Part 1: Background
Last month, the now infamous story of the Panama Papers unfolded globally. Thousands of sources — from notable newspapers to grassroots blogs — have been denouncing politicians, businessmen, and financial institutions on their front pages, accusing them of having direct or indirect connections to offshore bank accounts that hold millions of dollars, pounds, euros and yen. Prime Ministers, Presidents, and Kings from over 50 countries have been vilified by the media and countless protests were organized to demand their resignation and prosecution. With this ever growing whirlwind of leaked information and evidence against certain public officials, the question arises: who are the real criminals behind these offshore companies, and who are the real victims that suffer from them?
Uncovering the true identities of criminals poses a challenge. However, the real victims include individuals like Abu Yassin, a retiree from Aleppo, Syria who was killed in a surprise aerial bombing attack a couple of weeks back and Loreta from Lithuania who was trafficked and forced into sex slavery at the age of 15 with her friends. The actions of a few wealthy individuals led to the suffering of millions of people from around the world. With an understanding of the basic tenants of money laundering, the connection between the victimization of these individuals and the Panama Papers becomes evident.
The concept of money laundering is likely familiar. It is in essence the act of hiding the proceeds of criminal activity within the financial system. Criminals profit from illegal activities such as human trafficking, arms dealing, selling prohibited substances, selling stolen goods, or selling illegally obtained fuel in conflict zones. Such transactions are made in cash. Criminals involved in these types of activities often have a requirement to conduct large transactions on a global scale in an efficient and inconspicuous manner. Being able to conduct business through a financial institution can help organized criminals operating on a global scale conduct business more efficiently and effectively, however in order to access the financial system, criminals need to find ways to disguise the true nature of their businesses.
The three stages of the money laundering are (1) Placing the money into the financial system (2) Layering the money once it has entered the financial system and (3) Integrating it so as to make it seem legally obtained. Placing the money is oftentimes the hardest step as it involves the act of depositing or transferring bulk quantities of cash. If certain thresholds are met while performing these transactions, financial institutions are obliged to report it to regulators, which may lead to prosecution the individuals performing these transactions. For this reason, criminals develop elaborate plans to legitimize the cash profits of their crimes, allowing them to place the money into the financial system. These plans involve lengthy training periods. Once the cash is successfully deposited into the financial system, numerous transactions involving many front companies and entities are performed to hide the money trail from authorities. These transactions can include the purchases of homes or luxury items, transfers to many different accounts around the world, or trading in the stock market. It is at this particular step of the process that the idea of offshore (shell) companies comes into play. Criminals will set up offshore companies that are only companies in name. They do not have employees, nor do they sell products or services. They are created in countries that have strong Bank Secrecy laws, making it exceptionally difficult (if not impossible) for regulators and law enforcement from other countries to track the source of money in these companies and their accounts. Consequently, money launderers find this to be the ideal method of disguising ill-gotten gains and transfer them to the intended beneficiary. Integration is the final step in the process and entails the full incorporation of dirty money into the legitimate financial world. Once it is too hard for authorities to track the real source of laundered money, the money laundering cycle is considered successful and the criminals now have accounts with millions of dollars on them to spend on more criminal activities.
Businesses and individuals can conduct a proper screening of vendors before engaging in transactions to avoid inadvertently engaging in transactions that assist criminals disguise illicit funds. On May 9, the International Consortium of Investigative Journalists will release a database containing information of the 200,000 offshore entities involved in the Panama Papers investigation.