Fixing India’s Anti-Money Laundering Regime

In the past year, India has been among the most zealous countries in the world in stepping up the fight against money laundering and related economic and security issues. The effort that probably got the most attention was last year’s surprise “demonetization” policy (discussed by Harmann in last week’s post), which aimed to remove around 85% of the total currency in circulation. But to assess India’s overall anti-money laundering (AML) regime, it’s more important to focus on the basic legal framework in place.

The most important legal instrument in India’s AML regime is the Prevention of Money Laundering Act, which was enacted in 2002, entered into force in 2005, and has been substantially amended since then. The Act defines a set of money laundering offenses, enforced by the Enforcement Directorate (India’s principal AML agency), and also imposes a range of reporting requirements on various institutions. Furthermore, the law gives the Enforcement Directorate the authority to freeze “tainted assets” (those suspected of being the proceeds of listed predicate offenses), and to ultimately seize those assets following the conviction of the defendant for the underlying offense.

How effective has India been in its stepped-up fight against money laundering? On the one hand, over the past year (since the demonetization policy was announced), banks logged an unprecedented increase of 706% in the number of suspicious transaction reports (STRs) filed, and reports from last July indicated that the total value of the assets frozen under the Prevention of Money Laundering Act in the preceding 15 months may have exceeded the cumulative total of all assets frozen in the prior decade-plus of the law’s operation. And the government further reported that its crackdown on shell companies had discovered around $1.1 billion of unreported assets.

Yet these encouraging numbers mask a number of serious problems with India’s AML system, problems that can and should be addressed in order to build on the momentum built up over the past year. Here let me highlight two areas where greater reform is needed: Continue reading

Should There Be a Public Registry of Politically Exposed Persons?

Under the “Know Your Customer”-oriented regulatory regime endorsed by organizations like the Financial Action Task Force (FATF), financial institutions and similar entities must apply heightened scrutiny to so-called “politically-exposed persons” (PEPs), as well as their family members and close associates. FATF defines PEPs as individuals who are or have been entrusted with prominent public positions (such as heads of state or government, senior politicians, senior government, judicial, or military officials, senior executives of state-owned companies, and important political party officials), as well as their family members and close associates. (For simplicity, here I’ll use the term PEP to include both the PEPs themselves, and their family members and close associates, as the FATF recommendations make clear that the latter should be covered by the same heightened due diligence rules.) The rationale behind FATF’s recommendation of more stringent due diligence for PEPs is the idea that PEPs are higher-risk customers, because they have more opportunities than ordinary citizens to acquire assets through unlawful means like embezzlement and bribe-taking. Thus, FATF’s Recommendation 12 (which many countries have adopted) advises that countries should require financial institutions to employ additional due diligence measures for foreign PEPs in order to establish the source of the PEP’s assets, and to conduct enhanced ongoing monitoring of the business relationship with the PEP.

That all seems like a good idea. But how, exactly, is a bank supposed to determine whether a prospective client is a PEP? Here, the FATF recommendations say only that financial institutions should “have appropriate risk-management systems to determine” whether a prospective customer is a foreign PEP. In practice, financial institutions rely on a relatively small number of private providers—like World Check (Thompson Reuters), World Compliance (Lexis-Nexis), and a handful of others—to screen prospective clients to see if they are in a database (generated and maintained by the private service providers) of known PEPs. Presumably (though I haven’t been able to figure out whether this is true) financial regulators in countries that have adopted the FATF recommendations on PEP screening will treat a bank’s use of one of these reputable services as satisfying the bank’s responsibility to take reasonable measures to determine whether a client is a PEP, even if in fact the service failed to accurately identify a given customer as a foreign PEP—though the bank might still be on the hook for other legal violations in connection with the PEP’s account.

So, keeping track of who’s a PEP has been entrusted to the private market. There is no “official” PEP list maintained by any national government or inter-governmental organization like FATF, nor does any government (to the best of my knowledge) directly monitor or regulate the private providers like World Check and World Compliance to ensure their PEP lists are accurate and up to date. Is this a problem? Should we be happy leaving PEP screening entirely to the private market, or should there be greater government and/or civil society involvement in generating, maintaining, and revising PEP lists?

This issue came up last month at the “Tackling Corruption Together” conference held the day before the London Anticorruption Summit. David Lewis, the Executive Secretary of FATF, gave a presentation that emphasized (among other things) the importance of due diligence on PEPs. During the Q&A someone from the G20 Research Group (whose name I didn’t catch) asked Mr. Lewis about whether there was the need (and political will) to create public PEP registries, noting both the importance of accurate PEP lists, as well as the inefficiency of individual banks paying private services for screening individual names one at a time. Mr. Lewis replied, quite forcefully, that the creation of public PEP registries would be a “terrible idea.” He knows far more about this issue than I do, and I don’t know nearly enough to come out in favor of public PEP registries, but I have to say, I didn’t really find Mr. Lewis’s reasoning all that persuasive. Continue reading

Guest Post: After the Media Circus, What (If Anything) Have We Learned from the Panama Papers?

GAB is pleased to welcome back Professor Jason Sharman, Deputy Director of the Centre for Governance and Public Policy at Griffith University, Australia, who contributes the following guest post:

After the initial flurry of media attention to the Panama Papers, Matthew Stephenson rightly asks how much, if anything, we have really learned from this affair beyond the celebrity gossip.

A notable degree of modesty is in order here, as what we have seen so far is a tiny, almost certainly unrepresentative sample of the vast quantity of information leaked to International Consortium of Investigative Journalists (ICIJ). The initial wave of media coverage related to 140 individuals, including 12 heads of state or government. Since the ICIJ database became searchable on May 9th, we have a few more names, mostly small-time crooks, and it is possible to run individual name searches to your heart’s content. Nevertheless, given that Mossack Fonseca had created 214,000 shell companies, what we have seems to be less than 1% of their clientele, and presumably the most sensational and outrageous cases. If you looked at your average big international bank, took the records of 214,000 accounts, and subjected them to a detailed financial audit, you probably would find at least a few hundred people engaged in crime or some other seriously shady business (putting banks’ own criminal conspiracies like rigging the LIBOR and Forex markets and sanctions-busting to one side).

Matthew’s earlier post asked about the structure of the offshore shell company industry–in particular, whether it was dominated by a few major providers, or whether it was a highly fragmented market with many firms, each with small market share. The answer is both: There are a few big wholesalers of shell companies, four or five, plus a couple in the US. The wholesalers sell to thousands of intermediary retailers, who then sell to the end-users, i.e. the beneficial owners. I was surprised by how many retailers Mossack Fonseca dealt with (14,000), given that the other wholesalers of equivalent size engage with 2,000-3,000 intermediaries. The difficulty keeping track of this number of retailers, let alone their customers, might explain Mossack Fonseca’s otherwise-puzzling suicidal indiscretion in transacting with customers who brought a huge amount of risk for a fairly trivial sum of money, e.g. those on US government sanctions lists.

What does the structure of the industry mean for regulatory solutions? The retailers could take up the slack if the wholesalers were put out of business, although the process of forming shell companies would be less efficient and more expensive. More importantly, the more concentrated the industry, the easier it is to regulate, compared to the whack-a-mole situation of thousands of independent retailers. As Rick Messick rightly points out, for this regulation to work, however, it is necessary for the Eligible Introducer system between wholesalers and retailers to work in identifying beneficial owners. Despite a litany of earlier high-profile failures, a Guardian piece actually suggests that the British Virgin Islands authorities had recently got on top of this problem: in 2015, 90 requests from the local Financial Intelligence Unit to Mossack Fonseca turned up the names of 89 beneficial owners. However, because customer identity documents are now almost always scans rather than paper, there seems to be no good reason why they can’t be held in the jurisdiction of incorporation.

More broadly, with the Panama Papers and the earlier April 2013 offshore leak, we (or at least the ICIJ) now have information on just over 320,000 offshore shell companies, which probably represents something like 15-20% of all the offshore shell companies ever created. You can work out the total number in that BVI has about 40-45% of the worldwide market. It currently has 450,000 active companies, and 950,000 formed in total since the creation of its registry. If we could draw a random sample of these companies and the associated documentation, rather than cherry-picking the worst of the worst, then we could form a much more accurate and robust conclusion on what the typical uses of offshore shell companies actually are.

In just looking at the information we do have from the Panama Papers, two things are fairly apparent, yet don’t seem to have attracted much comment so far: Continue reading

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.     Continue reading

London Anticorruption Summit–Country Commitment Scorecard, Part 1

Well, between the ICIJ release of the searchable Panama Papers/Offshore Leaks database, the impeachment of President Rousseff in Brazil, and the London Anticorruption Summit, last week was quite a busy week in the world of anticorruption. There’s far too much to write about, and I’ve barely had time to process it all, but let me try to start off by focusing a bit more on the London Summit. I know a lot of our readers have been following it closely (and many participated), but quickly: The Summit was an initiative by David Cameron’s government, which brought together leaders and senior government representatives from over 40 countries to discuss how to move forward in the fight against global corruption. Some had very high hopes for the Summit, others dismissed it as a feel-good political symbolism, and others were somewhere in between.

Prime Minister Cameron stirred things up a bit right before the Summit started by referring to two of the countries in attendance – Afghanistan and Nigeria – as “fantastically corrupt,” but the kerfuffle surrounding that alleged gaffe has already received more than its fair share of media attention, so I won’t say more about it here, except that it calls to mind the American political commentator Michael Kinsley’s old chestnut about how the definition of a “gaffe” is when a politician accidentally tells the truth.) I’m going to instead focus on the main documents coming out of the Summit: The joint Communique issued by the Summit participants, and the individual country statements. There’s already been a lot of early reaction to the Communique—some fairly upbeat, some quite critical (see, for example, here, here, here, and here). A lot of the Communique employs fairly general language, and a lot of it focuses on things like strengthening enforcement of existing laws, improving international cooperation and information exchange, supporting existing institutions and conventions, and exploring the creation of new mechanisms. All that is fine, and some of it might actually turn out to be consequential, but to my mind the most interesting parts of the Communique are those that explicitly announce that intention of the participating governments to take pro-transparency measures in four specific areas:

  1. Gathering more information on the true beneficial owners of companies (and possibly other legal entities, like trusts), perhaps through a central public registry—which might be available only to law enforcement, or which might be made available to the general public (see Communique paragraph 4).
  2. Increasing transparency in public contracting, including making public procurement open by default, and providing usable and timely open data on public contracting activities (see Communique paragraph 9). (There’s actually a bit of an ambiguity here. When the Communique calls for public procurement to be “open by default,” it could be referring to greater transparency, or it could be calling for the use of open bidding processes to increase competition. Given the surrounding context, it appears that the former meaning was intended. The thrust of the recommendation seems to be increasing procurement transparency rather than increasing procurement competition.)
  3. Increasing budget transparency through the strengthening of genuinely independent supreme audit institutions, and the publication of these institutions’ findings (see Communique paragraph 10).
  4. Strengthening protections for whistleblowers and doing more to ensure that credible whistleblower reports prompt follow-up action from law enforcement (see Communique paragraph 13).

Again, that’s far from all that’s included in the Communique. But these four action areas struck me as (a) consequential, and (b) among the parts of the Communique that called for relatively concrete new substantive action at the domestic level. So, I thought it might be a useful (if somewhat tedious) exercise to go through each of the 41 country statements to see what each of the Summit participants had to say in each of these four areas. This is certainly not a complete “report card,” despite the title of this post, but perhaps it might be a helpful start for others out there who are interested in doing an assessment of the extent of actual country commitments on some of the main action items laid out in the Communique. So, here goes: a country-by-country, topic-by-topic, quick-and-dirty summary of what the Summit participants declared or promised with respect to each of these issues. (Because this is so long, I’m going to break the post into two parts. Today I’ll give the info for Afghanistan–Malta, and Thursday’s post will give the info for Mexico–United States). Continue reading

Guest Post: The UK Should Fight Corruption Using “Unexplained Wealth Orders”

Nick Maxwell, Head of Advocacy and Research at Transparency International-United Kingdom, contributes the following guest post:

UK Prime Minister David Cameron has made the fight against global corruption a high priority for his government, declaring that corruption is the cancer that is at the root of many of the world’s problems. But as much as we should applaud the UK’s efforts to support anticorruption measures and good governance abroad, it is equally important that the UK ensure that it is not a safe haven for the proceeds of corruption stolen throughout the world. Yet here the UK has fallen short: We have only seen limited asset restraint and recovery against the proceeds of corruption, especially against those currently associated to power. While estimates of total extent of the problem vary, it is generally agreed that large amounts of unexplained suspicious wealth enter the UK each year and are invested in the British financial system, in property, in luxury goods or in other areas of the economy. And despite the fact that UK law enforcement has the necessary expertise on this issue, the rate of asset recovery by UK agencies of the proceeds of grand corruption is undeniably very low compared to the scale of the problem.

Given the scale of the problem and the inadequacy of the government’s response to date, Transparency International’s UK chapter (TI-UK) established a taskforce of experts to review the legislation in place to deter grand corruption and recover stolen assets that have made their way into or through the UK. The results of the taskforce’s deliberations were published last month as a discussion paper entitled Empowering the UK to recover corrupt assets: New approaches to illicit enrichment and asset recovery; the paper sets out a new proposal for UK law enforcement: the use of an Unexplained Wealth Order (UWO), which would allow UK law enforcement to start proactively questioning suspicious unexplained wealth associated with foreign public officials, and to start civil recovery proceedings against the relevant assets.

Continue reading

Guest Post: Money Laundering and Asset Recovery in Vietnam

Mathieu Tromme, co-founder of the Partnership for Research in International Affairs & Development (PRIAD), contributes the following guest post:

In 2012, the Financial Action Task Force (FATF) placed Vietnam into its International Cooperation Review Group (ICRG) mechanism–often referred to as FATF’s “blacklist”–due to FATF’s determination that Vietnam was not making sufficient progress in addressing deficiencies in its anti-money laundering and combating financing of terrorism (AML/CFT) regime. For Vietnam, this blacklisting was most unwelcome news. Like many other countries, Vietnam had suffered from the global economic downturn, and FATF’s blacklisting threatened its tenuous recovery. Landing on FATF’s blacklist increases a country’s risk profile, affects its credit rating, hampers international trade and investment, and impedes access to the international banking system (due to the enhanced customer due diligence which FATF requires). In response, Vietnam enacted a Money Laundering and Counter-Terrorism Law in 2012 (which took effect in early 2013). After the Asia Pacific Group made an on-site visit to verify Vietnam’s action plan, FATF once more declared Vietnam technically compliant. The country came off the FATF blacklist in February of 2014.

At the same time as this was happening in 2012, FATF issued a revised and consolidated set of 40 AML/CFT recommendations (from an original 40 + 9 “special recommendations” on terrorist financing), which ushered in a number of new standards and evaluation criteria. Of particular interest in Vietnam is Recommendation 30 on “Responsibilities of Law Enforcement and Investigative Authorities,” according to which jurisdictions are now expected to conduct pro-active parallel investigations into both the predicate offence and possible money laundering and terrorist financing offences. Moreover, under this Recommendation, jurisdictions are expected to designate a competent authority which can expeditiously identify, trace, and initiate actions to freeze and seize proceeds of crime. In Vietnam, meeting this new recommendation will be a real challenge, and might again threaten to land it on the FATF blacklist. Continue reading