The State of Financial Crime 2022 - Read our global compliance survey

What do the Pandora Papers mean for compliance teams?

AML Compliance Knowledge & Training

More than 11.9 million confidential files have been released that expose the secret wealth and offshore dealings of the rich and powerful in what’s been called the “biggest trove of leaked offshore data in history”. 

Making headlines across the globe, the Pandora Papers were leaked by the International Consortium of Investigative Journalists (ICIJ), working with more than 140 media organizations including The Guardian and BBC in the UK and L’Espresso in Italy. The scale of the Pandora Papers investigation is larger than previous leaks, such as ICIJ’s landmark Panama Papers investigation – which in 2016 led to police raids, the fall of prime ministers in Iceland and Pakistan, and helped drive new anti-money laundering laws (AML) in the European Union (EU). In 2017, the Paradise Papers highlighted countries where laws enable ultimate beneficial owners (UBOs) to be hidden, and how wealthy individuals are exploiting shell company structures. Finally, the FinCEN files leak exposed financial institutions that have been complicit in the movement of trillions in illicit funds. 

While the Pandora Papers have exposed the hidden fortunes of world leaders, billionaires, and politicians, they also cast a light on how anti-money laundering rules are being circumvented through a network of shell companies. 

European investigations

European personalities implicated in the leaked documents include former UK Prime Minister Tony Blair, Czech Prime Minister Andrej Babiš, and Dutch Finance Minister Wopke Hoekstra.

Fears of loopholes in Swiss AML laws are strengthened by the Pandora Papers. Between 2005 and 2016, at least 26 Swiss firms that appear in the papers provided services to clients whose offshore companies were later investigated for money laundering and other financial crimes. 

Russian nationals are also disproportionately represented in the Pandora Papers. The ICIJ’s analysis showed that Russians are behind 14% of the more than 27,000 companies whose ownership details were exposed by the leak. 

The Pandora Papers also revealed the high net worth owners of UK properties that were bought using offshore firms. Former PM Tony Blair and his wife purchased a £6.45m Victorian building by acquiring a British Virgin Islands company that held the property, saving more than £312,000 in stamp duty. And £7.5m in earnings from Unaoil – a business that paid bribes to secure oil and gas contracts – was funneled offshore and invested in UK property, including a cinema complex and business park. 

Purchasing and owning property via an offshore company is legal, but it is also a common way for criminals to move and hide illicit wealth. In 2018, the UK government published draft legislation that would require the ultimate owners of UK properties to be declared. However, it has not yet been presented to Parliament meaning it is unlikely to become law soon. 

Meanwhile, a 2019 parliamentary report said the UK’s financial system and property market attracts people “such as money launderers, who may wish to use property to conceal illicit funds”. It said criminal investigations are often “hindered” because police cannot see who ultimately owns properties. The UK government recently raised the risk of money laundering through the property from “medium” to “high”.

Following the leak, the European Commission agreed to present new legislative proposals to tackle tax avoidance and tax evasion by the end of the year. 

During a debate in plenary, MEPs unanimously expressed disgust at the Pandora Papers’ revelations and accused EU governments of enabling a decade of tax dodging through an inability to properly reform outdated tax laws. 

Days earlier, finance ministers were criticized for removing three countries (Anguilla, Dominica, and Seychelles) from its blacklist of global tax haven offenders.

Johan Langerock, political adviser for the European Greens said: “To combat tax evasion and money laundering, it is important to know who the beneficial owner of a company or other legal entity is. However, this criterion is still not considered in the EU’s blacklist, which renders this tool less effective.”

Key takeaways for compliance teams

For compliance teams, there is much to unpack in the Pandora Papers. An important first step is to understand the types of exposure being reported in the papers and to revisit any clients whose risk level may need to be reassessed based on this.  Adverse media screening can help surface links for investigators when they are assessing financial crime risks, particularly now that so many leaked files are in the public domain. 

Given the increasing frequency of investigative exposés, firms should consider setting aside resources and/or developing a contingency plan in the event that they need to respond quickly to new stories and handle any regulatory or law enforcement inquiries they generate.  

Client lists should also be scrutinized. Where relevant, compliance teams should ask enhanced due diligence questions around trusts, shell corporations, corporate service providers, and known jurisdictions that are commonly mentioned in these leaks. 

In particular, firms should explore their exposure to Politically Exposed Persons (PEPs), the risks they pose, and how these can be mitigated. The lack of a consistent global approach to how PEPs are defined makes this harder for compliance teams, but revisiting relationships, particularly through adverse media checks, is key.

In addition to mitigating legal risks, firms should also act to counter reputational risks. Immoral but not illegal behavior such as tax avoidance won’t lead to regulatory action, but it could damage the trust of customers and prospective investors. Environmental, social, and corporate governance (ESG) risks are also a key threat to a firm’s reputation.  

As developments in the European Parliament so far have shown, FIs should also expect to see movement on new anti-money laundering and corruption legislation. In particular, firms should anticipate new registration requirements for offshore property owners. 

To explore the latest financial crime trends, challenges and hotspots, download our new report: State of Financial Crime 2021: Mid-Year Review. 

Originally published October 7, 2021, updated May 5, 2022

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

Copyright © 2022 IVXS UK Limited (trading as ComplyAdvantage).