Panama Papers Explained

What 2016’s unprecedented data breach means for your firm

The Panama Papers refers to a massive data breach at Panama-based law firm Mossack Fonseca & Co in 2016, which led to approximately 11.46 million files of confidential financial data being leaked. These documents exposed a firm that was helping clients launder money, dodge sanctions and evade tax. 

Numerous multinational companies and high-ranking government and public officials were identified in the documents. 

The Panama Papers highlighted the need for banks and other financial institutions to understand the risks of doing business with entities located in tax havens. 

So, what exactly did we learn from this significant event?

What did the breach reveal?

The documents revealed the myriad options that can be used to exploit offshore tax regimes. 12 national leaders, 143 politicians, their families and close associates from around the world were exposed. 

While many offshore business entities are entirely legal and most of the documents showed no illegal behaviour, it was some of the shell corporations set up by Mossack Fonseca that were revealed to be engaging in sinister activities. This included fraud, tax evasion and the avoidance of international sanctions.

What is a shell corporation?

A shell corporation is a business that’s created for the sole purpose of holding funds and managing another entity’s financial transactions. Unlike a traditional company, it doesn’t have employees, make money or provide customers with a product or service. While shell corporations aren’t illegal, in the case of the Panama Papers, many were created for illegal purposes. Shell corporations can allow companies to exploit the benefits of liberal tax laws, anonymity and relaxed regulatory regimes in countries like the Caribbean – or in this case Panama.

Where does anti-money laundering come in?

The biggest concern with shell corporations is their ability to provide anonymity. In the Caribbean, banking secrecy laws allow owners of shell companies to conceal ultimate beneficial ownership (UBO) details, and therefore their identities. This makes it easier for illegitimate funds to be concealed and transferred to others, without any oversight or ability to track the source of funds. 

What does this mean for your business?

The Panama Papers showed that money laundering and other illicit financial activities are all too common – particularly when tax havens and shell corporations are involved. Financial institutions need to be aware of these risks when offering services to such customers. 

If you’re asked to provide services to a high-risk client, your AML process needs to include enhanced due diligence (EDD), as the international Financial Action Task Force (FATF) requires financial institutions to deploy measures that align with the risk presented. 

Help with increasing challenges

Managing risk assessment, stricter due diligence processes and ongoing monitoring of high-risk clients will present increasing challenges – and costs – for financial institutions. 

That’s where First AML comes in. By automating many of your AML processes, we can make sure you meet the requirements and keep tabs on high-risk clients, allowing you to focus on your business and what you do best.