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Workshop Panama Inquiry Committee of the European Parliament

Money Laundering and Tax Evasion

by Prof. Dr. Brigitte Unger

26th of January 2017

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Source: UNODC

The Role of Offshorefor Money Laundering

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Overview

1. The Use of Offshore Centers for Criminal Purpose

2. Evaluating the 3rd Anti Money Laundering Directive

3. Evaluating the 4th Anti Money Laundering Directive

4. Recommendations how to Reduce Money Laundering andTax Evasion in the view of the Panama Leaks

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1. The Use of Offshore Centers forCriminal Purpose

• What are Offshore Centers?

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1a. What are Offshore Centers?

• Offshore first mentioned in 1920ies: Al Capone, Meijer Lanski brought theirmoney outside their US state `‘offshore‘ (Delaware, New Jersey....)

• Offshore companies have been established after World War II so that occupiedzones (Germany..) could do business overseas. MNCs like Shell and Unilever couldcontinue their business with this ‚remote access‘ instrument‘.

• Offshore centers were after the oil shock 1975 centers for finance out of thecontrol of the regulations of national central banks and indeed off the mainland(Bahrain…).

• Later, big mainland financial centers who engaged in offshore trading were alsocalled ‘offshore centers’ or ‘in between offshore and onshore centers’.

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1a What are Offshore Centers Today- financial centers included or not?

“The term offshore is not necessarily restricted to tiny or remoteislands. It can also be applied to any location (e.g. New Jersey,Delaware, City of London) that seeks to attract capital from non-residents by promising low/no taxes, low regulation, secrecy andconfidentiality.” (Prem Sikka , Essex, 2003)

“jurisdictions that specialize in attracting the registration of investmentvehicles with foreign sponsors.” (excludes important banking centers,such as Switzerland or Germany, by focusing on shell companies,trusts, special purpose vehicles, and mutual funds (see Meinzer, TaxJustice Network 2016).

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• Diverse lists of Offshore Centers due to different definitions.• The IMF (2014) lists 20 Offshore centers.• Van Koningsveld 40 OFCs• paper IMF 2000: 69 OFCs• In Murphy 2010: 92 OFCs

• The stock of assets of Offshore Companies worldwide is estimated in afar too wide range between 1 trillion and 21 trillion USD (vanKoningsveld 2015, p.233)

1a OFCs Definitions and Estimated Volumes

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Top OFCs Consensus Basis Murphy (2010)1 Bahamas 29 St Kitts and nevis 57 South Africa 86 Sark2 Bermuda 30 Andorra 58 Tonga 87 Somalia

3 Cayman Islands 31 Anguilla 59 Uruguay 88 Sri lanka4 Guernsey 32 Bahrain 61 US virgin islands 89 Taipei5 Jersey 33 Costa Rica 62 US 90 Trieste6 Malta 34 Marshall Islands 63 Alderney 91 Cyprus (Turkish Republic of Northern Cyprus)7 PANAMA 35 Mauritius 64 Anjouan 92 Ukraine8 Barbados 36 St. Lucia 65 Beligium9 British Virgin Islands37 Aruba 66 Botswana

10 Cyprus 38 Domnica 67 Campione D’Italia11 Isle of Man 39 Liberia 68 Egypt12 Liechtenstein 40 Samoa 69 France13 Netherlands Antilles41 Seychelles 70 Germany14 Vanuatu 42 Lebanon 71 Guatemala15 Gibiltar 43 Niue 72 Honduras

16 Hong Kong 44 Macau 73 Iceland17 Singapore 45 Malasia 74 Indonesia

18 St. Cincent and Grenadines46 Monserrat 75 Ingushetia19 Switzerland 47 Maldives 76 Joran20 Turks and Caicos 48 UK 77 Marianas21 Antigua and Barbuda49 Brunei 78 Melilla22 Belize 50 Dubai 79 Myanmar23 Cook Islands 51 Hungary 80 Nigeria24 Grenada 52 Israel 81 Palau25 Ireland 53 Latvia 82 Puerto rico26 Luxemburg 54 Madeira 83 Russia27 Monaco 55 Netherlands 84 San Marino28 Nauru 56 Phiippines 85 Sao Tome e Principe

TOP OFFSHORECENTERSIn Murphy 2010

- So many??almost halfthe world!?

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1b. What are Offshore Centers Doing?

• Helping to do business, finance investments?• Helping to evade taxes?• Helping criminals and Organized Crime Groups to launder

money?

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Ian van Koningsveld, PhD Tilburg University 2015, `The offshore world of bigmoney: abuse and myths` (De Offshore wereld van het grote geld: Misbruik enMythes)

studies the volume of assets involved in Offshore Centers and in how far criminalmoney was involved

analyses offshore companies in which owner is from abroad and which are notallowed to do business in offshore center.

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Geographic location of 4.2 million Offshore Companies (OSV)

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Most Offshore Companies in America

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Most Offshore Assets are held in Europe!!

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EU Countries:BAMLI: BaselAnti Money LaunderingIndexFSI:Financial Secrecy IndexMurphy 2010Tax HavensOFCs: Offshore Centersof EU Countries

UK: Channel Islands,Isle of Man, Bermuda,Guernsey, Jersey,British Virgin Islands,Isle of Man, Gibraltar,Turks and Caicos Islands,Anguilla, Montserrat,Alderney, Sark

BAMLI 2015 FSI 2015 Murphy 2010 OFCsAustria 109 24 * *Belgium 126 38 * *Bulgaria 146 * * *Croatia 141 * * *Cyprus 100 35 10 *Czech Republic 125 81 * *Denmark 143 83 * *Estonia 147 77 * *Finland 149 90 * *France 103 31 69 MonacoGermany 92 8 70 *Greece 84 85 * *Hungary 142 84 51 *Ireland 131 37 25 *Italy 90 58 * Campione d’Italia, San MarinoLatvia 112 59 53 *Lithuania 148 * * *Luxembourg 70 6 26 *Malta 132 27 6 *Netherlands 107 41 55 Aruba, Netherlands AntillesPoland 135 75 * *Portugal 139 78 * MadeiraRomania 134 * * *Slovakia 116 73 * *Slovenia 144 88 * *Spain 109 66 * MelillaSweden 137 56 * *United Kingdom 121 15 48 Channel Islands, Isle of Man, Bermuda, Guernsey, Jersey, British Virgin Islands, Isle of Man, Gibiltar, Turks and Caicos Islands, Anguilla, Montserrat, Alderney, Sark

San Marino

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Van Koningsveld study 2015• Van Koningsveld analyses the biggest 17 drug cases with which the

Dutch fiscal police (FIOD) was confronted between 1990 and 2012• plus data from the police and the Chamber of Commerce for criminal

cases where Offshore Companies were involved. He calculates that in741 criminal cases Offshore Centers were involved in 3434 financialtransactions with a volume of 56 Billion Euro within the last fourteenyears.

• 80% of cases concerned money transfers between banks• Many activities of OFC in Dutch real estate and mortgage market• Since stricter AML rules: shift of offshore activities from tax avoidance to

corruption, money laundering, tax evasion...• US Senate Study 2008: 100 billion of tax fraud through

OFC, of which 70% by individuals, 30% by companies

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2. Evaluating the 3rdAnti Money Laundering Directive

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2. ECOLEF

B. Unger

H. AddinkP.J. Engelen

J. Walker

F. Kristen

M. van denBroek

I. DeleanuM. Barlage

J. Ferwerda

D. v/d Linde

J. Brettl

The Economic and Legal Effectiveness of Anti-Money Launderingand Combating Terrorist Financing Policy – ECOLEF 2009-2012

JLS/2009/ISEC/AG/087

With the financial support from the Prevention of and Fight against CrimeProgram of the EU-Commission - Directorate-General Home Affairs

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2. ECOLEF Study 201 questions Desk Study (Mutual Evaluation Reports….) 27 times 5 questionnaires to Ministries, FIUs, Public

Prosecutors (PPOs), Supervisors and Supervised Banks Visited all the countries, more than 100 interviews. Four regional workshops with Ministries, FIUs, PPOs Dissemination conference 29th and 30th of November

2012 in Amsterdam Several Presentations of interim results to EU (DG

Home and DG Internal Market, ARO Conference inCyprus)

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2. Five Building Blocks

ThreatLegal

ImplementationExecution of

AML/CTF

Enforcement +internationalcooperation

Evaluation

ThreatAnalysis

Legal Effectiveness Study

Cost-BenefitAnalysis

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Vulnerability in mln Euro

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Vulnerability in % of GDP

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Five Building Blocks

ThreatLegal

ImplementationExecution of

AML/CTF

Enforcement +internationalcooperation

Evaluation

ThreatAnalysis

Legal Effectiveness Study

Cost-BenefitAnalysis

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AustriaBelgiumBulgariaCyprus

Czech RepublicDenmark

EstoniaFinlandFrance

GermanyGreece

HungaryIreland

ItalyLatvia

LithuaniaLuxembourg

MaltaThe Netherlands

PolandPortugal

RomaniaSlovakiaSlovenia

SpainSweden

United Kingdom

Number of months delay

Implementation of the 3rd AML DirectiveDelays in Months

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Delays of 3rd Directive ImplementationImplementation of 3rd Directive: 15th of Dec 2007 dueCountries mentioned as Reasons for Delay Legal Difficulties (System did not fit IRE) Social Difficulties (Opposition of legal professions BEL,F,PL) Political Difficulties (BEL no government) Other Difficulties (F long parliamentary procedure)

No political resistance from countries:EU prepared Directive wellFATF standards where there anyway and had to be dealt with Old member states statistically significantly more delay than new

member states Member states with internal supervision (professional

organizations) statistically significantly more delay

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Legal Effectiveness of MS’ Preventive AML/CTF Legislation• General factors that have negative impact

– Divergence FATF Recommendations and Third Directive withrespect to simplified due diligence and third party reliance (‘EUequivalence’)• Proposal Fourth Directive

– Open norms, application and interpretation difficulties (UBO,PEP, simplified CDD)

• Country-specific factors that have negative impact (cf.table 4.6 p.68 in report)– Due to no or wrong implementation or practical difficulties– Fundamental and technical legal hindrances.

• Fundamental: gaps in scope of coverage of obligedinstitutions (e.g. trust and company service providers notcovered in A) , deficiencies in criminalisation…)

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Five Building Blocks

ThreatLegal

ImplementationExecution of

AML/CTF

Enforcement +internationalcooperation

Evaluation

ThreatAnalysis

Legal Effectiveness Study

Cost-BenefitAnalysis

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FIU Typologies across EuropeLegend

Administrative FIUs – yellowLaw enforcement FIUs – blueHybrid FIUs – orangeJudicial FIUs – fuchsia

Stylized facts•All EU FIUs are classified•13 administrative FIUs•We complete the IMF(2004) classification•Overall valid IMF/Egmont classifications

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0

20

40

60

80

100

120

AT BG DK EE FI DE EL IE IT LV LT LU PL PT SK SL SE UK BE CY CZ FR MT NL RO ES HU

FIU Staff (in fte)

FIUs with shared premises FIUs withown premises

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FIU additional tasks

0123456789

Tasks additionally imposed on the FIU

Top 5 most commonly observed additional tasks No of MS

Supervision of obliged entities 13

Imposing administrative sanctions 11

Drafting AML/CTF legislation 11

Issuing guidelines for reporting entities 8

Conducting pre-trial investigations 6

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FIU Spread of Additional tasksLegend

Above EU average– fuchsiaAverage – greenBelow EU average – yellow

Stylized facts• FIUs with moreadditional tasks do nothave significantly higherbudgets•FIUs that have undergoneorganizational changeshave more additional tasks

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FIU Access to Databasestax data?

0

10

20

30

40

50

60

70

AT

BE

BG CY CZ

DK EE FI FR DE EL

HU IE IT LV LT LU MT

NL PL

PT

RO SK SL

ES

SE

UK

CommercialregisterTax

Custom

Social security

Bank data

Real estate

Police

Access to data unrelated to the type of FIU

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LegendRed – FIU modelGreen – External (gvmt)Blue – Internal (profess.associations)Yellow – Hybrid IOrange – Hybrid II

Eastern and Southern EU Member States generally include the FIU in theAML/CTF supervisory architecture

Very Diverse Supervision

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Five Building Blocks

ThreatLegal

ImplementationExecution of

AML/CTF

Enforcement +internationalcooperation

Evaluation

ThreatAnalysis

Legal Effectiveness Study

Cost-BenefitAnalysis

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Enforcement - The role of the Public Prosecutor

• PPOs build on the information flowing from the FIUs• Different legal systems – different PPO involvement in the

repressive enforcement chainCommon law (PPO participation in RED)

Civil law (PPO participation in RED)

• Differences within the system:– Malta (common law system) – police also prosecutes– UK (common law system) – PPO advises police in the pre-

trial stage– Finland (civil law system) – PPO is not involved in the pre-

trail stage

FIUinvestigation

Pre-trialinvestigation

Trialinvestigation Court decision

FIUinvestigation

Pre-trialinvestigation

Trialinvestigation Court decision

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Criminal sanctions - averages

Huge Differences in Punishmentof Money Laundering and Terr. Fin.

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0,00

5,00

10,00

15,00

20,00

25,00

30,00

AT BG CY CZ DK EE FI FR DE EL HU LV LT LU MT NL PL PT RO SK SL SE UK

ML convictions per FIU employee

0,00

10,00

20,00

30,00

40,00

50,00

60,00

70,00

80,00

90,00

100,00

AT BG CY CZ DK EE FI FR DE EL HU LV LT LU MT NL PL PT RO SK SL SE UK

ML convictions per 1,000,000 inhabitantsNot Many Convictions

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Effective repression in Europe?If I were a launderer…

LegendLow expected costs – fuchsiaMedium expected costs – yellowHigh expected costs – green

Proxy: Where are myoverall expected costs forcommitting ML higher?

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International cooperation

PPO

FIU

Ministry

PPO

FIU

Ministry

FIU.net

InterpolEuropol

Egmont

EuroJust

MoU

MoU

EJN

?

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Difficulties in international cooperationMentioned difficulties in internationalcooperation

No of memberstates

Time delays 15

Generic information (not specific to therequest)

6

Conflicting data protection systems 9

Language barrier 4

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Definitions of ML in practice

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Definitions of TF in practice

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Five Building Blocks

ThreatLegal

ImplementationExecution of

AML/CTF

Enforcement +internationalcooperation

Evaluation

ThreatAnalysis

Legal Effectiveness Study

Cost-BenefitAnalysis

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Thre

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s % o

f GDP

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FATF

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AT G G G Y G G G G Y Y G G Y RBE G G G G Y R G G Y Y Y G Y RBG G G G G G G G G Y Y G G Y YCY G G G G G G G G Y Y G G R YCZ G G G G G G G G Y Y G G Y YDK G G G G G G G G G G G G G GEE Y G Y G Y G Y G R Y G G R YFI G G G G G G G G Y Y G G Y YFR G Y G Y Y R G G Y Y G G Y RDE G Y G Y G G G G Y Y G G Y YEL G G G G G G G G Y Y G G Y YHU G G G G G G G G Y Y G G Y YIE G G G G Y Y G Y Y Y G G Y YIT G G G G G G Y Y Y R G G Y YLV Y G Y G Y G Y G R Y G G R YLT G G G G G G G G Y Y G G Y YLU Y Y Y G Y G Y G Y Y Y G R RMT G G G G G G G G Y Y G G Y YNL G G Y Y G G G G G Y G G G YPL G G G G Y Y G G Y Y G G Y YPT G G G G G G G G Y Y G G Y YRO G G G G G G G G Y Y G G Y YSK G G G G G G G G Y Y G G Y YSL G G G G G G Y G Y Y G G R YES G G G G Y Y G G Y Y G G Y YSE G G G G G G G G Y Y G G Y YUK G Y G Y G Y G R Y R G Y G Y

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Group Countries1 Austria, Denmark, Finland, Germany, Ireland and Sweden2 Belgium, France, Greece, Italy, Portugal, Spain and the United Kingdom3 Cyprus, Luxembourg and the Netherlands4 Bulgaria, Hungary, Romania, Czech Republic, Malta, Poland, Slovakia, Slovenia, Latvia, Estonia,

Lithuania

4 Groups of AML Europe

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3. The 4th AML Directive

stresses ´tax crime‘ as predicate crime for moneylaundering

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Definition of Money LaunderingTax Fraud – Tax Crime - Tax Evasion?

Types ofcrime

US Germany Austria Switzerland

Netherlands

Fraud yes only bybusiness andcriminalorganizations

only bybusiness andcriminalorganizations..If more than100.000 Euro

yes yes

TaxEvasion

Yes/no

only bybusiness andcriminalorganizations...If morethan 50.000Euro

no no no,misdemeanour

Bribery,Corruption

yes yes yes yes yes

Source: Unger 2007

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Evolution of AML and Tax Fraud Regulation 1996-2016From cold to hot phase

USA PATRIOT ACT 2001

1989 FATF 19911st AML Directive 3rd AML DIRECTIVE 2005 4th AML DIRECTIVE

2015

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WP1: CityRonen PalanPlus RichardMurphy

WP2: TJNMarkus Meinzer WP4: CBS

Duncan Wigan(Leonard Seabrooke)

COFFERS Combating Fiscal Fraud andEmpowering RegulatorsEU Horizon 20201.11.2016-31.10.2019

WP3: UBThomas Rixen

WP5: ULSheila Killian

WP7: CBSBo Bøgeskov

WP6 & 8: UUBrigitte Unger(Joras Ferwerda)

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Darwinian Devils Hitting the Tax-Eco System

Ruleswill createnew loopholes

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4. Conclusions and Recommendations• Money laundering needs true compliance of a lot of different actors (countries,

Ministries, FIUs, PPO, Courts, reporting entities..) and at an international level.

• Is a ‘victimless’ crime’ - no direct victim visible. Makes it difficult as a policygoal.

• Different Legal Systems,• Different Goals of AML Policy: Drugs, Smuggling – Corruption – Tax Evasion

• Different Vulnerabilities and Threats to which countries are exposed:Cash countries versus big financial centers

• Barriers for international cooperation: time delay, language, data protection

• Avoid compliance in the books, number games (danger of blowing up STRs,SARs, UTRs.....)

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Recommendations• There are four different country groups for AML:External Pressure – Internal Pressure – Through flows – New MSThey need different speed, different subgoals for compliance in practice.Avoid a one size fits all approach.

• AML is a very American idea, with US taking the lead. EUROPEAN wayNeeded. European strength is VARIETY of institutions.– Historically settled institutions (legal system..)- Some institutions are very old, chambers (from medieval guilds) who

work in supervision of AML policy in some countries

• EU should develop best practice model, a WHITE LIST for creating voluntarycompliance.

• Wrt Offshore:– close European offshore islands– Transparency, Central Registers (Bank Accounts, Ultimate Beneficial

Owner, Tax Payments)– Compliance of Banks and of Facilitators (laywers, notaries, accountants,

tax advisors...) Needed!!!Trade-Off between AML, Anti Tax Evasion and Privacy!

Presentation | Brigitte Unger50

Prof. Dr. Brigitte UngerUtrecht UniversitySchool of EconomicsKriekenpitplein 213584EC UtrechtThe Netherlands+31-(0)30-253-9809B.Unger@uu.nl

THANK YOU !

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European OffshoreCompaniesand Personsin ICIJ Panama Papersopen access database

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Jurisdiction Offshore Entities Officers Jurisdiciton Offshore Entities OfficersAlbania 2 25 Luxembourg 10877 1764Andorra 490 55 Macedonia 2 3Austria 76 121 Madagascar 0 14Belgium 61 363 Moldava 2 85British Virgin Islands 69092 15211 Monaco 3168 1398Bulgaria 50 117 Montenegro 13 29Croatia 20 38 Netherlands 251 352Cyprus 6374 3678 Norway 17 115Czech Republic 173 272 Panama 18122 5357Denmark 14 65 Poland 161 146Estonia 881 108 Portugal 246 300Finland 66 60 Romania 8 109France 304 1005 Russia 11516 6285Germany 197 504 San Marino 0 1Greece 223 400 Serbia 9 54Hungary 90 186 Slovakia 1 128Iceland 15 213 Slovenia 21 58Ireland 1936 261 Spain 1170 831Isle of Man 4893 2018 Sweden 84 201Italy 347 1196 Switzerland 38077 4595Jersey 14562 7100 Ukraine 469 643Latvia 2941 162 United Kingdom 17973 5676Liechtenstein 2070 1147 United States 6254 7325Lithuania 33 36 Not identified 25700 39446

linked entities defined as: A company, trust or fund created in a low-tax, offshore jurisdiction by an agent; officers defined as: A person or company who plays a role in an offshore entity;ICIJ Panama Papers (2016) licensed under the open source data base license.