Panama Papers Fallout: BVI Ignored as Money-Laundering Haven

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By Llewellyn Hinkes-Jones

May 6 — In reports from 2008 and 2010, the Caribbean Financial Action Task Force (CFATF) and the International Monetary Fund (IMF) gave positive reviews to rules intended to combat money laundering in the British Virgin Islands (BVI).

Both groups supported the islands' financial policies even though The Guardian identified the BVI this year as the largest destination of offshore havens created by Panama law firm Mossack Fonseca, with over 6,000 entities created in 2004 alone. Leaked documents from the firm have been dubbed the Panama Papers.

According to The Guardian, the BVI incorporated over 950,000 entities, and fees on those incorporations account for over 50 percent of state revenue.

A Bloomberg BNA review found that authorities overlooked red flags concerning corporate due diligence in the British territory for years.

The CFATF 2008 Mutual Evaluation Report on the BVI indicated that the islands adhered to many of the Financial Action Task Force (FATF) recommendations, including the recommendations regarding introducers—lawyers or accountants that can conduct business on someone else’s behalf—and ultimate beneficiaries.

However, the report found there was “no requirement for a financial institution to immediately obtain” information on ultimate beneficiaries from all third parties. And yet, the report considered that the BVI's rules were sufficient in customer due diligence, customer identification, beneficial ownership requirements and ongoing due diligence.

The IMF included the CFATF review in its 2010 report.

Another report from the IMF emphasized the BVI was “broadly in line with international standards,” and “record-keeping, monitoring and reporting requirements are extensive,” while still saying there were specific issues with customer due diligence.

The IMF and CFATF didn't respond to requests for comment for this article.

Changes made in October 2015 to the island’s “Eligible Introducer Regime” hint that large loopholes had existed in the law. The changes, which went into effect in January, now require beneficial ownership information of companies incorporated through eligible introducers to be provided at the time of registration. The new rules also require that companies file with the BVI Registrar of Corporate Affairs as well as register a list of directors.

In the previous system, the exception for up-front beneficiary information from eligible introducers was acknowledged by the CFATF—but completely ignored by the IMF.

According to Richard Murphy, professor of practice in international political economy at London’s City University, the law was “wholly inappropriate.”

“It let everyone pretend that someone else had done the due diligence on beneficial ownership and often meant no one had,” Murphy said. “I think the BVI knew this and turned a blind eye—the standard tax haven response.”

Elise Bean, former counsel on the Senate Homeland Security and Governmental Affairs Committee for former Sen. Carl Levin (D-Mich.), said the BVI's situation sounded very similar to that of Liechtenstein.

“In that country, they did it with lawyers. They said, as long as you’re a lawyer, you’re a trusted entity,” Bean said. “The whole world eventually rejected that idea and the country was put on a blacklist.”

Policy Versus Enforcement

Robert Palmer, campaign leader of banks and corruption for Global Witness, didn’t believe that the potential loophole in the BVI law was as important as enforcement.

“The system isn’t working,” he said, noting that BVI up until 2015 had been ignoring the majority of law enforcement requests for details of beneficial ownership.

But new changes to the Financial Action Task Force (FATF) standard may improve the situation, he added.

“The old methodology was just about whether rules were on the books,” Palmer said. “The new methodology stresses good implementation.”

Bean also stressed the need for enforcement.

“In Panama, where Mossack Fonseca operated from, the laws were good. The agreements were good. The policies were good,” she said. “It was just enforcement that was flawed.”

To contact the reporter on this story: Llewellyn Hinkes-Jones in Washington at ljones@bna.com

To contact the editor responsible for this story: Heather Rothman at hrothman@bna.com