Paradise Papers: Offshore law firm has record of compliance failures

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WASHINGTON, USA — Following the celebrated leak of 11.5 million confidential documents dubbed the Panama Papers from the Panama law firm of Mossack Fonseca, the latest leak of 6.8 million confidential records – the “Paradise Papers” – from the global offshore law firm Appleby reveals, among other things, how the firm sometimes failed to keep out questionable clients.

Appleby’s Cayman Islands office, for example, had more than 600 clients on its books whose records were labeled “non-compliant” – meaning that the firm had no current IDs, contact information or other particulars needed to make sure it wasn’t setting up shell companies and other structures for criminals or corrupt politicians, the International Consortium of Investigative Journalists (ICIJ) reported.

The emails, client records, bank applications, court papers and other files were obtained by the German newspaper Süddeutsche Zeitung and shared with ICIJ and other media organizations. They represent the inner workings of Appleby from the 1950s until 2016. The files include documents from the firm’s corporate services division, which became independent in 2016 under the name Estera.

Appleby released a media statement online that said the firm is committed to high standards. Following a thorough and vigorous investigation, Appleby said, it rejects any allegations of wrongdoing by the company or its clients.

Appleby said: “We are an offshore law firm who advises clients on legitimate and lawful ways to conduct their business. We do not tolerate illegal behaviour. It is true that we are not infallible. Where we find that mistakes have happened we act quickly to put things right and we make the necessary notifications to the relevant authorities.”

Appleby, which was founded in Bermuda, is one of the world’s most prestigious offshore law firms. Although Appleby is not a tax adviser, the 119-year-old firm is a leading member of the global network of lawyers, accountants, bankers and other operatives who set up and manage offshore companies and bank accounts for clients who want to avoid taxes or keep their finances under wraps.

Along with helping to set up shell companies, trusts and other offshore entities, the firm has various subsidiaries, affiliates and business units that draft wills, represent clients involved in litigation over workplace accidents or divorce and advise corporations. North Americans account for the biggest part of Appleby’s workload; the firm has worked for residents of all 50 US states.

Appleby sees itself as an industry leader, proving to the world that the offshore industry can operate cleanly and professionally. “We provide innovative, timely and ethical advice,” the firm advertises in its eight-page brochure.

When ICIJ and its media partners began publishing the Panama Papers investigation in April 2016, offshore promoters downplayed its significance. They said Mossack Fonseca, the Panama-headquartered law firm at the center of the scandal, was an outlier.

Appleby’s internal files show, however, that that even when offshore law firms invest large amounts of money and effort to stay compliant and reputable, the secrecy and the lure of financial gain at the heart of the shadow economy make it difficult for offshore operatives to avoid doing business with criminals, corrupt politicians and other questionable clients, ICIJ noted.

Appleby collects “Offshore Law Firm of the Year” awards and is cited as part of what insiders call the “Offshore Magic Circle,” an informal collection of the world’s biggest offshore law firms, which jostle for the same business. Former employees serve as members of Parliament, judges and other government officials and at least one low-tax jurisdiction, the Cook Islands, used Appleby’s expertise to draw up its own offshore laws.

Its clients include princesses, prime ministers and Hollywood stars. Appleby has worked for some of the world’s wealthiest oligarchs from Russia, the Middle East, Asia and Africa. In the firm’s Bermuda office, more than one in ten companies had ties to clients with political connections, including politicians, their families or their close associates, according to an internal memo. Many of the highest-profile clients were managed by separate Appleby teams of trust specialists. In April 2016, Appleby announced the launch of Estera, formerly the firm’s profitable fiduciary arm, which manages the companies, trusts, jets and other assets of the global elite. Appleby and the new company remain close; some former Appleby employees now work for Estera from the same office address they occupied before.

In 1993, a US House subcommittee reported that Crescent Petroleum, a major private oil company, was being investigated by US authorities to determine whether it was a “front company” for then Iraqi President Saddam Hussein. Even if Crescent wasn’t manufacturing weapons itself, the report stated, “it was certainly linked to the principal Iraqi organization that was.”

Crescent Petroleum, owned by Hamid Jafar, had been an Appleby client since 1984.

Another client who appeared to fall through the cracks was Ehud Arye Laniado, director and co-owner of Omega Diamonds, a Belgian company operating on the Antwerp diamond exchange. In May 2013, Belgian news media reported that Omega Diamonds had agreed to pay about $200 million to settle allegations that the company had had not declared income from African diamonds.

Later, when Laniado wanted to create a new trust, an Appleby employee noted news reports about Omega Diamonds’ legal problems but cleared the law firm to do business with him. Appleby created the new trust for him in April 2014.

Despite expressed internal concerns, Appleby kept Laniado as client.

Between 2005 and 2015, more than a dozen internal and regulatory examinations of Appleby’s offices in the Isle of Man, the Cayman Islands, the British Virgin Islands, Bermuda and London found flaws that could have involved Appleby in litigation and had financial and reputation implications, ICIJ reported.

After a 2005 review by a regulatory agency, the Bermuda Monetary Authority, Appleby’s trust company was ordered to improve 21 deficiencies in its performance and to obtain fresh, accurate records of its clients’ passports, addresses and sources of wealth.

The next year, an internal audit by Patrick at the British Virgin Islands office looked at 45 client files and found that only one of them met Appleby’s standards. Of the five Appleby offices reviewed around that time, Patrick reported that only the Hong Kong office kept its documents “in good order.”

An internal audit of the Cayman Islands’ trust office in 2008 found the risk of breaking laws and Appleby’s own protocols to be “high” in more than half of all the categories under review. The audit report noted a risk of fraudulent activities and said Appleby “may not be complying” with the law.

A 2012 review by regulators in the British Virgin Islands found holes in Appleby’s procedures for dealing with high-risk politicians and associates.

When the Bermuda Monetary Authority audited an Appleby subsidiary in October 2014, it found “key or highly significant” weaknesses in nine areas. Nearly half – 46 percent – of the files reviewed by the agency lacked information on the origin of the money Appleby managed for its clients. There was “no evidence” that Appleby identified risks of money laundering and terrorism financing, the agency said, and the firm had not adopted the recommendations from previous audits.

“These omissions have heightened the Authority’s concern about the firm’s regulatory compliance and control environment,” the agency said. In October 2015, an Appleby director disclosed in a confidential document to government regulators in the British Virgin Islands that the Bermuda office had “settled” a fine imposed by Bermuda regulators after it conceded that it had failed to follow up on many of the agency’s recommendations for fixing weaknesses in its anti-money-laundering net. Appleby’s internal records show that the firm set aside $500,000 for the fine, but its existence has never been publicly disclosed. There was “no public censure,” the director wrote, adding that Bermuda’s regulators “agreed to keep the matter entirely private.”

A spokesman for the Bermuda Monetary Authority told ICIJ that it would not confirm or deny enforcement decisions. In 2016, the spokesman said, the authority changed its policy and now publishes details of fines and other sanctions online.

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