The Pandora Papers and the Bank Secrecy Act
Journal of Regulatory Compliance
Loyola University of Chicago School of Law, JD 2022
The recent Pandora Papers leak in October 2021 shined the light on the massive and intricate web of offshore accounting that allows for insurmountable amounts of wealth to be hidden throughout the world. One of the most shocking revelations of these Papers was how heavily the United States was implicated in creating and perpetuating this system. As such, legislators have been pressured to find a way to crackdown on this sort of offshore money. One way that they have proposed addressing the problem is by amending the United States’ current criminal financial legislation, the Bank Secrecy Act.
The Pandora Papers
On October 3, 2021, the International Consortium of Investigative Journalists (ICIJ) released the Pandora Papers. With nearly 12 million leaked documents detailing the financial secrets of over 330 politicians and 91 world leaders, the Pandora Papers are the largest journalism partnership in history, exposing the global system of offshore dealings. As stated in the ICIJ’s statement outlining their findings, “the Pandora Papers investigation provides and unequaled perspective on how money and power operate in the 21st century—and how the rule of law has been bent and broken around the world by a system of financial secrecy enabled by the US and other wealthy nations.”
One of the most shocking revelations to come out of the Pandora Papers is just how central the United States is to the entire offshore system. The Pandora Papers investigation found that many of the key players, including multinational banks, law firms and accounting practices headquartered in the United States and Europe are at the heart of the problem.
One such US entity is Baker McKenzie, the largest law firm in the US, which is credited with helping establish the modern offshore system through lobbying and drafting of legislation. Baker McKenzie has made huge profits from work done for people tied to corruption and fraud including Ihor Kolomoisky, a Ukrainian oligarch, for whom Baker McKenzie allegedly laundered $5.5 billion through a web of shell companies and purchases of factories and commercial properties all across the US. Another of Baker McKenzie’s clients is Jho Low, a fugitive financier accused of embezzlement of more than $4.5 billion from the Malaysian economic development fund. Low allegedly relied on Baker McKenzie as well as its affiliates to shift stolen money through a network of companies in Malaysia and Hong Kong. And these are just two of the firm’s many clients implicated in the Pandora Papers.
While the Pandora Papers expose the massive international network used to hide exorbitant sums of money, the implication of US firms involvement in this system is undeniable. As such, there have been calls on both sides of the political aisle for a crackdown on the entities that have allowed this system to thrive in the US.
The Bank Secrecy Act
The Bank Secrecy Act (BSA) was enacted by Congress in 1970, originally to prevent tax evasion, ensure sufficient record keeping, and keep criminal organizations in check. The BSA has since evolved to encompass other financial crimes, including financing terrorism, narcotics trafficking, and money laundering.
The BSA takes a two-pronged approach to combatting these financial crimes. First, with record keeping requirements, and second, with reporting requirements. One of these reporting requirements mandates that institutions that fall under the scope of the BSA must submit suspicious activity reports (SARs) within 30 days of the initial detection of suspicious activity.
In the fifty years since the BSA was enacted, it has grown both in scope and in power. The BSA now applies not only to banks and financial institutions but also to the Securities and Exchange Commission (SEC) and Commodity Futures Trade Commission (CFTC). The BSA also established money laundering as a federal crime thanks to the 1986 version of the Act. Other such amendments and additions have only increased the BSA’s scope, including an amendment in 2001 concerning financing terrorism and an update in 2020 that included antiquities dealers, advisors, and consultants. A former deputy chief counsel with the Office of the Comptroller of the Currency addressed with evolution, stating that the BSA is “sprawling in scope” and “now applied to all kinds of criminal activity, including human trafficking, elder abuse, fraud, even COVID-19 related fraud.”
What comes next?
Following the release of the Pandora Papers, lawmakers have pushed for a crackdown on financial “enablers” and for the establishment of due diligence laws for the “middlemen” entities that allow for the movement of wealth by foreigners through the United States. One proposal is for the amendment of the BSA to further expand its scope to catch their entities that slip through the cracks of the BSA, allowing for the flow of wealth exposed by the Pandora Papers. Some of these “enablers” include attorneys conducting financial activities and involved in the creation of limited liability companies as well as shareholders.
The bipartisan legislation, Establishing New Authorities for Business Laundering and Enabling Risks to Security (the ENABLERS Act), came about after a Washington Post report detailed the role US trust advisors played in assisting a Colombian business man to launder drug money and how two Ecuadorian brothers were able to conceal millions of stolen from their homeland. One of the lawmakers spearheading this amendment stated that it would “ensure” the US stops “giving kleptocrats and criminals a safe haven for the money they steal from their people. In turn, it would protect Americans from inflated real estate prices, job loss, human trafficking, and influence peddling.”
While this proposed legislation that curtails offshore financing may be a step in the right direction, the US is just one part of the entire system. Although the US plays a massive role in this sort of dark money scheme, ending this system will require a huge overhaul of financial policy worldwide as well as domestically. Nonetheless, the ENABLERS Act seems to be a good place to start.