European offshore locations and the compliance regime

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We’re seeing more and more scrutiny in the press of international finance centres like Cyprus, and even Switzerland. We take a closer look at what is actually at stake there and the implications for how we view anti-money laundering regulation.

What’s brewing in Switzerland? 

The highest executive body in Switzerland has released a policy proposal to tighten the country’s anti-money laundering policies, bringing them in line with international standards. The Swiss Parliament is set to start discussing this later this year.

Under the new proposals, lawyers, notaries and other advisers are required to comply with the due diligence that financial institutions are already obliged to follow.

This would also be in line with the EU Fifth Anti-Money Laundering Directive (5AMLD) which specifies that that AML regulations extend to advisors understood widely, i.e. any external advisors, accountants, tax advisors and ‘any other person that provides material aid, assistance or advice on tax matters as principal business or professional activity’. 

For a discussion on the merits of the Risk-Based Approach in the context of audit firms, you can head here.

What brought about these changes in the world’s foreign asset management leader? 

It’s fair to say that the Panama Papers leaks had a role to play in this. Switzerland was among the top five countries where financial middlemen were used to set up offshore companies with a Panama law firm. Swiss intermediaries had helped set up more than 38,000 offshore accounts on behalf of clients over the course of four decades (Source: OCCRP).

It’s easy to sensationalise with numbers, and for the opposing view in the debate to be that many of these activities described above are perfectly legal…which indeed they are! 

But let’s look at it this way: are advisors (widely defined) able to do a better job of catching money laundering with tighter due diligence? 

Some time ago, we had a look at a specific case from the Paradise Papers where the concept of ‘due diligence’ was abused in the case of Alisher Usmanov, an oligarch with close ties to the Russian government. 

Leaked emails show that he was the owner of a private trust company that was responsible for performing due diligence checks on his private trust. The below cycle would have been caught out in a system designed to spot red flags through proper due diligence checks. 

The new proposals additionally suggest that new due diligence measures will also apply to certain financial intermediaries in the area of trading in banking precious metals.

The topic of the gold trade and questions about the supply chain behind this precious metal is a longstanding one in Switzerland.  Switzerland is home to four of the world’s largest refineries of gold and is the importer of up to 70% of the world’s gold. The wider debate about the responsibilities of big business in the face of revelations of abuse in the supply chain of precious metals is ongoing in Switzerland.

Ultimately, the clear message in such stories is that compliance is here to stay. In the words of the FT: ‘An era of harder compliance is here already and Switzerland cannot afford to fall behind.’ 

Those pesky offshore locations

The intermediaries involved in the Panama Papers, mapped. Source: SwissInfo.

Cyprus is another centre of international finance that occupies a high-profile role in much of the literature resulting from the publication of leaks like the Panama and Paradise Papers. 

For example, have a look at our mapping of the offshore trail enabling Paul Manafort to spend ill-gotten gains in the US. There are many factors that make Cyprus an attractive destination for business (218,000 companies registered on the island at the point of writing):

  • Its 12.5 percent corporate tax rate (low)
    Its exemptions for non-residents from dividend taxes, 
    Its being party to treaties that help companies avoid double taxation,
    English is an official language,
    It is an EU member state. (Source: OCCRP)

It is easy and attractive to set up a company in Cyprus, and it is because of the further ease with which corporate vehicles lend themselves to abuse that international regulation has its specific aims. 

A fascinating recent report documents how Cyprus’s history is intertwined with geopolitical developments and tensions. Although historically, Cyprus has acted quite hospitably to a significant amount of Russian business and money flows, its EU membership also acts as a pressure point in ensuring Anti-Money Laundering efforts and compliance with international standards.

We documented, for example, the recent regulations aiming to stop the abuse of what could also be perfectly legal corporate structures of ‘shell companies’. Embracing international standards enables Cypriot financial services providers to navigate profitable and legitimate interested at the same time as complying with important regulations. 

Ultimately, it seems there is still a way to go when it comes to implementing a regulatory regime that would work and deliver results. However, as we have concluded previously, clear rules are a good defence from unwanted trouble. 

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