Q & A on Extreme Vetting

By Christine Duhaime | February 12th, 2017

The Executive Orders issued by the US Government for immigration and subsequent statements by the administration indicate that the Department of Homeland Security is starting a process of “extreme vetting” of prospective immigrants, refugee claimants and non-immigrant visa applicants. From a terrorism perspective, here is a Q&A about “extreme vetting.”

What is “extreme vetting”?

Extreme vetting is not in place yet. In the weeks to come, what extreme vetting will involve is that when a person from those 7 countries, and any other situation that may be determined to be high risk, attends a US Embassy for an interview to visit or immigrate to the US, according to what we know so far, they will be required to provide:

  • A list of the websites they have visited;
  • A list of social media they are members of with their passwords for access;
  • A review of those people who the applicant follows, and who follows the applicant on all social media platforms, together with checking of those followers and followed persons against global security databases for risks and such;
  • The contact list on their cellular phone which will be vetted as against those lists maintained in the global security database;
  • The telephone numbers the applicant has called or received calls from, again which will be vetted as against global security databases; and
  • The same type of vetting for emails, as for telephone numbers.

It is going to be a person’s cellular phone that is key in extreme vetting and an applicant who has no cell phone, or has a wiped-out cell phone will probably be denied entry because that would be suspicious.

Social media apps like WeChat in China, for example, are already monitored and linked in databases to identify and monitor certain people – the US proposition is to do the same with multiple sources and larger data points as part of its immigration screening process.

In the years to come, who you know will become much more important in immigration and will work for and against applicants. Names that result in red flags will harm applicants and those that result in neutral or “prominent person” flags, will assist an applicant’s immigration process.

Is there a danger in the extreme vetting process?

Yes. The most immediate danger is the protection, control and sharing of personal information.

Extreme vetting will create what I call: “extreme data.”

Extreme data will include our whole lives, including photos, conversations, contacts, relationships, residences, personal experiences and such. It will require extreme protection. There is a risk of the private sector attempting to convince the US government that it should provide services for extreme data collection, maintenance, analysis and such. The enormity and sensitivity of the data, from a terrorism and national security perspective, means that it will never be appropriate for the private sector to be involved. Take for example, information in respect of prominent persons, diplomats, prime ministers and other world leaders which, if in the hands of the private sector, would create greater risks of exposure of prominent people to leakage of the data and to risks of physical harm from terrorists. The public sector has legal and constitutional duties to the population whereas a private sector actor in this scenario would only has contractual obligations to the public sector.

The second danger is in respect of what will happen when names, connections, telephone numbers, emails and social media followers are connected in a growing database. Given that this is a counter-terrorism exercise, it may link people to suspected terrorists who have no link whatsoever except that they followed someone on social media who, unbeknownst to them, had links to terrorists.

Another danger is that applicants may be denied for no reason other than their social media profiles suggested they would not be best suited for immigration to the US, which may not be the best basis for such decisions.

What are the 7 countries that will be subject to extreme vetting? 

They are Iran, Iraq, Syria, Libya, Somalia, Sudan and Yemen.

Did the President Trump decide what the 7 countries were? 

No. The US Congress had earlier identified those seven countries under a previous government administration. And four of them were also identified as part of HR158 by the Obama Administration a year ago when the Visa Waiver Program was changed to revoke visa waivers for Iran, Iraq, Syria and Sudan on the basis that foreign nationals from those countries, or who had traveled to those countries, pose a terrorist risk.

Will some countries stay on the banned list?

Yes – probably two will come off and the rest will stay on. Those that remain on the list will remain because it means that their government is not able to provide US immigration officials with comfort that their passport system, and identity documents of their nationals are sound, secure and reliable. It is likely that Syria and Iraq will remain on the banned list for some time. They have documents that pose security risks (see below) and they lack the passport control infrastructure to operate a passport and identity system that is reliable.

Do those 7 countries pose a terrorist risk? 

Yes and no.

ISIS is present in six of the seven countries and very active in Syria, Iraq and Libya. In Syria and Iraq, ISIS ran fairly sophisticated operations and controlled swaths of the population, performing many government functions such as education, training, supply of essential services and food, landlord, employment and tax collection. The two concerns with respect to Iraq, Syria and Libya are that ISIS has promised to send its people to the US disguised as fake refugees to cause death and destruction and they have also promised to bring a weapon of mass destruction to the US via Mexico that would have originated from Pakistan. These are the visible large-scale terrorism threats that we know of because they came directly from ISIS but there are thousands of others known only to intelligence agencies that may be more serious.

For Syria and Iraq, the Director of Frontex, the EU border agencies has said that it is not possible to ascertain the identity of foreign nationals from Syria or Iraq entering the EU in all cases because of the prevalence of false passports. Many journalists have gone to the Middle East to test out the ability of obtaining fake passports – a journalist with the Guardian, for example, reported last year that two separate transnational criminal organizations in Iraq offered him fake (but authentically made) Syrian passports, ID card and birth certificate, with the help of a Syrian official in the Embassy, for $2,500.

The problem of fake passports lies primarily in the security of the issuing process. Transnational criminal organizations, such as ISIS, have access to a large number of blank Syrian passports that they then personalize for a price, the end result of which is a real, but fake, passport that cannot be easily detected even by experts (more here where Frontex’ Director says that with the fake passport issue, the EU does not know who exactly, has entered the EU).

Iran is a different story. You can read our article here in Quartz as to why Iranians are not a threat in respect of ISIS. The previous administration included Iran not because of individual terrorism threats of its citizens but because of what the US calls state-sponsored terrorism, meaning support of organizations such as Hezbollah. This is a different type of terrorist financing that has no relevance to ISIS.

What will the future of extreme vetting hold?

Extreme vetting will, in a few years time be done by artificial intelligence. The social media and connections of applicants will be analyzed to determine their risk profile by machines and those machines will also be able to predict the likelihood that the person is a terrorist or a threat to national security. There is already predictive AI that can assess whether a person is an employment risk, or at risk of breaking the law based on their Instragram posts. It is not too much of a leap to using that technology to predict a terrorism risk.

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US President signs Financial Crime Executive Order to, among other things, bring foreigners to “Face Justice in the US”

By Christine Duhaime | February 11th, 2017

Come Face US Justice

On Thursday, the US President signed an executive order to protect the US from transnational criminal organizations and, inter alia, to tackle financial crimes.

The executive order is entitled “Enforcing Federal Law with Respect to Transnational Criminal Organizations and Preventing International Trafficking.” Its purpose is to dismantle international organized crime.

Thwarting Organized Crime for Certain Offences

Pursuant to the order, the new US government policy is to strengthen enforcement of the law to stop international criminal organizations and groups that undertake the following types of illegal activities:

  • financial crimes – the Order does not identify them but typically these include tax evasion, insider trading, terrorist financing, financial fraud, sanctions avoidance and illegal gambling;
  • concealing or transferring proceeds of crime (the money laundering offence);
  • IP theft;
  • corruption;
  • cybercrime; or
  • illegal smuggling of foreign nationals, wildlife, weapons or drugs.

Prioritizes Money Laundering, Financial & Other Serious Crimes

The executive order is designed to ensure that law enforcement highly prioritizes and allocates enough resources to identify, disrupt and dismantle international criminal organizations.

“Facing Justice in US”

In order to ensure the executive order has international teeth, it sets as US policy, the high priority of law enforcement to seek the extradition of foreign nationals from other countries who are members of international criminal organizations to “face justice in the US” and authorizes the sharing of intelligence with foreign countries regarding international criminal organizations. It also authorizes law enforcement to pursue efforts to prevent organized criminal activities taking root inside and outside the US.

Visa and Immigration Fraud

In keeping with the theme of the crackdown on immigration, the executive order directs law enforcement to prosecute offenses committed related to entering the US, such as visa fraud and immigration fraud, and to pursue prosecution in and outside the US.

Forfeiture of Proceeds of Crime

The executive order authorizes forfeiture actions to seize the assets and proceeds of crime from criminal activity derived from immigration and visa fraud, among others, in and outside the US.

Working Group Focus

Under the new executive order, the Attorney General, Secretary of State, Secretary of Homeland Security and Director of National Intelligence will direct the Threat Mitigation Working Group.

The Working Group will evaluate how to prevent foreign nationals who are associated with international criminal organizations from entering the US with a view to how immigration law can be better enforced or amended.

The Working Group will also improve coordination among federal agencies to identify, investigate, prosecute and dismantle such groups both in and outside the US and in that vein, will work on information sharing with foreign countries.

Finally, within 4 months, the Working Group must submit to the President, a report on the extent to which the US has a problem of TCOs and other groups.

Does It Have Anything to Do With Banks?

More Compliance Efforts Needed for Banks

While the executive order may appear to have no relevance to the banking sector and compliance staff, it does because the primary gatekeepers of the financial system to prevent financial crimes and the flow of proceeds of crime through the financial system, are financial institutions.

If there is a massive policy shift to investigations and prosecutions of financial crimes and the origination, flow and destination of proceeds of crime in and outside the US, it will have to involve and engage, the financial services sector. Whether they like it or not, financial institutions will be under greater scrutiny simply by virtue of the financial crime nature of the executive order.

Bank Scrutiny on Compliance

The second reason why this executive order will impact financial institutions is because the Working Group’s mandate is to report to the President on what can be done to stop international criminal organizations from being able to operate internationally. That means the Working Group is logically going to look at anti-money laundering compliance because the quickest fix to eliminating international organized crime is to deprive such group of banking services. It is very unlikely that the Working Group will make no recommendations to the President on anti-money laundering or counter-terrorist financing compliance internationally.

One needs to recollect that the order is international in scope – it seeks solutions to activities in other countries that are harming the US – not activities in the US that are solely domestic, and therefore it is global and foreign banks, in particular, that can expect to be scrutinized by the Working Group. Because they all have correspondent relationships, and ergo ties, to the US, all non-US banks are subject to US law (see Wegelin Bank prosecution and demise on this point, where the former Swiss bank relied on a lawyer’s opinion on the scope of anti-money laundering law, to its peril because the opinion was wrong).

Facilitating Foreign Nationals

Finally, this executive order should be read in conjunction with the earlier executive order on the safety of the US interior entitled “Enhancing Public Safety in the Interior of the United States” to get a sense of what the priorities are when it comes to its law enforcement and prosecution efforts and its focus on foreign nationals. You can read our summary here.

Under that earlier executive order, 10,000 removal officers will be hired for the purposes of enforcement of immigration laws. Moreover, regulations or guidance will be issued for imposing penalties and fines against Americans, American companies and foreign nationals for “facilitating” foreign nationals being present in the US without the proper immigration authorization.

No one knows if “facilitating” foreign nationals being present in the US illegally would be deemed to include providing financial services to them.  One would expect not but it is an unknown at this point.

There would need to be a causal connection between providing the financial services and the facilitation of a foreign national that led to the injury to Americans (immigration fraud). The causal connection may not be that hard to establish. Under US counter-terrorism law, providing financial services to unlisted persons who commit acts of terrorism that injure Americans in the Middle East can make a bank liable for those injuries under the crystal ball theory of liability. In that case, the Arab Bank case, a jury found that banking an undesignated terrorist substantially contributed to foreseeable injuries and there was, in tort law, a causal connection to tie banking services to personal injuries sustained in order to find liability.

Future of Massive Fines? 

One can expect that an unintended consequence of these two executive orders will be a larger number of foreign nationals in the US who are de-risked and financially excluded if US banks make decisions that banking them may expose them to liability for “facilitating” unauthorized immigration.

The other concern looming large is what it means for a foreign national or a foreign organization to “face justice in the US.” In the case of the Wegelin Bank, mentioned above, it cost $74 million to “face justice in the US” and the Bank closed because it could not survive the sting of a money laundering allegation hanging over it for banking the proceeds from tax evasion. In the case of the Arab Bank, mentioned above, the price to “face justice in the US” was estimated to be about $1 billion.

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World Check being sued over database of personal information

By Christine Duhaime | February 4th, 2017

A number of persons and organizations are allegedly preparing to sue Thomson Reuters, the organization that runs World Check for wrongly listing them in a database as a financial crime risk. World Check created (apparently without informed consent at least under Canadian law), an online global database that purports to provide anti-money laundering, sanctions and counter-terrorist financing mitigation advice by selling, for a fee, the personal and other information of people.

According to news reports, World Check listed a nine-month-old baby as a politically exposed person even though the baby did not have a bank account, was not opening one anytime soon and lacked the legal capacity to access financial services in any event.

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The smuggling of rhinoceros horns to China

By Christine Duhaime | January 22nd, 2017

The prosecution of wildlife smuggling is rare and especially if it involves a Canadian. But last year, Xiao Ju Gian, was sentenced in New York for 30 months incarceration for smuggling rhinoceros horns, elephant ivory and coral from the US into Vancouver, from which he abused the Canadian financial system.

Xiao Guan lived in Richmond, British Columbia and operated an antiques store called Bao Antique Ltd., from which he imported and sold smuggled goods. He also claimed to have an import business in Hong Kong. Over a one year period, he bought and smuggled illegally acquired wildlife with a value of over $500,000 in Ohio and Florida and sold the goods in China, after transporting them illegally, first to Vancouver. In one case, he bought one rhinoceros horn from the US for $30,000 and sold it to a Chinese foreign national who flew from China to Vancouver to buy it for $42,000. The Chinese foreign national then smuggled the rhinoceros horn out of Canada.

Guan was part of a sting operation in New York that involved the sale of rhinoceros horns to him by an undercover agent for $45,000 in 2014. As part of the undercover deal, Mr. Guan, who also lived in China, instructed his wife, Tie Jun Jian, in Richmond, British Columbia, to wire a $1,000 to the undercover agent in New York for a deposit. For SWIFT purposes, the wire transfer was noted as: “for a watch” in order to avoid scrutiny by the bank and law enforcement.

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Bail denied for “little known lawyer” charged with money laundering who had $19 million in cash parked at his firm and home because he poses a serious threat to the financial health of India

By Christine Duhaime | January 8th, 2017

Rohit Tandon, the Delhi lawyer charged with money laundering just before Christmas after approximately $19.9 million was found in cash at his law firm office and home, was denied bail on Saturday and remains incarcerated. In denying bail, the Court said that the money laundering offenses “pose a serious threat to the financial health of the country” and would “affect the economy of the whole country.”

The Court went on to note that financial crimes “constitute a class apart, and need to be visited with a different approach.”

“So much cash, they needed three cars to haul it away.”

There was so much cash seized from Mr. Tandon’s law firm and home, the police needed six suitcases, four steel trunks and three cars to haul it away.

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Nigeria gets ex parte asset recovery order for $153,000,000 in proceeds of corruption from PEP parked in banks

By Christine Duhaime | January 7th, 2017

The government of Nigeria will be able to recover $153 million in proceeds of corruption from Diezani Allison-Madueke, its former Minister of Petroleum, who was and remains a politically exposed person under anti-money laundering law.

The funds were alleged to have been stolen from the Nigerian National Oil Company when it was under her control as the petroleum minister. Nigeria’s national anti-corruption agency, the Economic and Financial Crime Commission, located the $153 million parked in three local banks, Sterling Bank, First Bank and Access Bank but it is unknown how much was removed from the country to London and Dominica.

The EFCC applied to Nigeria’s court on an ex parte application to seize the funds from the three banks.

Allison-Madueke fled Nigeria in 2015 where she was subsequently arrested on allegations of money laundering. She has a passport for Dominica which suggests there are funds parked there.

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Trial of PEP from Equatorial Guinea for money laundering in France; are Canada’s PEPs from Gabon next?

By Christine Duhaime | January 4th, 2017

Equatorial Guinea trial

Teodorin Obiang, the son of the President of Equatorial Guinea, is being prosecuted in France for allegedly laundering the proceeds of corruption in France. Mr. Obiang is also the Vice-President of Equatorial Guinea and is a politically exposed person. His trial is scheduled for June 2017.

He is accused of bringing $105 million into France using the financial system – money allegedly plundered from the country from oil sales, and using it to buy palatial Parisian properties and exotic cars. At the time he imported $105 million into France, his salary was $80,000 per year. His first lawyer, Olivier Metzner, was murdered and was found floating in the sea near Boëdic island in Gulf of Morbihan.

The President of Equatorial Guinea was the subject of a US Senate review on the use of lawyers for laundering proceeds of crime by politically exposed persons. Pursuant to that Report, Mr. Obiang hired US lawyers to set up companies for the purposes of laundering $100 million into the US through law firm trust accounts. Funds were used in the US for lavish expenses, such as a house in Malibu and a private jet, and to attend parties at the Playboy Mansion.

The Obiang family assets keep being seized around the world pursuant to this case, including a 76-metre luxury $100 million yacht seized just before Christmas in the Netherlands at the request of a Swiss Court.

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2016 in Review

By Christine Duhaime | January 3rd, 2017

Every year, we like to give a summary of the most popular stories on our website measured by analytics of visits because it gives a sense of what issues are of interest to the anti-money laundering and counter-terrorist financing community globally and future trends.

Here are some of our statistics for 2016:

Most popular story –> although written in late 2015, the most visited page in 2016 was our story on HR158 involving the new US Visa Waiver Program Amendment restricting access to the US for foreign nationals or visitors who were in Iran, Iraq, Syria or Sudan. This story, which spawned a similar article we wrote in Quartz, resulted in humanitarian aid agencies and journalists taking up the issue of HR158, although it was too late.

2nd most popular story –> also written in 2015, the 2nd most popular story was comparing how some Chinese foreign nationals who move funds to Vancouver use a well-known money laundering technique called smurfing. That article spawned numerous articles in the international media and brought the term “smurfing” out from use as a money laundering term into general use in the media.

3rd most popular story –> Our next most popular story was on the diamond trade being used for money laundering.

The next most popular were on Mahmoud Reza Khavari, the violent ways debts are collected in Macau; and our primer on beneficial ownership, shelf companies and shell companies.

Most popular search term –> The most popular search terms on the site in 2016 were “sanctions”, “money and crime”, “HSBC PEP”, “What is the role of FINTRAC”, “high risk countries”, “ISIS”, “beneficial ownership”, and “loan sharking Macau.”

Unusual searches –> There were some interesting searches including:

  • “Hiring money mules China”,
  • “Can I visit US if I visited Iran?”,
  • “EB5 money laundering”,
  • “Gazientep ISIS”,
  • “Macau people who lend money”,
  • “Swallowing cash”,
  • “Are Toronto strip clubs money laundering operations”,
  • “Entering Canada with fake ID”,
  • “For sale BC shelf company”,
  • “Girl friend of PEP”, and
  • “Why does the west allow money laundering from China and Russia”.

Most visitors came from –> Canada, then the US, UK, India, Hong Kong, Singapore, China, France and surprisingly, UAE and Russia were close to the top among visitors.

Most visitors from the US came to read about how some Chinese foreign nationals move money to Canada. The most read stories in Canada were about structuring of money from China to Canada.

But people from China this year visited a range of stories from FinTech,  legislation and counter-terrorism.

Most people from UEA visited us to read the story on HR158 as it relates to Iranians. Russians came mostly to our main page, then to learn about politically exposed persons.

Demographics –> Most of our readers were male between the ages of 25-34. The banks with the most visits were Bank of America, Barclays, Bank of Montreal, TD Bank, Royal Bank, followed by most global US banks. In terms of law enforcement agencies, Canadian law enforcement visited our site more than any other country, which is a change from last year.


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$2,000,000,000,000 in Proceeds of Corruption Removed from China and Taken to US, Australia, Canada and Netherlands

By Christine Duhaime | January 2nd, 2017

The questions and answers I’ve been asked the most in 2016 about China:

Q: How much money has been removed from China in proceeds of corruption?

A: According to the Bank of China, way over US$120 Billion or CAD$160 Billion between the years 1995-2008. China appears to have quit sharing data officially after 2011 because it said at that time that the outflows of proceeds of corruption was severe enough to threaten its economy and its political stability.

However, a Chinese Commission later said this:

  • The amount more than doubled in 2010 to US$412 Billion (CAD$553 Billion);
  • In 2011, it was at US$600 Billion (CAD$806 Billion);
  • In 2012, it was at US$1 Trillion (CAD$1.3 Trillion); and
  • By 2013, it was at US$1.5 Trillion (CAD$2 Trillion).

China also has something called “grey” income, which means income earned (or acquired off the books – basically handed to someone in the proverbial suitcases) in China that is not reported on income tax reports, and that is held by its richest families. By 2012, the grey income was CAD$1.3 Trillion according to the China Society of Economic Reform. Some of the grey income inevitably ends up in other countries.

Money Laundering

So, over $2,000,000,000,000 is missing from China and because China says it’s proceeds of corruption, it’s a $2,000,000,000,000 money laundering problem.

Bigger than the economies of most countries

If you want a sense of how come China said in 2011 that the illegal removal of $2 Trillion from corruption payments threatens its economy, note that, according to Wikipedia, there are only a few countries in the world that have an economy of $2 Trillion or more and they are: US, Japan, Germany, UK, France, China, Italy, Brazil and Russia.

Another way of looking at it is that the proceeds of corruption that flew out of China and landed in the US, Canada, Australia and the Netherlands is more than the entire economies of each of over 100 countries including the economy of Spain, Mexico, South Korea, Australia, Turkey or Switzerland.

Q: How many Chinese foreign nationals are involved in moving proceeds of corruption out of China?

A: According to the Bank of China, about 16,000 to 18,000 officials with ties to the public sector were involved in moving proceeds of corruption illegally from China to other countries.

Q: What are the 4 top countries where Chinese foreign nationals move proceeds of corruption?

A: According to the Bank of China, US, Canada, Australia and Netherlands. Those four countries accounted for CAD$160 Billion in proceeds of corruption being moved out of China as of 2011, the last date that China was willing to publicly talk about the issue with specificity.

There is no reason to believe that the new figure of $2,000,000,000,000 in capital flight from China has shifted to other than those 4 top destinations in any material way.

Q: In Canada, where does the money end up and why? 

A: Vancouver is the preferred destination, by far, because of perceived more relaxed anti-money laundering on-boarding compliance and more importantly, easier access to better schools and lifestyle for children of Chinese foreign nationals.

Q: How is the money moved? 

A: According to the Bank of China, foreign nationals from China create fake business transactions with private companies that acquire bank accounts and the funds are transferred as ostensible business investments to the US, Canada, Australia, and Netherlands and they also buy real estate.

Q: Is there anything wrong with taking proceeds of corruption from China in Canada? 

A: In law, yes.

Public officials who are paid significant proceeds of corruption are almost 100% of the time, politically exposed persons from China who use private banking services. Our PEP laws require that banks, when on-boarding them, apply enhanced due diligence procedures to:

  • Determine the identity of all nominal and beneficial owners with access to the banking account (hard and expensive to do properly);
  • Subject them to enhanced scrutiny to detect financial transactions that may involve the proceeds of foreign corruption;
  • Determine the source of funds being deposited into the banking account and the purpose and use of such account;
  • Review the activity of the account to guard against money laundering; and
  • Report suspicious activity that may involve proceeds of foreign corruption.

Whether we are dealing with PEPs or not, banks in Canada must close an account where proceeds of corruption from China are parked in the bank account because, firstly, it is an offence to import the proceeds of corruption into Canada from China (and a predicate offfence to money laundering, which makes the proceeds a reportable money laundering offence) and secondly, it is also an offence to transfer, send, deliver, dispose or deal with proceeds of corruption from China with intent to convert it believing it, or part of it, was proceeds of corruption.

It is the Criminal Code of Canada, in conjunction with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, that govern in respect of reporting and closing the bank account.

A: And in ethics, yes.

Exporting proceeds of corruption bankrupts countries and deprives the people who live there of wealth.

The most unfortunate example of how PEP laws are ignored when it comes to proceeds of corruption is Viktor Yanukovych, the former President of the Ukraine, who went from earning $2,000 per month to allegedly earning $200 million per month in five years, and is alleged to have parked over $12 billion in private bank accounts in the EU. That was more money than Bill Gates, the founder of Microsoft, was making and he’s the richest person in the world. Not one financial institution managing Mr. Yanukovych’s private bank accounts thought it was odd that he was earning more than Bill Gates running an impoverished country or took steps to confirm that his incredible newly earned wealth was not proceeds of corruption. They didn’t apply enhanced scrutiny – they applied no scrutiny.

Our thoughts here on why an extradition treaty with China will help Canada return the treasury of China back to its people.

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UK’s sweeping new law targeting bankers, lawyers, advisors, offshore professional directors, nominees with fines; and “public shaming” for enabling offshore tax evasion

By Christine Duhaime | January 1st, 2017

Wide, Wide Net for Enablers

Starting today, parts of the UK’s Finance Bill 2016 came into effect which allows the HMRC to go after so-called “enablers” who help UK tax payers avoid taxes using offshore schemes, services or arrangements, such as bank accounts, investment or broker accounts, trusts, companies, directors / officers or nominees.

The amendments introduce a “name & shame” procedure and civil penalties for anyone, including lawyers, bankers employees, investment firms, accountants, incorporation firms and introducers who help individuals, trusts, funds or companies avoid taxes offshore and for other forms of non-compliance in respect of inheritance, capital gains and income tax.

The name and shaming will be like a “perp walk” only online, so that a bank, law firm, advisor or other enabler will be forever located on an online search and is intended to hurt lawyers, accounting firms and banks where it hurts most – reputation.

Foreigners Beware?

Its important to note that offshore taxation and legal advice, and financial services provided to UK companies, shareholders, funds or individuals by necessary implication, always involves persons, firms, banks, advisors, introducers, enablers and incorporation services firms situated offshore (i.e., not in the UK) and so foreign persons, firms, entities and enablers should not automatically assume that the legislation does not apply to them if they are in other countries such as Canada, Guernsey, Cayman Islands, Dubai, The Cook Islands or the US.

If it did not apply to offshore enablers, the Bill would have little effect, although we have not come across any statement by the Financial Secretary on the issue of extra-territoriality of the Bill.

Am I Caught? 

The Bill captures people who enable others to avoid taxes using offshore mechanisms, including people who design, merely market or facilitate tax avoidance and specifically includes:

  • What the UK government calls the “whole supply chain of advisors and intermediators” who work in the flow from those who “develop offshore tax avoidance arrangements or schemes” to the tax payer who uses such arrangements or schemes to pay less tax than Parliament intended.
  • People who introduce tax payers to offshore tax avoidance schemes.
  • People who facilitate offshore tax avoidance arrangements
  • People who “develop, advise or assist” professionals develop offshore tax avoidance schemes and arrangements.
  • People who earn money from  offshore tax avoidance arrangements.
  • Banks and their necessary employees in the offshore tax avoidance machinery.
  • Trustees and their necessary employees in the offshore tax avoidance machinery.
  • Lawyers and their necessary employees in the offshore tax avoidance machinery.
  • Accountants and their necessary employees in the offshore tax avoidance machinery.

And also includes those who, for offshore tax avoidance:

  • Open bank accounts.
  • Provide legal services and legal documents.
  • Provide notary services and Powers of Attorney (the POA if a significant one).
  • Set up trusts and companies.
  • Act as professional trustees.
  • Act as professional corporate directors.
  • Act as nominees for offshore entities.
  • Help move money or assets, including by taking in placements or investments in other countries.
  • Provide planning services for offshore tax avoidance.
  • Act as a middleman or introducer, regardless of whether they are an advisor or not.
  • Complete currency conversions.
  • Hold funds in escrow or trust.

Considering that an enabler can be liable for merely introducing parties and for services that were careless, as opposed to deliberate, and may include foreign firms, advisors and middlemen, the Bill appears to the most sweeping ever enacted by a country to address tax evasion.

Clearly, the HMRC worked through all of the players who set-up and facilitate offshore trusts, and offshore private companies in order to map out those caught by the legislation.

Careless to Deliberate Conduct

The fines imposed can be quite significant, up to 100% of the amount of taxes avoided. Liability flows for a range of conduct including being careless to actual deliberately enabling tax avoidance.

The rationale behind the amendments is to “raise the stakes” to ensure that enablers, who the UK Government has said historically took the position that they will not be prosecuted, will be required to pay the costs of tax avoidance and be shamed by being named for assisting tax evaders use offshore arrangements.

Interestingly, the conduct is for tax avoidance, as opposed to the more serious tax evasion although it includes tax evasion as well as tax avoidance.

Tax evasion is a predicate offence to a money laundering offence (hence a reportable incident as a suspicious transaction to a FIU) but also, all tax evasion offenses are also money laundering offenses.

In order to be potentially liable, the lawyer, banker, advisor or enabler must have encouraged, assisted or facilitated a person to avoid taxes or be non-complaint in respect of offshore taxes.

An example would be a lawyer acting as a corporate nominee, a protector or a global bank providing offshore director services under numbered companies in order to obfuscate the beneficiaries of a trust if it leads to tax avoidance in the UK.

A Move to Just Lawyers as Advisors for Anything Offshore

Interestingly, we could not find any submissions by law firms or law societies in respect of privilege, or even the extra-territorility of the Bill in the debates in the UK Parliament.

Privilege does not attach to advice that is given in furtherance of criminality or fraud but often advice may be inter-twined as between advice that unwittingly was used for criminality and other parts of advice so the issue is of importance in the administration of justice when it comes to legislation impacting lawyers and law firms.

We suspect that, because only lawyers’ communications are protected by privilege (as opposed to advisors, trustees, protectors, banks, accountants whose advice is not), the Bill will result in a global move towards having anti-money laundering compliance and tax advice where they touch on offshore jurisdictions, be provided by external law firms so that communications (those that are privileged) can be safeguarded.

Not all uses of offshore taxation is tax avoidance or tax evasion but the Bill risks forcing firms that are not law firms, to open up their records to various governments around the world who will likely adopt similar laws.

However, one should recollect the testimony provided to the US Senate on correspondent banking in which banks said: “There is no reason for offshore banking to exist if not for tax evasion or other financial crimes.”

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