Fighting money laundering, drugs or dictator’s funds

It comes as no surprise but certainly with a touch of envy when one reads how, for many years, the use of Swiss banking secrecy has lured many illuminati (including an unpublished list from Malta) to accumulate and protect their wealth.

Not all were honest persons trying to hide their hard earned riches from prying eyes of home dictators – on the contrary these included drug traffickers, oil barons, arms dealers, and terrorists wanting to launder money and create financial infrastructures that have made them look less like criminal gangs operating in dirty cash and more like honest enterprises earning interest, making legitimate investments, and sending electronic cash transfers.

Conspiracy theories abound about corrupt governments, their mandarins and how these embezzled money and robbed the people they’re meant to serve. Regrettably these are no longer conspiracy theories created by the have nots but true stories leaked by recent investigations instigated by a team of global journalists in the Swiss Leaks project of 60,000 files that provided details on over 100,000 HSBC account holders.

Bank secrecy has a history spanning many decades and emanates from jurisdictions with extensive banking sectors that offered absolute confidentiality for clients to facilitate anonymity. 

In the past, secrecy restricted competent authorities from obtaining or sharing information on banking relationships and account activities which recent banking scandals have unashamedly revealed.

Massive flows of illicit money can damage the stability and reputation of any financial sector and threaten the growth of international development. The veil of secrecy has been identified to shroud in opaque 

terms various forms of money laundering traditionally composed of three stages – starting with the placement stage, followed by the layering stage and finally the integration stage.

In the placement stage money derived from illegal activities is often initially introduced by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account. Once the money has been sanitized, the launderer engages in a series of movements to distance them from the source.

Typically they would integrate the funds by investing in real estate, luxury goods, or business ventures, for example selling imported used cars or running multiple petrol stations, enabling the business to look entirely legitimate. In order to facilitate their criminal activities, money launderers and terrorist financiers do take advantage of the freedom of capital movements and the freedom in Europe to supply financial services which the integrated single market area entails.

At the same time, the objectives of protection of society from crime and protection of the stability and integrity of the European financial system should be balanced against the need to create a regulatory environment that allows companies to expand businesses without incurring disproportionate anti-money laundering compliance costs.

A recent scandal has hit a global bank in Argentina where authorities are investigating a possibly deliberate fire in which documents from major financial institutions were lost – documents that contain information about economic fraud committed in the country.

After a police analysis determined that the fire that burnt down two warehouses belonging to the Iron Mountain company in Buenos Aires in 2014 was intentional, leading to suspicions about a conspiracy between Iron Mountain and its major clients – such as banks HSBC, BNP Paribas and JP Morgan – to destroy documentation involving economic crimes, by causing a fire in the company’s warehouses as the head of Economic Development of the City, former HSBC executive Francisco Cabrera, intervened in order to give the company these tax benefits.

Locally we meet article 435AA of the Criminal Code, which is applicable to the Prevention of Money Laundering Act ( PMLA) where the Criminal Court may order a bank to monitor the banking operations being carried out through one or more accounts of a person suspected of having committed an offence of money laundering for a specified period.

Provisions are also provided for international mutual assistance in the implementation of measures relating to confiscation, freezing, and other court orders related to the investigation of an offence of money laundering. Therefore the crusade to detect any covert money laundering activities is getting hotter.

Readers may be surprised to know that land based casinos can be exempted where, following an appropriate risk assessment, jurisdictions may decide to exempt fully or in part providers of certain gambling services from national provisions transposing the provisions of the Directive on the basis of the proven low risk posed by the nature and, where appropriate, the scale of operations of such services.

Naturally, in their risk assessment one needs to consider a number of factors to assess the degree of vulnerability of the underlying betting transactions, in particular to type of payment methods in use. It is interesting to note that strict rules of know your client now apply to all fiduciaries and trustees where they are obliged to report a rigid matrix of certified information on the underlying beneficiary before accepting any assignment. The immediate disclosure to the governing body by administrators, nominees or trustees within three days of any suspicious transactions of the client is now mandatory and has to be in writing. Gone are the days when easy international business can be signed based on a mere recommendation as all relationships have to be thoroughly vetted before acceptance.

This means conducting an ongoing risk assessment of the client ‘s business operations such that over the years, we note how the rule of mandate and later on that of trustees, has become quite popular in Malta. We find 42 accredited companies as administrators of private foundations in terms of Article 43(12)b of the Trusts and Trustees Act while more numerous are the authorisations of 143 companies by the MFSA empowered to act as a Trustee or Co-Trustee to provide fiduciary services in terms of the Trusts and Trustees Act.

It is strange to read how Alternativa Demokratika (AD) recently advocated that the provision of fiduciary services be rendered illegal as in its opinion and in the context of online betting companies it says that “It seems that professional firms and the Malta Gaming Authority did not carry out due diligence appropriately on ultimate beneficial owners of the companies they have registered and represented”.

Here one may disagree with its views since fiduciaries and/or trustees cannot cover up for clients knowing full well that disclosure can and is always be demanded by banks, the tax department, MFSA, FIAU, and of course the Malta Gaming Authority – the latter rigorously carries out probity checks and due diligence on all betting company applicants.

Equally sensational is the revelation in The Sunday Independent about a chartered accountant from Mosta who allegedly was offering over the counter residency permits gifted with the opening of local bank accounts and incorporation of over 800 shell companies to patronise business friends and members of the family of the late Col Gaddafi.

It appears that the registrar of companies was alerted by recent allegations that have been made in court concerning such covert operations. The Sunday Independent’s sources recount the highly dubious practice incorporating a wide-ranging network of fixers ranging from Customs agents to government employees and from financial regulators to banks – which ensures that predominantly Libyan clients are given fast track company formation procedures and residency permits with allegedly hardly any questions being asked, if any at all.

The newspaper alleges that hundreds of companies were registered at the Malta Financial Services Authority, again with very few questions being asked or background checks being carried out. The story continues to describe how foreigners applying for a residence permit (one admitted in court he does not speak English) during a short visit to Malta are whisked to Identity Malta’s permit office, where the chartered accountant is allegedly well known, and unashamedly paperwork is processed in record time.

The icing on the cake is a swift introduction to a local bank where VIP treatment is meted out resulting with a quick opening of company or personal bank accounts. With hindsight one recalls that there are millions of euros held by a nominee in name of the dead son of Muammar Gaddafi – currently frozen in Bank of Valletta.

In conclusion, a journalist at the Sunday Independent reported the BOV chief executive saying that FIAU did not investigate the bank nor its executives in connection with the ex-Libyan dictator’s business – more developments on the story may be revealed once the police conclude interrogations.