The Panama Papers and the “Eligible Introducer” Scam

Contrary to what the name might suggest, an “eligible introducer” is not a licensed internet dating site.  Rather, as the Panama Papers reveal, it is what corrupt officials, drug lords, and other crooks use to skirt the laws meant to prevent them from concealing their wealth and how they got it.  In antimoney laundering law parlance, an “eligible introducer” is an intermediary willing to vouch for an individual’s honesty.  An earlier post explained how easy it is for corrupt politicians to establish a shell corporation in a place like the British Virgin Islands by paying an eligible introducer to attest to their character.  Here I show how hiring an eligible introducer makes it easy for corrupt officials to secure the real prize: a bank account in the shell’s name.

The post is prompted by a story Trinidad Express journalist Camini Marajh published April 30 recounting how an eligible introducer brokered the opening of an account for a shell company owned by a politically-connected Trinidadian.  The story suggests that what has long been rumored about the offshore industry is true: despite a massive legal edifice meant to keep corrupt money out of banks, with the “right” eligible introducer anyone can open a bank account no matter who they are and how they intend to use the account.  What’s more, as Marajh’s story shows, if it turns out later that the account was used to conceal questionable or illegal transactions, neither the introducer nor the bank is likely to be held responsible.    

To keep corrupt officials, and indeed criminals of any kind, from parking their money in a bank or other financial institution, the antimoney laundering laws require that banks and other financial institutions take great care, “due diligence” in antimoney laundering lingo, before opening a new account.  They must be sure before accepting a new customer that he, she, or it, in the case of a corporation, is legitimate.  With a corporation a bank must be sure who the beneficial owner is and it must also understand what the corporation’s business is and what its bank account will be used for.  If the shell company’s owner says the account is to hold fees earned as “a consultant,” the bank should inquire as to what kind of consulting work the individual does and for whom.

A bank that fails to conduct sufficient due diligence to find out who the customer is and what its business is before opening an account risks fines and even closure.  Given the cost of investigating a prospective customer, and the consequences if a bank regulator later deems the investigation flawed, it is hardly surprising that banks would prefer to outsource the cost and risk associated with taking on new customers.  And that is precisely what eligible introducer laws allow.  A typical example is section 17(g) of St Lucia’s Money Laundering Prevention Act: a “financial institution . . . may rely on intermediaries or other third parties to perform . . . the customer due diligence process. . . .”

The value of such a rule to banks is obvious.  They can accept new clients, and the fees generated from servicing their accounts, without running any risk.  As one close follower of the offshore industry explains,

“[i]f anything goes wrong – for example, the client turns out to be a criminal – the bank can pass the buck to the professional who made the introduction.  It’s called “Cover Your Ass” or CYA for short, and is an important motivation behind KYC or “Know Your Customer”. . . .

This claim isn’t quite right, or at least it wasn’t in the case Marajh uncovered.  In that case the eligible introducer was adamant that, although something went wrong later, there was no buck to accept.  It had complied with all relevant laws and was thus in the clear.

The introducer in question was the Panamanian law firm Mossack Fonseca.  The Marajh story tells how Trinidadian businessman Ken Emrith relied on the firm, first to establish a shell corporation for him in Panama, and then as an eligible introducer.  It was in this latter role that the firm convinced the Bank of St Lucia International Ltd that Emrith was a legitimate businessman and it should therefore open an account for his Panamanian shell.

In brokering the account opening for Emrith, Mossack Fonseca told the bank that Emrith was a big time international consultant with multimillion dollar contracts from prestigious international clients.  It described the shell’s activities as: “Business consulting in Trinidad and Tobago and the Caribbean specializing in advising companies on infrastructure projects and financial operations.”  Marajh doesn’t say whether this is the only information Mossack Fonseca furnished the St Lucia bank about Emrith and his shell.  Nor does the story say whether the bank made any inquiries on its own.

But if the St Lucia bank had done business with Mossack Fonseca in the past, maybe the firm had referred it clients over the years, the bank may not have asked for any more than what is recounted above. After all, if the bank officials had a long (and profitable) relationship with Mossack Fonseca, they would surely have come to trust it.  And it is not unusual in the offshore industry for a bank to ask fewer questions about a prospective customer if the customer comes through a well-know introducer.  As one popular web extolling the advantages of putting money offshore explains, it is well known that where a service provider “has such a good relationship with the bank . . . the know your customer (KYC) procedure is more lax.”

Indeed, the cozy relationship between some intermediaries and some banks is why many offshore advisers counsel those wanting to open an offshore account to hire an eligible introducer (here and here for examples).  It makes it much easier to open an account.  If nothing else, an introducer can advise on how to handle matters in the prospective customer’s background that might pose a problem were the bank to learn of them.

Living in St Lucia, it could well be that bank officials didn’t know who Emrith was.  If that is the case, they wouldn’t have known that he was once an officer of a Trinidad and Tobago political party and that he had recently sought another position with the party.  They also would not have known of his association with Jack Warner, a former minister for public works in T&T now charged by U.S. authorities in the FIFA investigation.  Had they been aware of these facts, they might have deemed Emrith a “politically exposed person,” antimoney laundering speak for a politician or politician’s crony, and bank officials would have then had either to conduct “enhanced due diligence” on Emrith themselves or insist that Mossack Fonseca do so.

If the St Lucia bank’s officers did not know who Emrith was, they would also not have known that Emrith had once been a consultant to Trinidad and Tobago’s state-owned infrastructure bank, that he left it to consult for the company building a bank-financed road that has been the subject of corruption allegations, and that that company is a subsidiary of one of the construction firms implicated in Brazil’s car wash scandal.  Had the bank had this information, it might have wanted to know more about Emrith’s consulting business and who his clients were before agreeing to open an account.

Whatever bank officials knew, they did open an account for his shell.  It did not stay open for long, however.  A few months later a New Zealand shell company tried to wire just over $1 million to the account.  The bank refused to deposit the funds to the account until Emrith explained the source, and although Emrith told the bank the money was for consulting fees for technical work on a port development project in Namibia, the bank apparently remained suspicious.  After protracted dealings with Emrith that stretched out over some 19 months with Mossack Fonseca serving as an intermediary, it closed the account.

Marajh’s story does not say what raised the bank’s suspicions about the wire.  It could be that they knew that the person behind the New Zealand shell company was implicated in, and later pled guilty, to crimes arising from Brazil’s car wash scandal. Or perhaps just the receipt of $1 million plus from an unknown shell company was enough.

In reporting the story Marajh asked Mossack Fonseca about its role in helping Emrith’s shell open an account at the St Lucia bank.  A firm spokesperson responded that the firm had done nothing wrong.  It had no “fiduciary responsibility over the bank account.”  Furthermore, the firm did not try to persuade the bank to keep the account open by further vouching for Emrith and his business dealings.  Instead, all the firm did “was try and verify the basis for such decision. . . .  [Furthermore] we were never informed by the bank about transactions that may presumably be fraudulent.”

Marajh’s reporting has uncovered a scandal.  But there is nothing scandalous about what Emrith, Mossack Fonseca or the St Lucia bank did.  No one has accused them of doing anything illegal; nor does Marajh’s story say they did anything wrong.  Rather the scandal Marajh has exposed is how easy it is to thwart laws meant to keep crooks from hiding money in the banking system.

To be sure, these laws require all involved in shepherding a prospective client through the procedures required to establish a corporation and obtain a bank account in its name to ask searching questions about why the client wants to establish a corporation and what it plans to use the account for.  But by allowing each one in the chain to put the responsibility for asking questions on the one before it, the eligible introducer rule so dilutes responsibility for conducting due diligence that it makes it easy for crooks to slip around the elaborate barriers the antimoney laundering laws erect to keep their money out of the financial system.

It helps too that each link in the chain profits by passing the client along to the next link.  A law firm earns a handsome fee if it can find a corporate service provider willing to establish a corporation for its client in a jurisdiction like BVI.  The corporate service provider makes money, first by creating a corporation for the client and then by charging a yearly fee to service it.  The provider makes even more money if it can find a bank willing to open an account in the corporation’s name. The bank charges for opening the account and then for processing the transactions which pass through the account.  Why should anyone ask a lot of questions if a “wrong” answer might mean the loss of a nice fee, an income stream, or both?

The guidelines issued by the Financial Action Tasks Force, the international standard setter for antimoney laundering laws, leave it up to each country to decide if its banks and corporate service providers can rely on introducers.  Given how easy the introducer rule makes it to dodge the rest of the antimoney laundering law, the only “eligible introducing” governments should allow is that taking place on licensed internet dating sites.

3 thoughts on “The Panama Papers and the “Eligible Introducer” Scam

  1. Thanks, this is a very helpful explanation of how the system isn’t working (or perhaps one of the many ways in which it isn’t working). The natural question your post invites is what we should do about this. I take it from your last paragraph that you would favor simply abolishing the “eligible introducer” category, and requiring all institutions covered by AML regs to do their own due diligence on all customers? I can see certainly the appeal of that. I do wonder, though, whether something like the EI allowance might serve a legitimate function in some contexts? I can certainly imagine that one objection to requiring every covered entity to do its own due diligence on every client is that there will be a lot of resources devoted to duplicative (and possibly wasteful) investigations of the same people or entities. I could also imagine the concern that there might be smaller entities that are covered by AML laws but don’t have the resources on their own to do their own independent investigations of all clients. (Though perhaps if that’s the case, we should just let the smaller entities fail?)

    As is obvious, this is not my area, so I don’t really know what I’m talking about, but I’d love to know if you’d support simply getting rid of the idea of eligible introducers altogether, whether there might be legitimate disadvantages to such an approach, and whether there are alternative regulatory strategies that might help address the problem short of requiring every institution to do its own diligence in every instance.

    • Thanks for poking me on the obvious question: what is to be done?

      You can see that the eligible introducer rule was drafted to avoid duplication of effort. Why should a bank have to go to the time and expense of investigating a prospective customer if a law firm or other intermediary already has?

      The rule’s drafter’s recognized that a rule allowing a bank to rely on someone else conducting the due diligence could be abused so the rule provides that a bank can’t rely on just any law firm (or accounting firm or other entity). The introducer has to meet certain criteria. But those criteria are not only loose but the judge of whether the criteria are met is the bank, and the bank has a financial incentive (getting new customers) to err on the side concluding the intermediary qualified as an “eligible introducer.”

      If a bank’s decisions about who qualified as an eligible introducer were carefully reviewed by a regulator, some of the abuse might be prevented. But imagine a regulator in a small island nation trying to decide whether one of the banks it oversees had correctly concluded that a law firm in Russia, say, met the criteria for being an eligible introducer. Now imagine the regulator has a small budget and the nation itself depends upon offshore business for a good part of the national income.

      All the incentives point in one direction. A direction that leads to undermining the basic AML requirement: Know Your Customer

  2. Pingback: A New BOSS in Town: Changes to BVI Beneficial Owner Information Regime | GAB | The Global Anticorruption Blog

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