🌶💰Compliance with Anti-Money Laundering Regulations

The problem of money laundering has become one of the pressing and menacing issues of our time. Its consequences are felt not only by individuals but also by institutions, organizations, and society as a whole. The negative impact of money laundering spreads across several spheres:

1. "Economic Aspect": Legalizing illegal incomes causes significant harm to the country's economy. This applies to both the export of capital abroad and internal processes such as the expansion of drug trafficking, arms trading, and terrorism financing. The transition of capital into the "shadow" leads to a decrease in the volume of economic welfare, which in turn can lead to increased unemployment and non-payment of wages, pensions, benefits, and other social payments. As a result, society becomes stratified by income level, increasing social tension.

2. "Legal Aspect": Money laundering violates legislation, undermines principles of justice and order in society, fosters the spread of corruption, and creates a danger to law and order.

3. "International Aspect": In the world of globalization, money laundering becomes a transnational problem that crosses borders. It can have international consequences such as terrorism financing or undermining stability in different regions.

Therefore, it is necessary not only to strengthen legal mechanisms for controlling money laundering but also to implement comprehensive strategies aimed at preventing this phenomenon and punishing the guilty parties.

"Money laundering" is a financial crime aimed at disguising the source of funds and property obtained through illegal means and transferring them from criminal to legal circulation. However, it is important to note that this is a secondary financial crime, the purpose of which is to conceal the primary illegal acquisition of "dirty" money.

Understanding the danger posed by this activity, it would be logical to return to the roots of combating it. The first country to enact anti-money laundering legislation was America. Its first step towards detecting and preventing this crime was the adoption of the Bank Secrecy Act (BSA) in 1970.

A new intergovernmental body was created in 1989 - the Financial Action Task Force (FATF) . Initially, the activities of this body were limited to combating financial crimes, but after the September 11 attacks in the USA, circumstances compelled an expansion of its tasks. Therefore, FATF is a global organization engaged in combating money laundering and terrorism financing. It sets international standards aimed at preventing this illegal activity and the harm it inflicts on society.

FATF helps countries establish Financial Intelligence Units (FIUs). The main task of these units is to manage the flow of information between their institutions and law enforcement agencies. National and international legislation together with the regulatory functions of countries' FIUs assist financial institutions in combating this societal danger.

Another important organization is the International Monetary Fund (IMF), whose main goal is to ensure the stability of the international monetary system.

In order to detect and report potential cases of money laundering in accordance with current legislation, financial institutions must clearly understand the process of this criminal activity itself. Typically money laundering can be divided into three stages: placement, layering, and integration. This is a complex series of transactions in which funds are first deposited and then gradually transformed into a form that appears legal. 

"Placement" refers to the method and form of placing funds obtained illegally. For example, they are disguised as payments for fake invoices, transfer of funds to offshore companies or trusts, whose beneficial owners are anonymous, use of accounts in foreign banks, and instantaneous cancellation of transactions.

"Laundering" is understood as the process of separating funds obtained through criminal means from their source. This stage involves conducting a large number of financial transactions, through which the process of disguising the origin of funds and the owner takes place. This indeed complicates the tracking of transactions.

During the "integration" phase, laundered funds are transferred into the official economy, and legitimate transactions take place. For example, for the purpose of further enrichment, criminals may invest laundered funds in real estate or high-value assets.

Many countries have enacted legislation to combat money laundering. For example:

1. USA: USA PATRIOT Act, Bank Secrecy Act.

2. Canada: Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).

3. Australia: Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

4. Europe: EU's Fourth Anti-Money Laundering Directive (4AMLD).

What exactly is required by anti-money laundering legislation depends on each jurisdiction individually, but there are common rules for financial institutions:

1. KYC or Customer Identification Program – mandatory verification and identification by banking institutions of their clients to ensure legality. It can comprise of the following stages or processes:

a. Document Verification – The government-issued ID document of the individual is verified for forgery or any other issue.

b. Face Verification / Liveness Check – To identify any spoof attacks on time, face verification checks are performed to ensure the live presence of the customer.

c. Address Verification – Proof of Address (POA) is obtained that verifies the address on government-issued identity documents against POA.

2. Reporting of large foreign currency transactions – institutions are required to report transactions by a single client during a day if the transaction amount exceeds a certain threshold, according to legislative requirements.

3. Monitoring of suspicious activity and reporting – regulatory bodies publish recommendations for detecting suspicious activity and identify which behavior requires special attention. If anti-money laundering investigators detect behavior where transactions exceed reporting thresholds and are clearly not business-related, they must report suspicious transactions (STR) or suspicious activity reports (SAR) to FIUs as required by law.

4. Compliance with sanctions – regulatory bodies such as the US Department of the Treasury, the United Nations, the European Union, and the Financial Action Task Force require financial institutions to screen transaction participants against sanctions lists against individuals, companies, institutions, and countries.

International and national legislation is an important tool in combating money laundering, financial fraud, and other forms of financial crime. These legal frameworks are endowed with important powers to control and prevent these crimes, ensuring the security and protection of the country's financial system and the international community. However, with the development of society and the rapid pace of changes in financial technologies and criminal' methods, legislation must also constantly adapt. The absence of current and effective legislative mechanisms can create gaps that financial criminals exploit. Therefore, continuous updating and improvement of legislation becomes a critical necessity to ensure the effective protection of society's rights and its financial interests.

Thus, the European Parliament used its legislative initiative and adopted a package of laws strengthening the EU's toolkit to combat money laundering and terrorist financing in April 2024.

The new laws ensure that individuals with legitimate interests, including journalists, civil society organizations, and competent and supervisory authorities, will have immediate, unfiltered, direct, and free access to information about beneficial ownership stored in national registers. In addition to current information, the registers will also include data for at least five years.

The laws also give more powers to financial intelligence units (FIUs) to analyze and detect cases of money laundering and terrorist financing, as well as to suspend suspicious operations.

The new laws provide for enhanced due diligence and customer verification measures, after which so-called obliged entities (such as banks, asset managers and crypto-asset service providers, or real estate agents) must report suspicious activity to FIUs and other competent authorities. Top-tier professional football clubs engaged in major financial operations with investors or sponsors, including advertisers and player transfers, must also verify the identities of their clients, monitor transactions, and report any suspicious operations to FIUs from 2029.

The legislation also contains provisions for increased vigilance towards high-net-worth individuals (with a net worth of at least €50,000,000), a European-wide €10,000 cash payment limit, unless these payments are made between private individuals and are not related to professional activities, as well as measures to ensure compliance with targeted financial sanctions and avoid sanctions evasion.

To oversee the new anti-money laundering rules, a new body - the Anti-Money Laundering and Terrorism Financing Authority (AMLA) - will be established in Frankfurt. AMLA will be responsible for direct oversight of the riskiest financial institutions and will have the authority to intervene in case of supervisory failures, acting as a center for supervisory authorities and an intermediary in disputes between them.

Currently, the package of laws awaits official adoption by the EU Council.

As with any changes in legislation, these changes were also preceded by frightening events, in this case from the side of global politics and economics. One such event was the publication of the Panama Papers in April 2016. This major exposé, known as the Panama Papers or Mossack Fonseca: Terabytes of Secrets, revealed a new reality. This case opened the door to a world where the most influential people from all over the world use offshore companies for money laundering, terrorist financing, and tax evasion. 

Mossack Fonseca was founded in 1977 when Panamanian entrepreneurs Ramon Fonseca and Jürgen Mossack combined their small firms. Having extensive and strong connections in financial circles, their company developed quite quickly and was successful in its field. 

In the late 1970s, Panama developed a specific financial system with unprecedented banking secrecy laws. With the support of American banks, the country turned into a "tax haven" where non-transparent financial organizations were happy to open accounts for foreign companies. However, foreign firms were not allowed to operate directly in Panama, so they needed local intermediaries such as Mossack Fonseca.

Mossack Fonseca has become one of the most popular companies thanks to its expansion into new areas. In 1987, it became the first Panamanian law firm to open a branch in the British Virgin Islands, which had just become an offshore territory. Today, more than half of Mossack Fonseca's companies are registered in the British Virgin Islands. In total, approximately 40% of the world's offshore firms are located in this territory.

In 1994, the company helped the tiny island nation of Niue in Polynesia become an offshore zone and received exclusive rights to open firms in the country. Niue's banking laws differed from those of other offshore jurisdictions in that companies could be registered in Russian and Chinese - it was clear which clients Niue wanted to attract first. 

By 2001, Mossack Fonseca was transferring $1.6 million to the budget of Niue (the country's entire budget was two million). The popularity of the offshore attracted the attention of US law enforcement agencies, after which large banks imposed an embargo on working with Niue companies. As a result, Mossack Fonseca lost its profitable business and was forced to transfer some of its companies to neighboring Samoa. According to Vice, among the tens of thousands of companies registered in Niue, there were those related to Eastern European criminal networks and international drug cartels. Mossack Fonseca denied all of this, as well as accusations of involvement in money laundering and tax evasion.

At the very beginning of 2016, Mossack Fonseca found itself at the center of a high-profile corruption scandal in Brazil involving money laundering by the state oil company Petrobras. The scandal even affected the former president of the country, Luiz Inácio Lula da Silva, who was detained for interrogation, and his home was searched. The Brazilian authorities accused the Panamanian company of creating fictitious companies to withdraw the funds stolen from Petrobras. However, the Panamanian firm stated that it had nothing to do with the companies involved in the Petrobras scandal. 

Another case related to Mossack Fonseca concerned tax evasion in Germany. It involved searches at Commerzbank. The investigation began after the German authorities bought part of the Panama firm's archives from an informant. Shortly afterward, the Süddeutsche Zeitung began to receive confidential documents, free of charge and in full. These documents became the Panama Papers.

We can only speculate as to what other large-scale frauds Mossack Fonseca could have been involved in. However, the Panama Papers case didn't just expose these schemes, it revealed global problems in the use of offshore companies. This scandal not only became a catalyst for changes in the financial world, but also raised the need for transparency and an active fight against financial corruption, changes in legislation, and strengthening of international requirements to combat money laundering to a high level.

Of course, anti-money laundering legislation and new amendments to it also affect the activities of offshore jurisdictions, as offshore territories are often used for money laundering and tax evasion due to their low regulatory transparency. 

Here are some aspects of the impact of money laundering legislation on offshore jurisdictions:

1. Increased control and requirements for offshore companies: Many countries are strengthening their national money laundering laws to eliminate or limit the use of offshore jurisdictions for illicit financial transactions. This may include reporting requirements, customer identification, and other control mechanisms.

2. Cooperation with international organizations: Many countries that are offshore centers are required to cooperate with international organizations and other countries in money laundering cases through international treaties and agreements.

3. Mandatory reporting and disclosure laws: Some countries introduce laws that require offshore banks and financial institutions to disclose information about their customers and their financial transactions. This helps to increase transparency and makes it more difficult to use offshore for illegal purposes.

4. Application of sanctions: Countries can impose sanctions on offshore jurisdictions that don't comply with international anti-money laundering and financial transparency standards. This may include a ban on financial transactions with such territories and other restrictions.

5. International cooperation and information exchange: Money laundering legislation facilitates international information exchange between countries and authorities to identify and disrupt financial transactions that take place through offshore structures.

It is important to understand that offshore jurisdictions are not inherently evil or repositories of all vices. Understanding that offshore jurisdictions are not an exception, but rather a tool for optimizing financial strategy, is important in the context of global business. Offshore jurisdictions should be viewed as an opportunity to rationally allocate resources and ensure the efficiency of financial transactions. Offshore jurisdictions have tax advantages, provide protection from political risk and the ability to keep assets in a safe and stable jurisdiction in the event of an unstable political situation, and facilitate the development of international business. The use of offshore structures should and can be legal and comply with the requirements of international and national legislation.