What the Pandora Papers Taught Us About Global Financial Crime Compliance?

The 1 % of world elites have always been involved in corruption, money laundering, and other financial crimes. However, there wasn’t any specific body that could probe about their illegal activities due to no access to the technology.  

In the 21^st century, Investigative journalists took a great initiative to expose the criminals hiding behind the faces of politicians, businessmen, and other filthy riches. The Pandora Papers leak is one of the major leaks among the public by the ICIJ in the last decades.  

These massive data leaks from hundreds of countries exposed how rich and powerful people including politicians, government officials, and bureaucrats hide their money, avoid taxes, establish offshore companies to evade taxes, and easily launder money.

Did Pandora papers leaks bring something positive for the financial institutions? Yeah, beyond the headlines of politician’s involvement in money laundering activities. There was a wake-up call for the financial institutions as well to strengthen global financial crime compliance.

But how did the Pandora Paper help them? In this blog, we will highlight the failures of global financial compliance efforts and what were the lessons in this failure for the Fis.

A Quick Recap about Panora Papers Leaks

It was the data of almost 12 million documents released by the international consortium of investigative journalists in 2011. The leaks shocked the whole world as there were government officials, rich businessmen, politicians, army officers, and people from the judiciary involved in establishing the offshore companies.

These documents also revealed the techniques that the wealthiest and most influential people have used offshore companies to evade taxes and do money laundering and terrorist financing.

More than 300 well-renowned politicians from across the world were exposed by the ICIJ who were involved in secret financial dealings.

The wealthy person’s involvement was not the only surprise to the global financial system but the major surprise was that there was a huge failure and gap in the global financial crime compliance system which was unable to combat criminal activities on such a huge scale. Let’s find out about these failures.

Key Compliance Failures Highlighted by the Pandora Papers

1. Ambiguity in Offshore Jurisdictions

Among all failures, one of the major failures of financial institutions is how too many offshore companies are often used to hide money, evade taxes, and move money from one jurisdiction to another. 

Due to less strict rules on the establishment of these companies, they often have no physical appearance nor do they provide any service or products. 

The offshore companies created in such companies can act like a black hole where money hides from the public eye and make it very difficult for the regulatory companies to trace the region of money being sent to such jurisdictions.

2. Weak Customer Due Diligence (CDD) Practices

If an organization does not gather the required information about their clients to check that the person is the one he claims to be. 

Pandora’s paper revealed that the financial institutions failed to comprehensively perform the customer due diligence and Know your customer while onboarding new clients. 

In most cases, the people who avoided the EDD  process were Politicians. This helps them easily move money to such jurisdictions with weaker compliance efforts.

3. Inadequate Monitoring of High-Risk Clients

ICIJ revelation cleared one thing in the Pandora papers, most of those people who have political influences. 

This showcases that financial institutions often do not apply the AML regulations on politically exposed persons and their close associates because of their pressure, influence, or other things. This helps them easily prevent the detection process and move money from one place to another more often and easily.

What Lessons FIs can learn to enhance their Global Financial Crime Compliance Efforts

1. Strengthen Beneficial Ownership Transparency

Among all the failures financial institutions have to face disclosed in the multiple leaks is that organizations were not fully aware of how to disclose the beneficial ownership structure. 

Therefore, one of the clearest lessons from every leak is that businesses need to ensure that they implement stronger rules to disclose the true ownership assets. How can businesses achieve it?

Well, it’s not too complicated. While onboarding new clients, the compliance team must demand more transparency and keep updated the registries to know who exactly is doing the business.

2. Enhance CDD and KYC Processes

The revelation also discloses the failure of financial institutions in properly implementing the CDD and KYC processes. 

Therefore, financial institutions need to check their client’s identity beyond the basic techniques. 

For that, businesses need to collect all basic information such as the client’s real name, nickname, business address, source of income and why he is making a transaction to a money laundering-prone jurisdiction(if any). 

This means regular checks, ongoing monitoring, and asking tough questions when things don’t add up can enhance the CDD process and mitigate the chances of money laundering.

3. Implement an Advanced Transaction Monitoring System

Financial institutions need to understand that Compliance isn’t just a time procedure, you have to monitor and apply strict scrutiny through the client’s engagement with you. Therefore, businesses must incorporate the advanced AML monitoring and screening system to check the transactions in real-time, flag suspicious transactions, and report to the relevant department automatically.

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