Revelations from the OpenLux investigation underline the need for financial institutions to invest in AML tools and technologies
The wheels of international financial regulation often turn slowly, but five years after the Panama Papers scandal exposed the role played by financial centres such as Luxembourg in money laundering, the screws are finally tightening. And it is not just criminal enterprises that should be feeling anxious; financial institutions whose systems and processes have fallen short may now face public embarrassment and regulatory sanction.
It was in 2016 that the Panama Papers affair confirmed what many had long suspected. A leak of thousands of legal documents revealed that Luxembourg’s secretive financial system was not only facilitating its status as one of the world’s leading tax planning centres, but also attracting those keen to use opaque companies and offshore structures to launder the proceeds of criminal activities.
UBOs under scrutiny
The revelations were one important factor in the European Commission’s move in 2018 to strengthen its anti-money laundering (AML) regulation. In particular, it ordered all European Union states to establish registers of ultimate beneficial owners (UBOs) enabling anyone who cares to check – the public, journalists or law enforcement officials, for example – to identify who really owns an individual company; that is, who benefits when it earns income or makes a profit.
Luxembourg, to its credit, moved relatively quickly to comply with the regulation. It launched its UBO register in January 2019, one year ahead of the deadline set for doing so by the law. Still, critics point out that the register has significant shortcomings: most glaringly, it is not possible to search the register for a specific name, so if you want to check whether a specific corrupt individual or crime figure owns a company in Luxembourg, it can be hard to do so.
Such problems are widely acknowledged and sit alongside other gaps in the country’s regulatory system. One study published by the European Parliament last year warned that “Luxembourg takes the lead among high-risk countries within the EU” when it comes to vulnerability to money laundering.
Nevertheless, investigators have found ways to use Luxembourg’s UBO register to shine a light on potential wrongdoing. In particular, the OpenLux investigation, led by Le Monde newspaper and the Organized Crime and Corruption Reporting Project (OCCRP), has begun publishing a string of revelations with the potential to expose money laundering activity and the institutions that have facilitated it.
The scandal is only just beginning to break. But already, Le Monde has published stories that reveal how companies set up in Luxembourg have links to the Italian Mafia, the ‘Ndrangheta crime organisation, and the Russian underworld. It has also exposed money held in Luxembourg on behalf of Italy’s far-right League party.
Le Monde’s investigations have, not surprisingly, largely focused on Luxembourg companies with links to French nationals, but the OCCRP has partner organisations in countries across Europe and in North America. Each of these partners is pursuing its own inquiries into the data scraped by the Le Monde team – spanning 124,000 Luxembourg-registered companies – so it is likely that OpenLux will eventually expose dubious practices involving UBOs from all around the world.
It should, of course, be stressed that there are many perfectly legitimate reasons to own and operate a Luxembourg-based company. Even where individuals and corporates have set up shop in the country for tax reasons, they may well be operating legally, even if their activities might lead to a public relations backlash should they be exposed.
Nevertheless, it is already clear from the OpenLux investigation that the longstanding concern that Luxembourg is a favoured location for money launderers is justified. More evidence of the scope and extent of money laundering going on within the country’s financial system is continuing to emerge.
More regulation ahead?
For law enforcement officials, of course, this is good news. The work of OpenLux provides them with new opportunities to identify those involved in money laundering and, ultimately, to bring prosecutions. But the scandal is also being scrutinised by financial regulators; they are anxious to identify breaches of the extensive AML regulation that has come into force over the past decade. Banks and others caught up in the affair because of lax systems and controls will face censure.
Moreover, the European Commission has already signalled that the affair may force it to bring forward new regulation. We may now see further regulation designed to tighten tax loopholes and close transparency gaps – adding to the burden of complying with AML regulation that institutions already bear.
Against this backdrop, those institutions still pursuing out-of-date approaches to identifying and preventing potential cases of money laundering – depending, for example, on manual processes and paper-based documentation systems – will find it even more difficult to cope. Data analytics tools and technologies including automation, machine learning and artificial intelligence, by contrast, offer a way to deliver compliance more cost-effectively and efficiently.
In this context, the fall-out of the OpenLux affair may be far-reaching. The project will no doubt continue to make headlines as high-profile cases are exposed, but for banks and other financial institutions, the bigger picture is that this scandal provides yet another reason to consider investment in AML technology.