The term ‘money-laundering’ tends to bring to mind either speakeasies, fronts for organised street crime, or dodgy transactions through risky countries.
In fact, Financial Action Task Force (FATF) reports from the last few years give a surprising number of examples of reputable countries with serious deficiencies in their AML/CTF regimes. Here are three examples – and some information on how change is afoot in each of them.
1. Something rotten
Of our three case studies, the most surprising is Denmark, the little Nordic country of 5.7 million jutting into the North Sea. This sounds absurd: after all, Denmark has been the best performer on Transparency International’s Corruption Perceptions Index every year since 2012, usually duelling with Finland or New Zealand for the top spot on other years. How can it possibly be a money-laundering risk? In fact, according to the head of its Financial Services Authority, it only narrowly missed ending up “in the worst company” – that is, downgraded – due to its deficiencies.
So what’s going on? As the FATF reported just last month, Denmark has no national anti-money laundering strategy and its money-laundering secretariat is severely underfunded, while its risk-based approach is very much in its infancy. Worse than that, say the FATF, the Danish financial crimes are not defined widely enough and the penalties are far too weak. Danske Bank was also implicated (albeit through its branch in Estonia) in the massive, $2.9 billion ‘Azerbaijani laundromat’ case, while Nordea Bank’s name came up in the now infamous Mossack Fonseca ‘Panama Papers’ leak. In short, although it has (per FATF) a “solid foundation”, particularly for obtaining beneficial ownership information, it’s not quite good enough.
The Danish authorities have taken note. Business Minister Brian Mikkelsen denounced the Panana Papers revelations as unacceptable; the Danish parliament passed a new money-laundering act in June, a development that was welcomed by the FSA. These reforms will take some time to bed in, though, and in the meantime Denmark will not escape a little extra scrutiny than its squeaky-clean reputation might suggest.
2. Canada, eh?
In fact, Canada, the next country on our list also has a squeaky-clean reputation – and that might be the heart of the problem. In January, the Toronto Star ran a lengthy investigation whose first part was provocatively titled ‘Snow washing: Canada is the world’s newest tax haven’. Snow-washing is the notion that wrongdoers will use Canada’s ‘good name’ to disguise otherwise suspicious transactions; after all, if a transaction has a Canadian imprimatur, it make sense that authorities and commercial partners might not be quite as guarded as they would otherwise.
Canada was, in the first place, marketed as a tax haven by Mossack Fonseca. This was because Canadian limited partnerships do not have tax filing requirements in their own right, only the partners must file – and even then, only if they’re Canadian residents. This, however, indicates that the real heart of Canada’s problems is its secretive corporate registration schemes.
The Star uncovered rampant use of nominee directors to disguise the true owners and controllers of companies. In other words, “[c]ompany owners who don’t wish to be identified in Canadian corporate registries can pay a lawyer or a stand-in to appear on all public filings”. Unlike many European countries, there is no way for investigators to acquire information on the ultimate beneficial owner of a company without evidence of wrongdoing.
The Star notably cited the UK’s ‘persons with significant control’ regime as a world leader in transparency. Last year, too, Transparency International published a report, ‘No Reason to Hide’, which showed widespread use of shell companies in Canada.
Like Denmark, the impact of the Panama Papers awoke Canadian politicians to the looming reputational dangers the current system posed. The finance minister announced in July that reforms were on the way to make beneficial owners identify themselves in corporate registration – though he did not indicate that these records would be public, as they are in the UK. With the FATF becoming increasingly strict and increasingly demanding in these matters, there is no guarantee that Canada’s woes will end any time soon.
3. Spurning Japanese
Japan, the third-largest economy in the world, has been on the FATF’s radar for the best part of a decade, with serious deficiencies highlighted in 2008 (despite a “good legal structure” and effective resourcing of its regulatory and investigatory agencies), which remained unaddressed by the time Japan was evaluated in 2014. The FATF admonished Japan then that its “high-level political commitment” was simply not enough to make up for significant problems in three notable areas.
First, due diligence is very patchy – or was until very recently. By the time of its parlous assessment in 2014, Japan lacked a risk-based approach to money laundering, an effective regime for politically exposed persons, requirements for banks to have AML/CTF policies, and enforcement against shell banks.
It was at high risk of being classified as a ‘hazardous’ jurisdiction by the FATF, partly induced by revelations of widespread yakuza engagement at one of the country’s largest banks. As such, the government brought forward major AML legislation in October of that year, which passed the following month and came into force in October 2016. Many of these gaps were repaired by this legislation (as a Hogan Lovells briefing from the time discusses), just in time – though certainly not all.
Second, and possibly most concerning, is a set of problems in the Japanese counter-terrorist financing regime. Besides weak penalties, like Denmark, the biggest issue here appears to be one of definition, according to the FATF: “the Japanese law only criminalises funds collection by terrorists and it is unclear in the law that indirect funds provision and collection are covered and that funds provision and collection for terrorist organisations and individual terrorists for any other purpose than committing a terrorist act is covered.
The word ‘funds’ is not defined in this law, but on the basis of its use in other laws, the Japanese term ‘shikin’ signifies ‘funds, capital’ and relates to cash and things easily convertible into cash.” In other words, luxury items and other moveable property is harder to prosecute, let alone build a case against. To draw a contrast, what few gaps there were in UK law were convincingly closed this year after the Criminal Finances Act 2017 expanded National Crime Agency powers to cover betting vouchers, casino tokens and gaming vouchers.
Third, the solution to these CTF deficiencies really only came in the form of highly controversial international co-operation which Japan had dragged its heels on for some time. In 2000, Japan signed but failed to ratify the Palermo Convention (properly called the United Nations Convention against Transnational Organised Crime, or UNTOC) – a failure for which it was repeatedly cited by the FATF.
Faced with inadequate international co-operation in an era increasingly defined by international terrorism, as well as the deficiencies mentioned above, the government of Prime Minister Shinzo Abe chose to kill two birds with one stone. It used its large majority in the Diet and House of Councillors to pass a highly controversial bill reforming police powers and, significantly, the definition of criminal conspiracy.
Critics called it a serious encroachment on freedom of thought, but the Japanese foreign minister defended it in a letter to the New York Times as a necessity in light of the need to conclude the Palermo Convention. More cynically, it is widely thought that Abe is seeking to get Japan’s house in order in advance of the 2020 Tokyo Olympic Games (cited in passing in the Foreign Minister’s letter), almost universally seen as his passion project – up to and including him dressing up as Super Mario in Rio de Janeiro for 2016’s closing ceremony. In any case, Japan’s signature of Palermo was formally concluded in July 2017.
The long shadow of Panama
Major progress is being made around the world, even as these unusually reputable countries making up for their old shames in the field of AML/CTF. However, it is very striking how important the Panama Papers leak has been in encouraging this action. Particularly in the cases of Denmark and Canada, it is easy to imagine that very little would have happened at all had the enormous cache of documents not been leaked in 2015 by an anonymous whistleblower.
Japan, meanwhile, shows the impact another, external deadline can have on a country’s legal environment – and the possible unintended consequences for civil society and the criminal law of waiting too long to heal these open sores.