The “Panama Papers” and the Secret World of Shell Corporations

The leaked information is unraveling a secret world of shell companies used by wealthy individuals to allegedly hide assets, and the potential involvement of attorneys and bankers in allegedly facilitating the hiding of such assets. The International Consortium of Investigative Journalists reports that the law firm of Mossack Fonseca worked with more than 14,000 banks, law firms, company incorporators and other middlemen to set up companies, foundations and trusts for customers. In light of these events, financial institutions and other entities may need to consider whether they are implicated, how to assess the risks, how to minimize exposure, if any, and whether insurance coverage is available.

Understanding the Legal Risks

As prosecutors and bank regulators continue to follow the money trail, US domestic financial institutions and foreign banks with branches, agencies or other offices in the United States may face scrutiny if the Panama Papers directly implicate the institution or the institution maintains accounts for the hundreds of individuals or more than 200,000 shell companies contained in the Panama Papers. Prosecutors and bank regulators are likely to question the adequacy of anti-money laundering policies and programs required under the Bank Secrecy Act, including Know Your Customer policies, due diligence procedures and the risk level assessment and monitoring of accounts controlled by PEPs. In recent years, Bank Secrecy Act violations have resulted in highly public prosecutions and millions in penalties against banks.

Money laundering statutes, 18 U.S.C. Sections 1956, 1957, may also be implicated. Specifically, prosecutors may explore aiding and abetting liability for institutions that knowingly assisted the laundering of illicit proceeds or, more likely, willfully failed to inquire as to the source and ownership of illicit proceeds. Significantly, money laundering statutes specifically provide for extraterritorial jurisdiction if the conduct is by a US citizen, or, in the case of a non-US citizen, if the conduct occurs in part in the United States and the value of the funds exceeds $10,000.

Similarly, prosecutors are likely to explore conspiracy or aiding and abetting theories under the Foreign Corrupt Practices Act (FCPA) if any of the monies were used to bribe foreign officials. The FCPA applies to issuers of securities in the United States, or that have a principal place of business in the United States—or certain persons and entities, other than issuers and domestic concerns, acting while in the territory of the United States. The FCPA also has extraterritorial reach, and the Department of Justice has recently announced its intent to focus on more high-impact cases. The DOJ also recently hired more prosecutors, resulting in the increase of the Fraud Section’s FCPA Unit by fifty percent.

The offshore shell companies and financial institutions maintaining such accounts could also be implicated in the avoidance of economic and trade sanctions based on US foreign policy. Without proper mechanisms in place to monitor the nature and source of wire transfers, some financial institutions may have dealt with entities that are specifically barred by the Department of the Treasury’s Office of Foreign Assets Control (OFAC). Sanctions violations can result in criminal charges and penalties which have reached billions of dollars.

Financial institutions may also be subject to investigation for conspiracy to facilitate tax evasion by their US customers through the use of offshore entities.

Should an institution be publicly disclosed as being the subject of an investigation or ensuing prosecution, it is not uncommon thereafter to face shareholder lawsuits. Implicated or accused customers and/or clients may also sue, claiming the advice to participate in these shell companies was improper.

Internal Investigations

As a result of the media coverage and the dissemination of specific information, financial institutions may now be deemed to be on notice of potential wrongdoing within. It is likely that prosecutors and bank regulators will be issuing information requests and subpoenas to many financial institutions. Such institutions may be well advised, to the extent not already initiated, to conduct internal investigations to understand the facts and assess the criminal and civil exposure, if any. It is a significant benefit to have conducted an investigation before the first subpoena arrives.

As in other circumstances, the investigation should be conducted with a view toward protecting the attorney-client privilege. Institutions may thus opt for outside counsel to conduct the investigation, rather than in-house counsel or compliance personnel, in order to ensure the protection of the privilege, particularly where policy deficiencies are systemic and/or senior management is implicated. Significantly, outside counsel can protect findings and ensuing discussions under the attorney-client or work product privileges. That protection extends to consultants retained by outside counsel to assist in identifying and analyzing the facts. 

Following an assessment of the results of the investigation, and in the event wrongdoing is in fact uncovered, a voluntary disclosure to regulators or the appropriate government agency should be considered to attempt to minimize criminal and civil exposure and fines. Following the issuance of the Yates Memorandum, prosecutors will be looking for individuals who may be held accountable, and the institutions must take this into account. The new policy affirmatively directs prosecutors to focus aggressively on individual employees from the very beginning of an investigation, regardless of whether it begins in the civil or criminal context, and government attorneys are also expected to pursue internal referrals between their respective units. Other remedial action, such as updating and refining compliance policies and programs, may be in order.

Download: The “Panama Papers” and the Secret World of Shell Corporations