The ‘Pandora Papers’ – the release by the International Consortium of Investigative Journalists (ICIJ) of 12 million documents relating to offshore finance and tax avoidance – make it essential for companies to carry out much deeper due diligence on their customers.

That’s according to Andrew Sackey, Partner at Pinsent Masons, and Hinesh Shah, Senior Associate Forensic Accountant at the law firm.

The use of tax havens or secrecy regimes by wealthy individuals or companies demands that “sufficient comfort will need to be obtained to identify the beneficial owners behind any potential offshore structures, so that companies know who they are really doing business with,” the firm writes in guidance to clients.

However, Sackey and Shah note, “Being mentioned in the Pandora Papers – or earlier leaks such as the Panama Papers in 2016 and the Paradise Papers in 2017 – is not, on its own, a sign that any misconduct or wrongdoing has taken place. Many of the practices will be legal and used for legitimate purposes, including privacy.”

That said, companies dealing with wealthy individuals or entities will need to be able to demonstrate that any funds being transferred to and from financial havens do not represent the proceeds of crime.

There could also be a higher politically exposed persons (PEP) risk associated with individuals named in the Pandora Papers, which list political leaders as well as wealthy businesspeople and celebrities. Relatives of named individuals could also be impacted by their actions.

“PEPs are associated with higher levels of bribery and corruption risks and so identifying PEPs will trigger the need to conduct enhanced due diligence procedures, in accordance with PEP guidance issued by the Financial Action Task Force,” write Sackey and Shah. 

“The risks associated in dealing with PEPs will need to be carefully considered, assessed, and mitigated if necessary.”

Pinsent Mason warns that the consequences of failing to undertake proper due diligence could be “significant” and include reputational or commercial damage by association with tax evasion, bribery, corruption, money laundering, and other financial crimes.

“The UK’s tax and law enforcement administrations will be comparing Pandora revelations with other data sources, such as those provided by the Common Reporting Standards, to determine whether flags arise that point to irregular or inappropriate filings,” warns the firm.

“Carrying out robust forensic intelligence and legal due diligence activities can play a significant role in mitigating these risks.”

In related news, the UK Treasury carried out a consultation on reforming its Anti-Money-Laundering (AML) rules, from 22 July to 14 October this year.

Some in the financial and legal services sectors have complained that the UK’s current rules are a ‘tick box’ exercise that penalises smaller businesses where the risk of exposure to financial crime is relatively low or minor – certainly when compared to the scandals that have hit the likes of NatWest, Deutsche Bank, and other large institutions in recent years.

Speaking earlier this month, President of the Law Society, I Stephanie Boyce, said, “While we welcome HM Treasury’s commitment to making the AML regime proportionate and effective, the current regime does not promote a risk-based approach and instead drives ‘tick box’ compliance, to satisfy overly prescriptive requirements, which is a particular challenge for small firms.”

Estate agents have been among those hit by large fines for non-compliance, including smaller practices that had simply flagged problems on their books rather than been caught abetting financial crime.

Meanwhile in September, an AML report by BAE Systems warned that human trafficking is now one of the biggest concerns for compliance professionals worldwide.

The State of Anti-Money Laundering 2021 found one-quarter of UK risk and compliance professionals saying that human trafficking caused the biggest institutional financial losses of all money-laundering-related crimes. 

The good news is that is a lower number than in the US (one-third of professionals) and Australia (45 percent of survey respondents).