Politically Exposed Persons: Revelations of the Panama Papers

6 min read

Sep 27, 2023 6:05:00 AM

Politically Exposed Persons (PEPs) such as members of parliament, ministers, or heads of state have influence, power, and access to public funds. This makes them vulnerable to economic crime. Although they are funded by taxpayers, they often have no qualms about hiding their wealth in tax havens by, for example, setting up shell companies there. For this reason, such individuals are subject to stricter requirements in the fight against money laundering or terrorist financing than ordinary citizens. The extent to which money laundering and corruption are widespread among politically exposed persons and their relatives was dramatically brought to the attention of the general public by the Panama Papers. Financial institutions and other regulated companies or obligated entities must therefore exercise special due diligence to minimize the risk posed by this group of people.

What are the Panama Papers?

The Panama Papers refer to a massive dataset containing more than 11 million confidential documents. These documents contain information about the transactions of over 214,000 offshore companies. These companies were established by the Panamanian law firm Mossack Fonseca. The Panama Papers provide numerous indications of the involvement of celebrities and politicians in money laundering, corruption, and tax evasion.

Journalists from around the world researched and analyzed the Panama Papers under the leadership of the International Consortium of Investigative Journalists (ICIJ). In total, 370 journalists from 78 countries were involved in the evaluation. On April 3, 2016, the documents were leaked to the public, causing a massive scandal worldwide. The papers not only revealed the names of businessmen but also those of prominent politicians, their relatives, athletes, artists, and representatives of international organizations. Like many other criminals, they hid laundered or untaxed money in tax havens.

Some Examples of Politically Exposed Persons Mentioned in the Panama Papers

Heads of State:

Petro Poroshenko, former President of Ukraine
Vladimir Putin, President of Russia
Sigmundur Davíð Gunnlaugsson, President of Iceland
King Salman of Saudi Arabia

Other Celebrities:

Lionel Messi, footballer from Argentina
Fan Bingbing, actress from China
Pedro Almodóvar, Spanish film producer and director

Relatives of Politically Exposed Persons:

Ian Donald Cameron, deceased father of former British Prime Minister David Cameron
Mark Thatcher, son of former British Prime Minister Margaret Thatcher
Alaa Mubarak, son of former Egyptian President Hosni Mubarak

The Source: Background on the Revelation

The data from the Panama Papers was anonymously handed over to the Süddeutsche Zeitung. The newspaper then shared it with the International Consortium of Investigative Journalists (ICIJ). Initial contacts with the Süddeutsche Zeitung via encrypted channels took place as early as 2015. Nothing was known about the source, who called themselves “John Doe”. However, the individuals behind it explained their motives in an anonymous manifesto: They wanted to inform the public because they considered the offshore industry to be unjust and corrupt.

Mossack Fonseca: The Offshore Law Firm Behind the Panama Papers

The law firm Mossack Fonseca was founded in 1977 by Jürgen Mossack, who was born in Germany, and the Panamanian lawyer Ramón Fonseca in Panama City. According to the British Guardian, the firm was the fourth-largest offshore service provider in the world. It assisted thousands of clients worldwide in hiding their assets in shell and mailbox companies. These were preferably established in the British Virgin Islands, Panama, and the Bahamas.

Consequences and Impacts of the Panama Papers Revelation

After the scandal became public, some of the PEPs involved faced consequences. For instance, Icelandic Prime Minister Sigmundur Davíð Gunnlaugsson resigned just two days after the Panama Papers were exposed. He and his wife owned mailbox companies in the British Virgin Islands. The Spanish judiciary also acted swiftly, initiating numerous proceedings against several individuals mentioned in the Panama Papers, such as Pedro Almodóvar and Lionel Messi. The local judiciary of other countries also initiated criminal proceedings against those exposed in the Panama Papers.

The consequences were particularly severe for Mossack Fonseca. The law firm had to cease operations in 2020 after facing global pressure. Its founders, Jürgen Mossack and Ramón Fonseca, were also charged in Panama with money laundering and forming a criminal association. Criminal investigations or prosecutions against the firm and its employees were also carried out in other countries, such as Switzerland, Germany, the USA, and Peru.

The Panama Papers marked the end of Mossack Fonseca and triggered a global fight against tax evasion and financial crime. Numerous investigations and inquiries are still ongoing. The International Consortium of Investigative Journalists (ICIJ) has published a database containing information on more than 810,000 offshore entities as part of the Panama Papers. Thoroughly examining it is a mammoth task.

Political Reactions

The release of the Panama Papers sparked a global debate on tax avoidance and money laundering. As a result, many countries have taken measures to combat offshore tax evasion. Here are some examples:

Germany: The federal government has initiated measures against tax avoidance opportunities in response to the release of the Panama Papers.
European Union: The EU Commission has made proposals to increase the transparency of tax information and combat tax avoidance. It has also published a blacklist of countries considered tax havens.
United States: The Treasury Department has issued new rules making it more difficult to establish shell companies.
United Kingdom: The country has introduced a public register for companies that provides information about their true owners.

Switzerland also took action. They introduced a system of penalty-free self-reporting. This allows taxpayers to report tax evasion by disclosing foreign assets and income, thereby avoiding a tax penalty. Additionally, Switzerland increased due diligence requirements for transactions with offshore financial centers. The reporting obligation of the Financial Market Supervisory Authority (Finma) was strengthened.

PEPs Monitoring

The Importance of Monitoring PEPs

Monitoring PEPs is crucial because money laundering, corruption, and tax evasion are significantly more common among this group than in the general population. Therefore, caution is advised when a company collaborates with them. Politically exposed persons are prominent and enjoy the public’s trust in the roles they perform. The influence of prominent political figures particularly increases their risk of corruption.

Companies must know the person they are working with. To minimize risks posed by these individuals, companies must ensure, during due diligence checks, that they regularly monitor the individual throughout the ongoing business relationship, in addition to exercising enhanced due diligence.

The law requires certain professions, such as banks, lawyers, or tax consultants, to verify the identity and risk profile of a client, especially if it concerns a politically exposed person. In addition to banks, lawyers, and tax consultants, other industries and professions are obligated to identify and monitor PEPs. These include, for example, real estate agents, insurance brokers, auditors, notaries, or casinos.

Which Measures are Relevant for Business Relationships with PEPs?

In practice, monitoring politically exposed persons means that the affected professions must take various measures to minimize the risk of money laundering or other financial crimes. These measures include, for example:

Identifying PEPs when establishing a business relationship or for transactions exceeding a certain threshold.
Verifying the origin of assets and income of PEPs (Due Diligence).
Conducting enhanced ongoing monitoring of the business relationship with PEPs (Monitoring).
Reporting suspicious activities or transactions of PEPs to the relevant authorities.
Providing audit-proof documentation of the review, the decisions made, and subsequent consequences.

These measures aim to ensure that the professions know their customers and can assess the risk of involvement in financial crimes.

Challenges in Uncovering Financial Crimes by PEPs

The Panama Papers case has shown that authorities worldwide were unable to detect the offshore frauds of a significant number of politically exposed persons in a timely manner. However, companies are expected to have these capabilities due to high compliance requirements. This poses significant challenges for financial institutions and other businesses.

Research on PEPs is particularly challenging because these individuals usually have power and influence, which they use to protect or conceal their transactions. For external business partners, even the identification of politically exposed persons is difficult. This is especially true when it comes to relatives of these individuals.

Efficient Solutions for PEP Checks

Solutions that cover current compliance requirements can simplify PEP checks. That’s why Pythagoras Solutions focuses precisely on these increasingly complex challenges. The requirements are not met by a single all-in-one tool, but by the clever combination of smart partial solutions. These can be individually adapted and scaled to the needs of each customer.

Every new business relationship begins with the challenge of knowing the new partner. Identifying a well-known political figure is relatively straightforward. However, it becomes more complicated to identify close relatives, as they do not necessarily reveal themselves as such. In such cases, subsequent measures that are actually necessary cannot be effectively implemented. The result: Enhanced due diligence does not apply to close relatives. Money laundering, tax evasion, and other criminal activities related to the business partner remain undetected because individuals from the PEP environment fall through the cracks.

Pythagoras Solution offers automatable solutions with Partner Screening, Transaction Monitoring, and Transaction Screening that can be perfectly coordinated with each other:

Partner Screening: KYC compliance solution for business partner checks
Transaction Monitoring: Plausibility analysis of transactions
Transaction Screening: Anti-money laundering compliance through adaptive AML software

The politically exposed person is not only identified and checked once but is continuously monitored for sanctions, money laundering, and suspicious transactions. Only in this way can criminal behavior in these circles be detected at an early stage.