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.

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