February 9, 2021

It is surprising to consider that roughly 2% of global GDP is laundered annually, amounting to between $800B – $2T. Banks spend around $8B annually combating Money Laundering activities but affect only 0.1% of criminal finance.

KYC 360 wrote about this AML problem recently and this blog highlights their findings and commentary.

In their findings they stated that in effect the ROI of the global AML program initiatives is poor. Compliance costs to organizations exceed recovered funds by a considerable amount, and the private sector can be subjected to larger penalties than the criminals.  It is even hard to comprehend that no competent authority has the resources to fully evaluate all the data submitted to it by industry. There is something wrong with this current state of the system.  There are many questions that need to be considered, why do so many AML initiatives and much of the media attention focus solely on offshore jurisdictions when a comprehensive change may be required?

Following the 2007 crisis, governments sought better disclosure of beneficial ownership of offshore structures and financial accounts to help slow fiscal deficits. President Obama stated at the time “that a Cayman Islands building (Upland House) was home to 12,000 corporations.  Now either that’s the tallest building in the world or there’s a scam going on.”  After that, the hunt for tax evaders took off, aimed particularly at the offshore industry, which was chastised forever as ‘tax havens.’ Few analysts and commentators distinguished between “havens” (no tax at all) and low or neutral tax jurisdictions, or between legal avoidance and evasion.

Fewer still recognized that the world’s leading offshore jurisdictions did not always fit the label called out by the media, including the US, the UK and a number of full member EU member-states such as the Netherlands, Luxembourg, Lichtenstein and Malta.

Initiatives sold on the pretext of cleaning up the so-called tax havens have included FATCA (from 2010) and CRS (from 2014), both of which seek disclosure of whom the ultimate beneficial owners of entities and accounts are.  Beneficial ownership disclosure requirements then followed, capturing a range of different vehicles and assets, and under pressure from the European Union (EU), a growing number of offshore jurisdictions have committed to public disclosures from 2023.

Economic substance (ES) was next on the agenda. ES requires firms to demonstrate that income streams from certain activities are, in fact, based on real local activity to justify the use of low tax jurisdictions, thus limiting the use of ‘shell companies’ and letterbox entities.  EU Council Directive 2018/822, known as “DAC 6”, also seeks to force third-country firms (i.e., those within “tax havens”) to report not only on hallmarks of tax evasion, but also on legitimate tax avoidance, and so on. Thus, the focus now seems to be on the “morality” of tax planning and avoidance.

The consensus is that today’s offshore industry is anything like it was twenty years ago when the US Senate PSI Committee first investigated the use of offshore structures to launder Raul Salinas’s $100m.  Offshore jurisdictions are collecting, reporting, and disclosing an avalanche of data on client activities and beneficial owners, both locally and globally. When taken together, these initiatives give authorities a significantly better holistic picture of the industry, but critics persist in using outdated perceptions to mount concerns and attacks.  If only the authorities had the time, and the right strategy and resources to deal with the data industry is providing.

The challenges it appears is that several aspects of AML policy are misguided.  Initiatives have moved way beyond permitting authorities to identify and prosecute crimes into raising more tax.,  To some AML professionals DAC6 and FATCA go beyond criminals, to fishing expeditions for revenue raising, including in circumstances where there is no suggestion or evidence of evasion.  Given the limited resources available to the AML authorities, some question their efforts to be focused on raising revenue or catching criminals.

Onshore locations should start to mirror the costly high standards relating to reporting and disclosure, controller and beneficial owner checks, registration, and corporate governance that offshore centers have been obliged to follow, particularly if offshore have to pay an equivalent tax. The USA, for example, never permitted reciprocity in respect of FATCA automatic exchange of information. AML concerns need to consider the details of entities and the business details that is being transacted in Delaware, Nevada, and Wyoming.

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#AML, #FinCEN, #FinancialCrime, #Banks, #KYC, #EnhancedDueDiligence, #EU, MoneyLaundering, #BenefitOwnership


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February 9, 2021