According to the United Nations, money laundering accounts for approximately $800 billion to $2 trillion (or 2-5% of global GDP) annually.¹ To put the impact of money laundering into perspective, Canada’s GDP was roughly $2 trillion in 2021. Thus, the potential financial impact of money laundering globally is equivalent to the GDP of Canada.
The Money Laundering Cycle
Money laundering is the process of concealing or disguising the existence, source, movement, destination or illegal application of illicitly derived property or funds to make them appear legitimate. Money Laundering occurs in three stages: (1) placement of funds into a financial system, (2) layering of transactions to disguise the source, ownership, and location of the funds, and (3) integration of the funds into society in the form of holdings that appear legitimate.²
How Does $2 Trillion Enter the Banking System
In April 2016, the International Consortium of Investigative Journalists (ICIJ) revealed the Panama Papers, which encompassed approximately 11.5 million leaked files from the law firm, Mossack Fonseca & Co. (“Mossack Fonseca”) based in Panama. The leak exposed offshore holdings related to politicians, current and former world leaders, amongst other influential individuals across hundreds of countries. The law firm was instrumental in assisting clients launder funds and evade taxes and sanctions through the establishment of shell companies in offshore jurisdictions.
Shell Companies in Offshore Jurisdictions
Are shell companies illegal? No. However, shell companies can be set up for illegal functions. While shell companies do not have employees nor do they provide a product or service, their purpose is to hold funds and manage another company’s financial transactions. For the purposes of money laundering, a shell company in the right offshore jurisdiction using the right law firm is a ‘match made in heaven’.
Bank secrecy laws throughout the Caribbean, prohibiting banking institutions from disclosing customer data to third parties, coupled with complex shell company structures and trust accounts made the exposure of the company’s ultimate beneficial ownership untraceable. Companies were registered in tax havens by the law firm, Mossack Fonseca, and payments were made to individuals to act as directors or shareholders of those companies (i.e., nominees). Utilizing these structures, illegitimate funds were transferred without disclosing the beneficial ownership details nor the source of funds.
How It All Fits Together
Banks worked with wealthy clients, including those who built their wealth through illicit means and referred them to law firms, such as Mossack Fonseca to assist in establishing complex business structures to mask beneficial ownership details. At that point in time, banking client onboarding processes were overlooked and often “willful blindness” took place on behalf of bank management to obtain a significant book of business. Law firms worked along side accountants and other professionals to establish complex business structures to benefit their clients and often serve as vehicles for money laundering activities. When the Panama Papers were leaked, global banks and professional service companies took a hit due to their ineffective anti-money laundering practices and compliance program implementation.
Financial entities, credit unions, casinos, and other entities are required to comply with anti-money laundering regulations to ensure they are taking the necessary steps to mitigate the risk of money laundering (and terrorist financing) activities. Our professionals are certified anti-money laundering specialists and can help you set-up your anti-money laundering processes or assist at any stage of the process.
Alessandra Leggio, CPA, CA, CPA (Florida), CAMS, CFE, CFI
Partner – Forensics
Direct: (289) 809-1241
Sukhanpreet Dhanotta, CPA, CA
Partner – Audit
Direct: (905) 479-1700