A hornet’s nest has been stirred up by the leak of millions of financial files by the International Consortium of Investigative Journalists (ICIJ) in collaboration with journalists around the world. The ICIJ says that its work reveals more than 120,000 offshore companies and trusts, exposing the hidden dealings involving politicians, businessmen and others. While authorities around the world are assessing the validity of these documents, the extent of the information emanating from the British Virgin Islands, the Cook Islands and elsewhere is revealing in many ways. Importantly it is a rebuff to those who claim that there is no problem with the workings and transparency of the international financial system. Whatever the veracity of the allegations contained in the ICIJ report, they reveal the extent of highly complex and secret financial and corporate structures, and their cross-border nature. These revelations have already spurred some to call for more regulation by governments.
It began as a trickle but has turned into a flood. HSBC, Barclays, Wachovia, JP Morgan, and UBS have all been engulfed by waves of scandal involving, money laundering, fixing interest rates, risky trades, and rigging the money markets. The question now is – have the banks gone bad? The claim by senior bank executives they ‘we did not know’ rings hollow, and must not be allowed to stand if they are to regain their integrity.
The banks have long resisted greater hands-on supervision of their activities, but the recent rash of publicity surrounding their bad conduct proves that left to their own devices market discipline is not enough. Their involvement in dubious transactions, including in greasing the wheels of corruption through money laundering requires the full implementation of existing rules and regulation, and empowered supervision. The World Bank’s Stolen Asset Recovery Initiative (StAR) along with Financial Market Integrity (FMI) have long pressed for the banks to do more to prevent money laundering and to fight corruption. As a rough estimate, it is believed that $20 – $40 billion is stolen from the coffers of developing countries every year. Much of it ends up being laundered through the banks, passing through financial capitals around the world en route to the beneficiaries. Mechanisms to detect illicit cash flows have long been in place, but the existing system is not working, and corruption is eating away at the foundations of the banking system.
Last week, British NGO Global Witness published Grave Secrecy, a report on how U.K. registered companies were allegedly used to launder the profits of corruption. Hundreds of millions of dollars passed through the corporate accounts of dozens of shell companies that held bank accounts at Asia Universal Bank (AUB), the largest bank in Kyrgyzstan. Although the report is based on one concrete case of alleged corruption and money laundering in that country, its relevance goes beyond that single example.
It is just one illustration of how money launderers and those involved in large-scale corruption use companies to hold criminal assets whilst ensuring that information on the control of those companies is virtually inaccessible. The essence of those schemes is to parcel out different bits of information on the company to different jurisdictions from which such information can only be obtained with difficulty (so-called secrecy jurisdictions). Indeed, how does one find relevant information on a U.K. company owned by a company registered in the British Virgin Islands with a company secretary in the Marshall Islands and a director in Panama? Criminal creativity knows no bounds.