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Money Laundering Watchdog Criticizes Lax AML Enforcement and “Creative Compliance” in Wake of Panama Papers

PANA Issues Recommendations to European Parliament: Tougher Enforcement, Greater Transparency, Improved Information Sharing and Prohibitions Against Outsourcing of Customer Due Diligence

In the wake of the Panama Papers, the European Parliament (“EP”) formed PANA, a Committee of Inquiry into Money Laundering, Tax Avoidance, and Tax Evasion. We previously wrote about PANA in May when it was examining the role of lawyers in money laundering and tax evasion schemes. After opening their October 19 meeting with a moment of silence to honor the life of Maltese investigative journalist Daphne Coruana Galizia, who recently was killed by a car bomb, PANA approved a draft report and recommendations for review by the EP. The findings and recommendations range from reporting standardization to outsourcing to illicit real estate transactions to attorney-client privilege.

European parliament in Brussels, Belgium.


A few themes emerged from the PANA report:

  • the European Union (“EU”) has strong law, but lacks vigorous enforcement;

  • the EU’s many regulators are stymied by a severe lack of communication, both within nations and between countries;

  • beneficial owners (“BOs”) are mostly unknown because regulated entities are not fulfilling their reporting obligations and the BO register is not robust, accessible, or standardized;

  • intermediaries, like banks, lawyers, accountants, wealth managers, and other financial institutions, are not living up to their obligations because they are engaging in “creative compliance” and leaving compliance responsibility to third parties.

Based on these findings, PANA recommends:

  • uniform definitions and punishments for money laundering and tax-related infractions,

  • “automatic exchange of information,” reciprocity, and “Common Reporting Standards” between regulators to facilitate better information sharing,

  • the creation of a “publically accessible,” standardized BO register that includes the ultimate beneficial owner (“UBO”),

  • the EP pass legislation to “make it illegal to outsource [customer due diligence (“CDD”)] procedures to third parties,”

  • adoption of stronger forfeiture laws that allow cross-border confiscation of illegally obtained assets,

  • stronger sanctions against banks and other intermediaries that “are knowingly, willfully, and systematically implicated in illegal tax schemes,”

  • lawyers should no longer be able to hide behind the attorney-client privilege to escape reporting requirements, like suspicious transaction reports (“STRs”),

  • countries devote more resources to fighting money laundering and tax evasion,

  • the EP vest more oversight powers in PANA.

Many of these recommendations mirror U.S. policies that we have addressed. For example, both PANA and the policymakers behind the Corporate Transparency Act(“the Act”) about which we recently blogged, believe that the best defense against money laundering is a robust BO register. PANA’s recommendations take this a step further, calling for the creation of a single, “publically accessible” EU BO register. The U.S. has not yet joined federal and state information into a single BO register.

Additionally, both the EU and U.S. strive for greater uniformity in their laws. EU member states do not always share the same regulatory requirements for money laundering and tax-related offenses. The Act and PANA’s recommendations impose uniform, minimum requirements on all. As in the U.S., it is unclear whether the increased spending to meet minimum compliance requirements will be offset by the promise of uniformity.

Both PANA and the Act were motivated by the alleged use of attorney-client privilege to cloak UBOs and hide formation details. The EP and individual EU member states have many legislative and regulatory options at their disposal to alter lawyer behavior, including civil sanctions and criminal penalties. An alternate model for the EU could is the proposed American Bar Association (“ABA”) rule that recent guest blogger, Bruce Zagarisdiscussed. This proposed rule would require lawyers to engage in “reasonable, proportional, risk-based due diligence” of prospective clients and monitoring of current clients for signs of money laundering or other bad behavior.

building

European parliament building, Brussels, Belgium


One of PANA’s most interesting recommendations is the call for a prohibition on outsourcing CDD. While a recent FinCEN rule on CDD (about which we have blogged, here and here) strengthens reporting requirements, it does not limit compliance options for reporting entities. If the EP were to act on this recommendation, the expertise of specialist third-party providers could be lost and regulated entities would need to create costly in-house departments from scratch. While this better aligns incentives for the regulated, it may prove too costly for smaller entities. Unfortunately, this recommendation does not address the heart of the problem, which PANA itself identified—a lack of effective enforcement by the EU and its member states.

Finally, the repeated refrain in the PANA report matches that of the Royal United Services Institute (“RUSI”) report, about which we recently blogged. The RUSI report focuses on the role of information sharing—both among reporting entities and between regulators and reporting entities—in catching criminals. PANA’s recommendations lag behind those in the RUSI report. The EU still struggles with basic information sharing between agencies within countries and across borders. While differing legal regimes, languages, and cultural norms are likely major contributors, the EU suffers from a more fundamental issue: PANA identified a lack of standardization of when agencies should share information and in what form. Addressing this problem is only the first step in leveraging information sharing in the battle against crime.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VII, Number 299
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About this Author

Andrew D'Aversa, Ballard Spahr, Philadelphia, Litigation White Collar Attorney
Associate

Andrew N. D'Aversa is an associate in the Litigation Department and was a summer associate with the firm in 2016. He focuses his practice on white collar defense. He has experience in matters involving money laundering and the application of state money services statutes and regulations to virtual currency and related products. Andrew maintains an active pro bono practice working with the Pennsylvania Innocence Project. Andrew is a frequent contributor to Money Laundering Watch, Ballard Spahr’s blog focused exclusively on money laundering issues.

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