United States: Panama Papers Fallout: A Push For Transparency And Regulatory Reform

Andres Fernandez is a Partner and Gabriel Caballero is a Senior Counsel in Holland & Knight's Miami office


  • After the release of the "Panama Papers," the White House has announced efforts to seek regulatory reform aimed at financial transparency and fighting money laundering, corruption and tax evasion.
  • Once implemented, these administrative actions and legislative proposals will significantly impact U.S. and non-U.S. companies, including financial institutions, many of which are currently dealing with complex issues involving financial reporting, global tax transparency, money laundering and public corruption.
  • In addition, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) has announced significant designations involving a number of Panama-based individuals and companies, including financial institutions, that have been linked to the Panama Papers.

In the wake of the "Panama Papers" – the unprecedented leak of 11.5 million files from a Panamanian law firm that revealed thousands of names and addresses linked to offshore companies – the White House has announced several efforts to seek regulatory reform aimed at financial transparency and fighting money laundering, corruption and tax evasion. Additionally, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) has announced significant designations involving several Panama-based individuals and companies, including financial institutions, that have been linked to the Panama Papers.

Steps to Combat Money Laundering, Corruption and Tax Evasion

The White House announced several important steps to combat money laundering, corruption and tax evasion, and called upon Congress to take additional action to address these critical issues. Specifically, the White House announced the following:

  • New administrative actions to increase transparency and disclosure requirements that will enhance law enforcement's ability to detect, deter and disrupt money laundering, terrorist finance and tax evasion, including:

    • Final Treasury regulations on "Customer Due Diligence" (CDD) that enhance transparency by requiring financial institutions to know and keep records on who actually owns the companies that use their services. On May 11, 2016, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) published a final rule requiring financial institutions to know and verify the identities of the natural persons (also known as beneficial owners) who own, control and profit from companies when those companies open accounts. This rule is discussed in later detail below.
    • New proposed tax rules jointly issued by Treasury and the Internal Revenue Service (IRS) closing a loophole allowing foreigners to hide assets or financial activity behind anonymous entities established in the United States. Among other things, the proposed rules will require foreign-owned entities that are "disregarded entities" for tax purposes, including foreign-owned single-member limited liability companies (LLCs), to obtain an employer identification number (EIN) with the IRS.
  • On May 5, 2016, Treasury sent Congress draft legislation requiring legal entities to know and report information on beneficial ownership. If implemented, this legislation would require companies formed within the United States to file beneficial ownership information with Treasury, and companies would face penalties for failing to comply. The proposed legislation also contains technical amendments to the current Geographic Targeting Order (GTO) authority that would clarify FinCEN's ability to collect information under GTOs, such as bank wire transfer information. The most recent GTOs temporarily require certain U.S. title insurance companies to record and report the beneficial ownership information of legal entities making "all-cash" purchases of high-value residential real estate.
  • On May 5, 2016, the Department of Justice (DOJ) sent Congress draft legislation seeking to advance transnational anti-corruption efforts. If implemented, this legislative proposal would:

    • expand foreign money laundering predicates to include any violation of foreign law that would be a money laundering predicate if committed in the United States
    • allow administrative subpoenas for money laundering investigations
    • enhance law enforcement's authority to access foreign bank or business records by serving branches located in the United States regardless of bank secrecy or data privacy laws in those jurisdictions
    • create a mechanism to use and protect classified information in civil asset recovery cases
    • make the time period in which the United States can restrain property based on a request from a foreign country, currently 30 days, parallel to the domestic restraint period, which is 90 days; and extend the procedures to authenticate foreign records of regularly conducted activity in criminal cases to civil asset recovery cases
  • The issuance of a letter from Treasury Secretary Jacob Lew to Congress calling upon it to approve initiatives that have been pending for several years and that would help crack down on offshore tax evasion. Among other things, Secretary Lew's letter calls for:

    • the approval of several tax treaties – some of which have been waiting for U.S. Senate approval for several years – with other countries that would enable U.S. law enforcement to obtain information about financial accounts in those countries
    • adopting legislative proposals that provide full "reciprocity" under the Foreign Account Tax Compliance Act (FATCA)

Once implemented, these administrative actions and legislative proposals have and will significantly impact U.S. and non-U.S. companies, including financial institutions, many of which are currently dealing with complex issues involving financial reporting, global tax transparency, money laundering and public corruption. Consequently, both U.S. and non-U.S. companies will need to revisit their existing financial reporting and tax compliance obligations, as well as their policies and procedures to address any new applicable requirements resulting from these announcements.

Long-Awaited Rule on CDD Requirements for Financial Institutions

FinCEN's final rules on Customer Due Diligence (CDD Rule) require financial institutions to know and verify the identities of the natural persons (also known as beneficial owners) who own, control, and profit from companies when those companies open accounts.

The CDD Rule also amends existing regulations under the Bank Secrecy Act (BSA) and adds a new requirement for financial institutions – including banks, brokers or dealers in securities, mutual funds, futures commission merchants and introducing brokers in commodities – to collect and verify the personal information of beneficial owners.

Specifically, the CDD Rule contains three core requirements: 1) identifying and verifying the identity of the beneficial owners of companies opening accounts; 2) understanding the nature and purpose of customer relationships to develop customer risk profiles; and 3) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.

With respect to the new requirement to obtain beneficial ownership information, financial institutions will have to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, as well as an individual who controls the legal entity. Based upon comments received in response to the proposed rule that was published in August 2014, the final rule extends the proposed implementation period from one year to two years, expands the list of exemptions, and makes use of a standardized beneficial ownership form that is optional as long as a financial institution collects the required information.

In light of the foregoing, U.S. financial institutions will need to review, revise and enhance their existing BSA and anti-money laundering (AML) policies and procedures, as well as the existing capabilities of their systems and monitoring controls, to address the requirements imposed by the CDD Rule.

OFAC Sanctions Money Laundering Organization, Multiple Foreign Companies and Financial Institutions

The Treasury Department's OFAC on May 5, 2016, designated the Waked Money Laundering Organization (Waked MLO) and its leaders, Nidal Ahmed Waked Hatum (Waked Hatum) and Abdul Mohamed Waked Fares (Waked Fares), as Specially Designated Narcotics Traffickers pursuant to the Foreign Narcotics Kingpin Designation Act (Kingpin Act). OFAC also has targeted six Waked MLO associates and 68 companies tied to the drug money laundering network, including Grupo Wisa S.A., Vida Panama (Zona Libre) S.A. and Balboa Bank & Trust.

OFAC has alleged that Waked Hatum and Waked Fares co-lead the Waked MLO, which uses trade-based money laundering schemes – such as false commercial invoicing, bulk cash smuggling and other money laundering methods – to launder drug proceeds on behalf of multiple international drug traffickers and their organizations.

In addition to the Waked MLO and its two leaders, OFAC designated six Panama-based MLO associates for providing material support and/or acting on behalf of the MLO: Gazy Waked Hatum, Ali Waked Hatum and Jalal Waked Hatum, brothers of Waked Hatum who manage Waked Hatum's import/export, retail, and real estate businesses; Mohamed Abdo Waked Darwich, Waked Fares' son, who manages Waked Fares' duty-free retail and real estate development operations; and two attorneys, Norman Douglas Castro Montoto and Lucia Touzard Romo, who provide a variety of services, including incorporating shell companies, to the Waked MLO and serve various roles in several Waked-related companies.

These designations also target the principal Panama-based companies allegedly used by the Waked MLO to launder drug and other illicit proceeds: Vida Panama (Zona Libre) S.A., an import/export company in Panama's Colon Free Trade Zone; Grupo Wisa S.A., a holding company for businesses involved in real estate, construction, retail, hospitality, and media, including the La Riviera chain of duty-free stores operating throughout Latin America; Soho Panama S.A. and related entities, including a luxury mall and real estate development in downtown Panama City; Balboa Bank & Trust, a Panamanian bank; and the Strategic Investors Group Inc., a holding company that owns and controls Balboa Bank & Trust as well as two other financial services companies.

OFAC alleges that Balboa Bank & Trust was used to launder narcotics and other illicit proceeds for multiple international criminal organizations. This marks the second time that a foreign bank has been designated by OFAC pursuant to the Kingpin Act in the last year. The first time occurred in October 2015, when OFAC designated Banco Continental S.A., a bank headquartered in San Pedro Sula, Honduras.

On the same day OFAC announced these designations, several Panamanian governmental agencies responded by seizing, intervening and taking similar responsive measures against several of the designated entities. Specifically, the Panamanian Banking and Securities regulators assumed control of Balboa Bank & Trust and Balboa Securities Corp. Honduran authorities took similar action against Banco Continental S.A. last fall following its designation, and that bank now finds itself in liquidation proceedings.

Concurrent with the aforementioned designations, OFAC issued three general licenses that authorize certain transactions and activities for limited periods of time with five entities owned or controlled by the Waked network. The first two general licenses aim to assist with winding down transactions for a limited period of time by authorizing specific activities that would otherwise be prohibited. The third general license is intended to allow both Panamanian newspapers to continue printing and operating by authorizing specific activities that would otherwise be prohibited.

On May 13, 2016, OFAC updated one Kingpin Act general license and published two new Kingpin Act General Licenses relating to Soho Mall Panama, Balboa Bank & Trust and Balboa Securities Corp.

The aforementioned designations have impacted several U.S. and non-U.S. companies (including financial institutions), many of which are currently dealing with complex issues involving existing business relationships, blocked property and outstanding receivables or loans granted to the designated parties. Domestic and foreign financial institutions have especially been impacted due to unintended consequences related to international transactions and geographical risk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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