How a false sense of security around western jurisdictions may help facilitate transnational corruption.
by Daniel Kennedy
On September 4, 2017, a group of major western newspapers ran stories alleging that leaked documents showed that the Azerbaijani government had laundered GBP 2.2 billion through four UK-registered companies and Danske Bank, a leading Danish private bank. The scheme, dubbed the “Azerbaijani Laundromat”, was reported to have taken advantage of loopholes in UK legislation that at the time allowed certain companies to conceal beneficial ownership. Among the alleged beneficiaries of the Laundromat include European politicians and journalists who have been supportive of Azerbaijan’s government and its autocratic ruling family, the Aliyevs.
Below we offer our takeaways on the matter:
- A “low-risk” jurisdiction is not the same as a “no-risk” jurisdiction. The reported Azerbaijani Laundromat scheme highlights how companies in seemingly transparent jurisdictions like the UK can be exposed to major beneficial ownership risks. It can be tempting, especially considering budgetary constraints, to not subject potential and existing counterparties in jurisdictions like the UK to obligatory basic screening. Often the fact that a company is already engaged in business relationship with a major western company is seen as sufficient evidence of its good standing. The Laundromat con appears to have made use of an Estonian affiliate of a Danish bank to move money into the UK, taking advantage of the limited scrutiny placed on companies in jurisdictions traditionally seen as transparent.
- Corrupt officials and financial criminals in high risk countries will continue to find ways to move proceeds to transparent countries. In countries like Azerbaijan, property rights are contingent on connection to political power, which leads to a climate where law enforcement agencies are enticed to engage in extortion, and judges are seemingly easily intimidated or bought. In pursuit of safe havens, high net worth individuals often transfer their wealth – and risks – to more transparent jurisdictions like the UK.
- The Azerbaijan Laundromat scandal will likely accelerate European efforts to increase AML regulations to require companies make their ownership transparent. Regulators are already closing some of the gaps that are believed to have allowed the Laundromat to function. Tellingly, two of the companies in the scheme, both Scottish limited partnerships, wound down before new legislation was introduced in June 2017 requiring them to disclose their beneficial ownership. The fact that a number of EU political figures and their families are implicated, including an Italian parliamentarian already under investigation for accepting Azerbaijani bribes, means EU and national parliaments will almost certainly raise the issue.
- Compliance teams should conduct basic screening on entities and individuals in low risk jurisdictions to uncover potential links to international money laundering schemes. While requirements to disclose beneficial ownership will likely become stricter, the onus will remain on counterparties to verify such information. Enhanced and regular background screening should be conducted on senior managers at western firms to understand their interests and those of their families. It is ultimately western professionals and locally-registered companies who facilitate the flow of illicit funds into western financial systems.
For more information, contact:
Daniel Kennedy – Associate, Due Diligence & Strategic Research
James Hunt – Managing Director, Due Diligence & Strategic Research