1. Home
  2. Bank Relations & KYC
  3. Evaluating Banks’ Overall Performance

The Panama Papers: reverberations throughout the financial services industry

Maybe you never heard of Mossack Fonseca before this week but the fallout from the Panama tax evasion and money laundering scandal could touch all echelons of the financial services industry.

EU Economic and Financial Affairs Commissioner Pierre Moscovici has described the amounts of money, the jurisdictions and the names associated with the Panama Papers as “frankly shocking”, while the UK's Financial Conduct Authority (FCA) has given banks until 15 April to complete their initial investigations on ties to Mossack Fonseca or to companies set up or managed by the firm. The scale of the leak, as well as the profile of beneficiaries and levels of wealth involved, are completely unprecedented. But the affair also has implications that are likely to shake the financial industry in several ways.

1. Tax and profit shifting now more in the spotlight than ever

While corporates may already have been preparing for the OECD's Base Erosion and Profit Shifting (Beps) rules, the Panama Papers have put increased political pressure on the European Commission to go further in its laws on corporate income tax reporting. The College of Commissioners will meet next week on 12 April to discuss planned EU measures to make companies report their profits and taxes paid in each country they operate in. According to Euractiv, the draft laws, planned as part of proposed revisions to the Accountancy Directive, go further than Beps. Companies can be sure that terms such as “tax efficiency” are already dirty words.

2. Pressure on banks to investigate Panama ties

In a letter addressed to UK-incorporated groups, dated 4 April, seen by the Financial Times, the FCA has demanded that regulated financial companies in the UK disclose any action they are taking following the release of the Panama law firm leak. They have until 15 April to submit the findings of initial investigations. This is a huge process and banks will have to review all their clients' accounts for any association with Mossack Fonseca. This will put significant pressure on the UK's financial services. The Financial Times states: “HSBC, Coutts, Rothschild, UBS and Credit Suisse are among groups that used Mossack Fonseca to set up thousands of offshore concerns for their clients over 40 years.”

3. FCA will send deterrent message on money laundering and financial crime

The FCA published its business plan for 2016-2017 earlier this week. Money laundering and financial crime was already one of the FCA's seven priorities for the coming year (coming second after pensions). The FCA states that it intends to roll out a Financial Crime Annual Data Return, which will enable the FCA “to focus our supervision on the right firms. Where we find firms with material weaknesses in their money laundering controls, we will use our enforcement powers to send a deterrent message to industry and/or impose business restrictions to limit the level of risk.” This statement indicates that the FCA will come down particularly heavily on transgressors of money laundering controls, which could be in for a stiff penalty.

4. Due diligence and KYC – or just a joke?

The Panama Papers show that the Swiss branch of HSBC provided financial services for Drex Technologies, one of the six business fronts managed by Mossack Fonseca on behalf of Rami Makhlouf, who is the cousin of Syria's President Bashar al-Assad and has reported wealth of $5 billion. In 2008 the US Treasury imposed sanctions on him. The BBC reports that an internal email, dated February 2011, from Mossack Fonseca's compliance department suggests “HSBC staff dealing with Drex Technologies knew who Rami Makhlouf was”. The leaked email states clearly that the HSBC compliance department in Geneva and in London knew the identity of Mr Makhlouf. The BBC states that in response, HSBC said: “Our policy is clear that offshore accounts can only remain open either where clients have been thoroughly vetted (including due diligence, 'Know Your Customer', source of wealth, and tax transparency checks), where authorities ask us to maintain an account for the purposes of monitoring activity, or where an account has been frozen based on sanctions obligations.” In any case, banks must remain accountable for the financial services they provide and due diligence or KYC should prevent services being provided to individuals or companies under sanctions. Anything else just makes a mockery of the whole due diligence/KYC process.

CTMfile Take: This week's revelations could be just the tip of the iceberg. Mossack Fonseca is just one law firm (there are almost certainly other similar firms) in just one offshore financial centre. It's global news but the implications for corporate governance, bank accountability and the process of due diligence are extremely serious for financial professionals responsible for company cash flows. This article mentions a handful of ways in which it will affect the financial service industry. There are certainly others. Please add your thoughts on this in the comment box below.

Like this item? Get our Weekly Update newsletter. Subscribe today

Also see


By Roger Knowles on 8th Apr 2016:

Not all that surprising unfortunately. Watch the consequent failure of regulators & politicians to do anything effective about it.

Add a comment

New comment submissions are moderated.