To start explaining, it is important to add another role as important as it is Internal Audit within the companies: the Compliance Officer. Where does it come from? What are their responsibilities?
After the most important financial scandals that took place in 2002 such as Enron and WorldCom the authority decided to tighten the nuts and the regulation changed. New rules were placed for public companies such as the prohibition of not being an auditor and consultant for the same company, disclosures if a company is dealing with a fraud, rotation of audit partners (5 years top), creation of the Audit Committee and how to protect whistleblowers among other things. And a new role emerges from this: the Compliance area.
Compliance as its name says it has the duty to comply with the law (externally) and with the policies and procedures (internally). Its difference with Internal Audit is to prevent rather than detect. As we all know either an external or internal Auditor determines a scope based on the nature of its revision in order to analyze what is being doing vs. what it should be. The bottom line: an auditor analyzes something that already has happened (after). Meanwhile compliance should be involved before taking a decision. (I.e. a contract, hire key staff, new provider, etc.)
Compliance should be in charge of manage the money laundering risk, which is defined as to give legality to money that comes from illicit activities. Those illicit activities are several among: traffic of drugs, human organs and humans. Prostitution, forgery, pornography, bribes, etc. The term “illicit” depends upon the legal framework of each country. The criminal will look for “paradises to launder money”…those countries or companies which can help him to launder lots of money at a low cost in a very quick time.
A tax haven is defined as a territory where taxes are levied at a low rate or has a system of banking secrecy. This means that banks are not allowed to give to the authorities the information of their clients… the real owner… is a “top secret” and it has to be kept as that, unless there is a criminal complaint. Offshore companies (legal entity), refer to be incorporated or register on tax havens.
Therefore, for its characteristics tax havens are used by some people for purposes of confidentiality…others for launder money and others to pay less tax or hide money from the IRS. The latest two mean a crime: tax evasion.
But tax evasion differs from money laundering. Although both are crimes they have specific characteristics. Therefore, depending on the circumstances, someone can be accused of both or just one.
Then there is another key concept: political exposed person…“PEP”. It is defined as someone who is or has been entrusted with a prominent function. Historically PEPs have shown us that tend to be corrupt. Taking bribes is illicit money; dirty money. It has to be laundered. Someone who is corrupt does not want to be known as such, so the money has to be seen as “clean”… as legal.
One of the key elements to deter and prevent money laundering is to know your customer (“KYC”) and apply customer due diligence. (“CDD”) Countries, authorities and companies need to know who the real owner is, as well as who controls. Criminals use among many methods: shell companies, front man or identity theft to disguise its identity; therefore verify who really is the owner, it is an extremely important control.
Although there is still an investigation carried out in Panama, it reminds us (again) the importance of internal control that companies should have and countries should promote. How many factors have in common with the Enron case?
-Worldwide there are flaws in the laws that generate legal technicalities that help criminals or there are still issues to be regulated. In Enron case energy wasn't regulated. Today it is the offshore industry.
-In both cases there were rumors of corruption.
-Lack of transparency: Enron didn’t present a Balance Sheet meanwhile in Panama due to bank secrecy information is not provided.
-Enron used “mark to market” for accounting valuation and afterwards a “hypothetical future value” among the creation of several companies to disguise the fraud and real owner. (It included a trust). Today in Panama it is reported a number of companies created by complex structures, also.
-Statements from both executives of companies were: “we didn't do anything wrong”. The rationalization is the same.
Regardless of the mentioned above and the importance of controls and managing risks there is something more transcendent: values. Why do people even knowing that something is wrong, they do it?
And the history…again is repeated…with so much similarities…