The Panama Papers & Eligible Introducers: Another Hole in Antimoney Laundering Laws


More evidence of the ease with which corrupt officials can dodge the antimoney laundering laws, and thus hide money offshore, emerged from a recent Panama Papers story out of New Zealand.  It discloses how lax the standards are for becoming an “eligible introducer.” An eligible introducer is a law firm or other entity that under the antimony laundering laws can arrange for an offshore corporation to be established in a client’s name and for a bank account to be opened in the corporation’s name.  An offshore corporation with attached bank account is what all corrupt officials want. It gives them a covert way to accept and hold bribes and money from other illicit activities.

The antimoney laundering laws are supposed to make it virtually impossible for corrupt officials to get their hands on an offshore corporation with a bank account: first by requiring the firms that establish corporations to scrutinize the background of those wanting to create a corporation and second by requiring banks, before opening a corporate account, to know who the company’s owner is and what the owner plans to do with the company and its account.  If those providing incorporation services and the banks each conduct this “due diligence,” a corrupt official is very unlikely to slip through both screens.  That leaves the official with one of two decidedly inferior options: hide the illicit funds under the mattress or entrust them to a close relative or friend.

Enter the eligible introducer.

To avoid a lumpy mattress or the risk that a relative or friend isn’t as “close” as thought, corrupt officials look for someone who can serve as an intermediary between them and incorporation agents and banks: a person willing to hide their identify and misrepresent the corporation’s real purpose.  Of course, that person must be one the incorporation agent and the bank can legally rely upon and so excuse the both from their legal obligation to conduct a due diligence analysis.

The antimoney laundering laws had originally barred incorporation agents and banks from relying on another’s due diligence. But agents and banks explained that much their business came through referrals from other banks, law firms, accountants, and the like and that these entities will have already conducted the required due diligence before making the referral.  It thus served no purpose, they argued, to undertake still another investigation and it was costly and time-consuming besides.

The Financial Action Task force, which sets the standards for national antimoney laundering laws, agreed.  Where a bank, law firm, or other entity had already investigated an individual, requiring another round of due diligence was indeed wasteful.  But the FATF was not willing to allow incorporation agents and banks to rely on just anyone’s due diligence.  Its guidelines provide that a bank or incorporation agent can rely on a third party’s due diligence only if the bank or agent “is satisf[ied] themselves that the third party is regulated and supervised . . . .”

What makes the New Zealand story so revealing is the close connection between New Zealand law firms and Mossack Fonseca.  Non-citizens can create a trust in New Zealand, and the law at the time the Panama Papers were published had such weak disclosure provisions that forming a New Zealand foreign trust was frequently part of a Mossack Fonseca plan to help a client hide money.  As a result, Mossack Fonseca did a significant amount of business with many New Zealand law firms.  When, in the wake of the Panama Papers release, demands were made to strengthen disclosure rules, several firms joined to lobby against the changes.

How close the relationships had become are illustrated by the experience of one Auckland law firm. Mossack Fonseca contacted it without prompting to ask whether it met the BVI Anti-Money Laundering Code of Practice Code’s criteria to be an Eligible Introducer.  (Editor’s note: Relying on a  now revised report by Radio New Zealand, this paragraph originally stated the firm had asked to become an Eligible Introducer. Thanks to the firm’s counsel for notifying GAB that the story had been revised.)

Mossack Fonseca maintains in response to the Panama Papers expose that it has complied with all BVI laws.  Nothing in the New Zealand story suggests it has not; nor does the story suggest or imply that the Auckland firm has violated any law.  But as an American pundit once famously observed about a Wall Street insider trading scandal, “the scandal isn’t what’s illegal; the scandal is what’s legal.”  What the New Zealand journalists have uncovered is an example of the ease with which an entity can be designated an “eligible introducer.”  It doesn’t have to be subject to a national antimoney laundering law — or at least in BVI it doesn’t.  All it has to do is to say it voluntarily complies with the law.  That meets the FATF “regulated and supervised by” a national antimoney laundering authority.

It is of course one thing for firms like Mossack Fonseca to enter into an eligible introducer relationship.  The intention of playing fast and loose with the law has surely never entered the minds of any of their members.  But what about a shady law firm seeking to qualify as an eligible introducer for a shady incorporation agent or bank?  As the FATF guideline is applied in practice, the incorporation agent or bank could recognize the firm as an eligible introducer so long as the firm claims it observes national antimoney laundering laws.  Under this standard even the American law firms Global Witness caught offering advice how a corrupt minister could hide money offshore would likely qualify as an eligible introducer.

Earlier Panama Papers stories (here and here) have uncovered other ways the eligible introducer rule can be used to skirt antimoney laundering laws. With evidence mounting as to how easy the eligible introducer rule can be abused, isn’t it time for national regulators and the Financial Action Task Force to scrutinize it?  Did FATF and national lawmakers really intend for it to be so easy to dodge the antimoney laundering laws?  Hasn’t the Panama Papers expose made it clear enough that the time to review, if not scrap, the eligible introducer rule has come?

2 thoughts on “The Panama Papers & Eligible Introducers: Another Hole in Antimoney Laundering Laws

  1. Pingback: Another Hole in Antimoney Laundering Laws | Anti Corruption Digest

  2. This is both interesting and useful (as well as depressing), but I’m going to continue to press you on the question I raised in a comment on your last post. To quote Lenin (which I don’t do all that much): “What is to be done?”

    One obvious option would simply to close the “eligible introducer” loophole, requiring every covered institution to do its own due diligence on every prospective client. That seems to be what you’re gesturing towards your last paragraph, That would address the problem you raise but might also have significant costs. I’m not mainly concerned about costs to the banks per se, but if due diligence resources are spread too thin, with lots of redundant investigation of parties that have already been checked multiple times by reputable firms, then institutions might end up doing a slapdash, shoddy job of due diligence across the board.

    The other alternative (besides the unappealing option of doing nothing) would be some sort of more stringent regulatory solution. Perhaps stricter rules on which entities can quality as EIs? Maybe some kind of certification/registration system run by an international body? Or perhaps a rule that says, if an EI makes an introduction of a client later implicated in fraud, all clients introduced by that EI must now be subject to independent due diligence from scratch, and/or that entity can no longer qualify as an EI?

    Again, I’m really out of my depth here. I’d never even heard of EIs until I ready your posts (which is one of the reason those posts were so useful). But I’m still grasping about for a sense of the right policy response.

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