The Panama
Papers bring out several issues related to vulnerabilities of controls from
countries and companies. We have heard about them…tax havens… offshore
companies, banking secrecy, money laundering, political exposed persons… but
what are they? How are they related to each other?
To start
explaining, it is important to add another role as important as it is Internal
Audit within the companies: the Compliance Officer. Where does it come from?
What are their responsibilities?
After the
most important financial scandals that took place in 2002 such as Enron and WorldCom
the authority decided to tighten the nuts and the regulation changed. New rules
were placed for public companies such as the prohibition of not being an
auditor and consultant for the same company, disclosures if a company is
dealing with a fraud, rotation of audit partners (5 years top), creation of the
Audit Committee and how to protect whistleblowers among other things. And a new
role emerges from this: the Compliance area.
Compliance
as its name says it has the duty to comply with the law (externally) and with
the policies and procedures (internally). Its difference with Internal Audit is
to prevent rather than detect. As we all know either an external or internal
Auditor determines a scope based on the nature of its revision in order to
analyze what is being doing vs. what it should be. (For more information refer to the article, Value: Internal Audit) The
bottom line: an auditor analyzes something that already has happened (after).
Meanwhile compliance should be involved before taking a decision. (I.e.
a contract, hire key staff, new provider, etc.)
Compliance
should be in charge of manage the money laundering risk, which is defined as to
give legality to money that comes from illicit activities. Those illicit
activities are several among: traffic of drugs, human organs and humans. Prostitution,
forgery, pornography, bribes, etc. The term “illicit” depends upon the legal
framework of each country. The criminal will look for “paradises to launder money”…those
countries or companies which can help him to launder lots of money at a low
cost in a very quick time.
A tax haven
is defined as a territory where taxes are levied at a low rate or has a system
of banking secrecy. This means that banks are not allowed to give to the
authorities the information of their clients… the real owner… is a “top secret”
and it has to be kept as that, unless there is a criminal complaint. Offshore
companies (legal entity), refer to be incorporated or register on tax havens.
Therefore,
for its characteristics tax havens are used by some people for purposes of confidentiality…others
for launder money and others to pay less tax or hide money from the IRS. The
latest two mean a crime: tax evasion.
But tax
evasion differs from money laundering. Although both are crimes they have
specific characteristics. Therefore, depending on the circumstances, someone
can be accused of both or just one.
Then there
is another key concept: political exposed person…“PEP”. It is defined as someone
who is or has been entrusted with a prominent function. Historically PEPs have
shown us that tend to be corrupt. Taking bribes is illicit money; dirty money.
It has to be laundered. Someone who is corrupt does not want to be known as
such, so the money has to be seen as “clean”… as legal.
One of the
key elements to deter and prevent money laundering is to know your customer
(“KYC”) and apply customer due diligence. (“CDD”) Countries, authorities and
companies need to know who the real owner is, as well as who controls.
Criminals use among many methods: shell
companies, front man or identity theft to disguise its identity; therefore
verify who really is the owner, it is an extremely important control.
Although
there is still an investigation carried out in Panama, it reminds us (again)
the importance of internal control that companies should have and countries
should promote. How many factors have in common with the Enron case?
-Worldwide
there are flaws in the laws that generate legal technicalities that help
criminals or there are still issues to be regulated. In Enron case energy
wasn't regulated. Today it is the offshore industry.
-In both
cases there were rumors of corruption.
-Lack of
transparency: Enron didn’t present a Balance Sheet meanwhile in Panama due to
bank secrecy information is not provided.
-Enron used
“mark to market” for accounting valuation and afterwards a “hypothetical future
value” among the creation of several companies to disguise the fraud and real
owner. (It included a trust). Today in Panama it is reported a number of
companies created by complex structures, also.
-Statements
from both executives of companies were: “we didn't do anything wrong”. The
rationalization is the same.
Regardless
of the mentioned above and the importance of controls and managing risks there
is something more transcendent: values. Why do people even knowing that
something is wrong, they do it?
And the
history…again is repeated…with so much similarities…
By Mónica
Ramírez Chimal, México
Partner of
her own consultancy Firm, Asserto RSC:
www.TheAssertoRSC.com
Author of
the books, “Don´t let them wash, Nor dry!” and “Make life yours!” published in
Spanish and English. She has written several articles about risks, data
protection, virtual currencies, money laundering. Monica is international
lecturer and instructor and has been Internal Audit and Compliance Director for
an international company.
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