Know Your Customer: How the Pandora Papers Impact Global Money Laundering

In September of 2021 a massive leak of nearly 12 million documents exposed hidden wealth, tax avoidance, and money laundering by some of the world’s richest people. Branded the Pandora Papers, this cache of files revealed the secret finances of 35 world leaders and more than 300 public officials in more than 90 countries. While the world press and various authorities continue to examine the lengths to which wealthy individuals will go to create offshore structures and trusts in multiple tax havens, financial institutions are quickly changing the way they approach “knowing their customers.” 

This loophole in KYC laws is changing as various countries begin to regulate financial activities with laws that fall under a new description of “Know Your Customer’s Customer” (KYCC). These new KYCC laws require financial institutions to examine who their customers are doing business with, their sources of funds and legitimacy, and assess the risk that those third parties are laundering money.

In the United States, the Customer Due Diligence (CDD) Final Rule requires business entities to disclose “beneficial ownership” information. The Rule defines a beneficial owner as:

• each individual who, directly or indirectly, owns 25% or more of the equity interests of a legal entity customer; and
• a single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager (Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer); or any other individual who regularly performs similar fuctions. This list of positions is illustrative, not exclusive, as there is significant diversity in how legal entities are structured.

The CDD Final Rule contains three core requirements:

1. Identify and verify beneficial owners of companies opening accounts
2. Understand the nature and purpose of those customer relationships to develop customer risk profiles
3. Conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.

Similarly, once the Corporate Transparency Act (CTA) comes into effect on January 1, 2022, all U.S. companies will have to report their Ultimate Beneficial Owner (UBO) information to the Financial Crimes Enforcement Network (FinCEN). Any new incorporation or significant UBO change must be reported. Companies formed before the Act’s effective date will have two years to report to FinCEN.

Similar laws already apply in the European Union and Canada. Most EU Members now have a UBO Register in place and in Canada the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) requires all reporting entities must now report beneficial ownership information.

This isn’t just a legal compliance issue, we’re talking about risk mitigation for financial institutions. To properly manage your institution’s risk and protect against infiltration by illicit funds, you need to know the beneficiaries of your clients’ activities. Regardless of whether you’re talking about another shell company, an owner, a partner, a customer, or a supplier, each could be the source or destination of illicit funds.

While the addition of KYCC and UBO due diligence means more work and upfront costs, the alternative is far worse; fines, significant financial losses, and damage to your business reputation due to allowing illegal funds to pass through your institution.

That said, there is some good news: the newest technologies and processes are already available to help cut the cost and workload while delivering effective AML, KYC, and KYCC risk management. You don’t have to shoulder the burden of customer due diligence and UBO reporting on your own.