divide into two main objectives: ways to minimize risk and ways to obtain a competitive advantage. As the title of this blog indicates, we’re focused here on minimizing the short-term risk of a legitimate business being used in a money-laundering scheme.
 
Practitioners sometimes use the term KYC to refer to the anti-money laundering rules that prescribe the steps a financial institution must take to establish the identity of a customer and the source of customer funds. However, the procedures can be adapted for use by any type of business regarding any entity with which it transacts business, including customers, agents, partners, vendors, service providers, etc.

Confirming a person’s identity starts by obtaining the person’s name, date of birth, address(es) and identification number. If the person is an entity (company, trust, partnership, etc.), it may well be advisable to verify the identity of individuals with authority or control over the entity, depending upon the risks associated with that person. A first step in determining the risks associated with a person is a check against lists maintained by government agencies of persons such as suspected terrorists or terrorist organizations, drug traffickers, denied persons, etc. A good place to start would be the consolidated screening list of the Departments of State, Treasury and Commerce and the specially designated nationals list of the Office of Foreign Assets Control, but other lists may require examination as well.

If a check against screening lists turns up nothing, however, that doesn’t necessarily mean that no further investigation is merited. Some level of enhanced due diligence or investigation may well be required. A start is asking the person to respond to a questionnaire concerning its background and business and to supply documents, such as financial statements, annual reports, organization charts, lists of officers, directors, and key shareholders, brochures, credit reports, etc. Interviews of the person or the individual(s) in control, searching public databases, interviewing references, and conducting or engaging a third party to conduct an investigation of the person are further steps in the intelligence gathering process, again depending upon an assessment of the risks presented.

How does one assess risk? The truth is that risk assessment must be tailored to each industry sector and situation. Some typical “red flags” include the involvement of: “politically exposed persons” (an individual who is or has been entrusted with a prominent public function), tax haven or secrecy jurisdiction entities, private banks, persons in jurisdictions with high levels of corruption or trafficking of drugs, humans or arms, offshore bank accounts, transactions with no business purpose or a structure inconsistent with their business purpose, improper accounting or documentation, etc., etc.

I’ll post a blog later about the other side of business intelligence, methods, both legal and illegal, businesses seek to obtain competitive advantage (and ways to defend them).

The Crossroads of Human, Drug and Arms Trafficking

The three scourges of transnational organized crime - trafficking in humans, drugs and arms - are often discussed as separate problems. When they are analyzed together, solutions are sought in coordinated action by source, transit and destination countries.

What this misses, of course, is the fourth dimension of the crime - the jurisdiction where the money is laundered. Laundering the proceeds of transnational criminal activity is critical for two reasons. Money can be used as evidence against the perpetrators and can itself be the target of investigation and seizure.

Secrecy is crucial to successful money-laundering. Hence, the role of secrecy jurisdictions such as Panama. There are the locations where money can be removed from direct association with the underlying crime, the trail disguised and the money made available again to the criminal with its origins hidden.

The Panama Papers revealed to the general public what had been known for decades about Panama. Here’s what a wikileaked 2006 memorandum from the U.S. embassy in Panama had to say: The Panamanian “incorporation regime ensures secrecy, avoids taxes, and shields assets from the enforcement of legal judgments. Along with its sophisticated banking services, Panama remains an environment conducive to laundering the proceeds from criminal activity and creates a vulnerability to terrorist financing.”

Of course, Panama is not alone. The UN Office on Drugs and Crime estimates that more than $600 billion of the proceeds from transnational organized crime may have been laundered through the global financial system using multiple bank secrecy jurisdictions.

But altering bank secrecy rules alone will not solve the problem. Secrecy jurisdictions have professionals who have developed sophisticated means to hide the source and use of money: special purpose vehicles, instruments such as bearer shares, foundations, trusts, trust companies, banks and bank accounts. And these jurisdictions have made a point of lax cooperation with the rest of the international community in criminal and tax investigations.

In other words, what started as a business to help a wealthy few protect their privacy and perhaps legally minimize their taxes has grown to be an enormous loophole in the international legal system designed to protect against the plagues of human, arms and drug trafficking.

Experts know that money-laundering often depends for its success on approximating as closely as possible legal transactions. For example, inter-company transfer pricing becomes under- or over-invoicing or back-to-back loans becomes a loan-back scheme. And better yet if the money-launderer can use an unwitting legitimate business to cleanse the money.

My next blog will look at ways that legitimate international businesses try to avoid becoming tools of the money-laundering trade.

#panamapapers

Havens for Corruption

What do international tax evasion and the bribing of a foreign official have in common? You might guess that the primary nexus is the practice of paying off a foreign tax officer to lower the tax burden on an international deal, but you’d be wrong. The 2014 OECD Report on Foreign Bribery, however, found that only a minuscule percentage (0.21%) of the bribes studied were offered or given to a tax official.

My economist friends might say that both tax evasion and official corruption result in extracting funds that would otherwise flow to a government thereby reducing needed public sector resources. Political scientists might note that both undermine people’s faith in the fairness of rules and institutions established for the common good thereby encouraging normally law-abiding citizens to elbow their way to the front of the line. And both would in theory be right.

But experienced international business lawyers would respond more practically. What the two crimes have in common is the perpetrator’s need for secrecy. The same methods used to conceal income - methods revealed in the Panama Papers - are often used to hide evidence of bribes. Since the number of investigations under the Foreign Corrupt Practices Act (FCPA) began to skyrocket a decade ago, practitioners helping clients comply with anti-bribery rules have learned that one of the brightest of “red flags” is the involvement of an offshore company in a tax haven.  Or, what might better be called havens from transparency or secrecy jurisdictions.

The OECD Report mentioned above states that more than a third of the 400 hundred plus bribery cases studied involved the use of a corporate affiliate, often a company located in a secrecy jurisdiction. The Panama Papers tell the same story in a different way. The leaked documents show the offshore holdings of twelve current and former world leaders, 128 other public officials and politicians around the world and several associates of Russian President Putin.

Some of that wealth may have legitimate sources.  But, not surprisingly, the Securities and Exchange Commission (SEC), which is one of the agencies charged with enforcing the FCPA, is reportedly scrutinizing the Panama Papers for any evidence of violations.

My next blog will take a final look at secrecy jurisdictions - from the point-of-view of illegal trafficking in arms, narcotics and human beings.

The Panama Papers Are Only The Tip Of The Iceberg

Most international business lawyers know that the use of offshore companies disclosed in the Panama Papers - as massive as it is - represents only the tip of an iceberg of wealth, tax evasion, corruption and international crime.

The press, led by the International Consortium of Investigative Journalists, is focusing on Mossack Fonseca, the Panamanian based law firm from whose files leaked a mind-boggling 2.6 terabytes of documents. And with some justification. MF reportedly set up more than a prodigious 200,000 offshore companies by itself.  But a preoccupation with just MF vastly underestimates the use of entities in tax havens.

There are dozens of law firms in Panama alone that promote themselves as experts in doing what MF does. Scores more are located in other tax haven jurisdictions, such as the British Virgin Islands, the Cayman Islands, the Bahamas, Seychelles, Jersey, Luxembourg, Mauritius, Niue, Hong Kong and, of course, Nevada. What does that tell us about the number of tax haven entities in the world? Let’s grant to MF the status of being a global leader in the industry - a characterization which it undoubtedly once welcomed and now regrets. And let’s further adjust for the fact that many schemes utilize more than one jurisdiction.  Even bearing those caveats in mind, it is clear that MF accounts for only a tiny fraction of the millions of entities located in tax havens around the world. Does the number of entities tell us anything concrete about the amount of hidden wealth? Not directly. But in his 2013 paper, “The Missing Wealth of Nations,” Gabriel Zucman estimates that as much as 8% of global wealth is held in tax havens, three quarters of which is not reported in official statistics.

To be sure, some, perhaps even most, of these entities are set up for legitimate purposes and are operated legally. Just as surely, many others have evading taxes as their goal, a practice that robs governments of funds they would otherwise receive and forces them to raise rates on less creative taxpayers. But others are used for even more nefarious purposes - the subject of my next two blogs.

Welcome!

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