Consolidating the international consensus that the professional enablers of corruption should be required to watch out for dirty money would require landmark reform initiatives—split roughly evenly between enacting new rules and enforcing existing ones—by five major democracies.
The United States and Australia are the only two democracies that still need to impose anti-money laundering (AML) laws on non-bank enablers. The United Kingdom and Germany need to enforce the rules they have on the books. Switzerland needs both a broader law and stronger enforcement.
The Summit for Democracy offers a prime opportunity for these five countries to stand together and commit to properly regulating and supervising their enablers of corruption.
Introduction and Summary
With only a month remaining until U.S. President Joe Biden hosts the Summit for Democracy on December 9 and 10, there is just enough time for Biden to try to convince the U.S. Treasury Department and four other major democracies—Australia, Switzerland, Britain, and Germany—to make big announcements about plans to regulate enablers of corruption. These five democracies have highly developed and widely exploited financial systems, making them key to consolidating the international consensus that professional enablers of corruption should be forced to help law enforcement watch out for dirty money. But making this happen would require a strong and urgent push by Biden, because Treasury has not displayed any ambition around anti-corruption, because other countries invited to the summit appear to be given a relatively free hand to design their own deliverables, and because governments are unlikely to take on powerful domestic interests without substantial international pressure.
It has been 22 years since the G8 committed to imposing AML rules on non-bank professional enablers, tasking the Financial Action Task Force (FATF) with updating its international standards accordingly, which it did in 2003. Since then, more than 94 percent of countries—including all member states of the European Union—have at least partially transposed the FATF’s recommendations on enablers into national laws, although compliance and enforcement tends to be weak. Advancing from widespread technical compliance to a truly ubiquitous and effective system of stopping professional enablers from secretly handling the harmful proceeds of corruption would require bold initiatives by five founding members of the FATF.
The only two democracies that do not have laws imposing AML obligations on non-bank enablers are the United States and Australia. Fortunately, both may now be taking steps toward catching up:
- United States: The U.S. Congress responded to the Pandora Papers by introducing the Enablers Act, which would bring the United States into FATF compliance. The Biden administration is now finalizing an anti-corruption strategy, which among other priorities, is meant to address “professional service providers [who] enable the movement and laundering of illicit wealth, including in the United States and other rule-of-law-based democracies.” The Biden administration should use the Summit for Democracy to express support for legislation like the Enablers Act, announce that Treasury’s Financial Crimes Enforcement Network (FinCEN) plans to invoke its existing authorities to regulate low-hanging fruit (including investment advisors, real estate title insurers, and art dealers), and unveil a deal with Senate appropriators to increase FinCEN’s budget by 50 percent.
- Australia: The Australian Senate is conducting an inquiry into why it has taken so long for the government to follow through on its 15-year commitment to amend the AML/CTF Act of 2006 to impose AML obligations on non-financial enablers. Australia should immediately advance that so-called “tranche two” legislative amendment, scoped broadly enough to come into full compliance with the three FATF standards on non-bank enablers (recommendations 22, 23, and 28). Australia should conduct a national AML risk assessment and provide adequate budgetary resources and statutory authorities for supervisors to swiftly implement tranche two, broadly raise awareness in the private sector, comprehensively supervise compliance, and aggressively enforce the law.
While the United States and Australia should hold hands and jump together to establish AML rules for enablers, three other major democracies should commit to broadening and enforcing the rules that they already have on the books:
- Switzerland: The Swiss Parliament should expand the Swiss AML law such that it kicks in not only when enablers themselves become parties to financial transactions, but also when they get involved in related administrative activities on behalf of clients. That would cover cases like Swiss advisors forming companies for kleptocrats and Swiss lawyers relaying covert financial instructions from Vladimir Putin’s bank to Panamanian law firm Mossack Fonseca. Separately, the ongoing reorganization of Swiss prosecution should strengthen law enforcement’s capacity to fight international corruption, while the new attorney general should investigate law firms, art freeports, company service providers, vereins, and PR firms that reportedly move dirty money for proxies of authoritarian regimes.
- United Kingdom: Prime Minister Boris Johnson—who has recklessly contorted the Tory party into an intake valve for the proceeds of corruption reportedly flowing from Russia and other foreign powers—should give U.K. law enforcement all the support it needs to aggressively investigate and prosecute malign foreign influence in London, from elite Russian expats to their professional enablers. Johnson should return to having a Minister of State for Security and Economic Crime and make this anti-corruption drive their top priority. The U.K. Parliament should immediately pass legislation to establish public disclosure requirements for foreign owners of U.K. properties and agents of foreign powers.
- Germany: Berlin should initiate a sweeping and hard-hitting review—to be run by a statesman of German law enforcement—evaluating how to thoroughly insulate financial regulators such as BaFin and the financial intelligence unit (FIU) from commercial interests that impede their independent mission to fight financial crime, a challenge that was highlighted by the Wirecard scandal and recently underscored by the IMF.
These top five country priorities were identified by reviewing the national policy vulnerabilities most exploited by professional enablers in the Pandora Papers and other similar reporting on dirty money. Throughout that research process, other policy needs emerged among the remaining G7 nations and notable financial secrecy centers. Those also-ran country recommendations are included as an appendix. The hope is that many other jurisdictions—including important middleman countries and tax havens—could be pressured to similarly shore up their rules and enforcement against enablers of corruption. But that kind of global campaign would have to start with some formidable commitments by the largest democracies, starting with the United States.
Launch a campaign to regulate enablers, pushing the Enablers Act through Congress while Treasury regulates low-hanging professions
The United States is among the less than 6 percent of countries (7 of 119) that are non-compliant with the FATF’s international standards on AML rules for non-bank enablers. That is, unlike more than 94 percent of the world, the United States does not have any rules in place requiring non-bank enablers to have compliance officers, trainings, audits, and controls reasonably designed to spot potential money laundering by identifying customers, scrutinizing transactions, keeping records, and reporting suspicious activity to the government.
Fortunately, that may change soon, as the regulation of enablers has become a top priority among U.S. lawmakers, law enforcement, civil society, and other stakeholders. President Biden’s memorandum prioritizing the fight against corruption as a core national security interest—and ordering U.S. departments and agencies to develop a presidential anti-corruption strategy within 200 days—included a prominent warning about the threat of U.S.-based professional enablers who move and launder dirty money. The Congressional response to the Pandora Papers was the introduction of the Enablers Act, which would empower the U.S. Treasury Department with all the Congressional support needed to come into FATF compliance during the last two years of Biden’s term. That would include imposing AML rules on the “four horsemen” of non-bank dirty money, which are lawyers, accountants, trust and company service providers (TCSPs), and covert public relations firms.
Corruption will be one of three areas for new policy commitments at Biden’s Summit for Democracy on December 9 and 10. Biden’s Treasury Department has shown no interest in prioritizing corruption and kleptocracy, so the risk is that Treasury repeats in December what it did at the UN General Assembly special session on corruption in June, which is to limit itself to showcasing what it is already good at (like sanctions and the existing reporting program for real estate title insurers) and new statutory mandates (like beneficial ownership reform, a kleptocracy rewards program, and rules for antiquities dealers). Taking the threat of corruption enablers seriously would require announcing major new efforts in December, a month that will serve as a crucial inflection point for Biden’s campaign against corruption and kleptocracy.
Recommendations: Feature in Biden’s anti-corruption strategy (due by December 20, 2021) the most sweeping plan to regulate non-bank professional enablers in U.S. history. At an official side event associated with the Summit for Democracy, announce that Treasury will begin carrying out this mission by promulgating rules in 2022 that would impose AML obligations on investment fund advisors, title insurers (making permanent an expanded version of geographic targeting orders), and art dealers. Announce that the Biden administration supports legislation like the Enablers Act. Work with Senate appropriators to announce an agreement to increase FinCEN’s fiscal year 2022 budget by 50 percent (an amount that was already requested by the administration and passed by the House).
Regulate and supervise non-bank enablers
Australia is the only developed country other than the United States rated non-compliant with all three of the FATF’s standards (recommendations 22, 23, and 28) to regulate and supervise non-bank enablers.
This has become a national security vulnerability as threat actors increasingly move their money outside of the banking system. In the seven years since Chinese leader Xi Jinping elevated malign influence operations, there have been many cases of Chinese espionage agents and organized crime groups funneling dirty money through property developments, casino employees, auto dealerships, charity auctions, and other non-bank avenues to launder and store ill-gotten wealth, cultivate and bribe government officials, elect and control compromised politicians, facilitate and conceal the fentanyl trade, and enable other harmful activities. While the Australian government has taken strong steps to build resilience to malign influence—banning foreign political donations, requiring foreign agent registration, outlawing foreign interference, excluding Huawei from its 5G network, and enforcing all the above—it has still not gotten to the key defensive measure against dirty money, which is to extend AML rules to cover non-bank enablers. As a comparative example, whereas enablers in Japan are regulated and aware of risky customers to watch out for—like yakuza gangsters or North Korean exporters—Australia has no way of similarly making its enablers help law enforcement spot threat actors like United Front operatives or triads. Regulating enablers would also help the government track financial footprints like those revealed in the Pandora Papers, a leak that contained about 400 Australian names, including senior figures in the property industry and a museum holding an artifact linked to a notorious antiquities looter.
For the past fifteen years, Australia has been promising to enact its own version of the Enablers Act as “tranche two” of the AML/CTF Act of 2006, a law that imposed AML obligations on financial service providers. At that time, the Australian government said that as soon as the financial tranche was implemented it would amend the law to also cover non-financial enablers such as real estate agents, lawyers, dealers in high-value goods, and trust and company service providers. The government started consultations in the middle of 2007, but then put the process on ice due to the financial crisis. Since then, tranche two has remained mired in endless bureaucratic shuffling, including statutory reviews, project plans, and cost-benefit analyses. The government repeatedly pledged to introduce tranche two legislation within a couple years—while also making commitments at the 2014 G20, 2015 FATF evaluation, 2016 UK Anti-Corruption Summit, and 2018 International Anti-Corruption Conference—but then it always failed to deliver. The only sectoral expansion enacted in recent years covers cryptocurrency exchanges, a reform that demonstrates how the regulatory ambit can be broadened through a simple amendment to AML/CFT Act. Even before the Enablers Act threatened to leave Australia isolated, the government was coming under rising pressure in the Australian senate to advance tranche two, which was pushed by the Greens a year ago and is the subject of an ongoing inquiry initiated by a Labor senator. The public comments submitted for that inquiry show that tranche two is supported by a broad coalition, including police federations, advocates for missing and exploited children, several AML experts, academic scholars, law enforcement agencies, national security experts, the Uniting Church in Australia, anti-corruption watchdogs, FinTech groups, financial planners, banks, and even some lawyers and accountants.
Recommendations: Immediately advance a legislative amendment following through on Australia’s longstanding commitment to expand the AML/CTF Act of 2006 to cover all professions needed to come into full compliance with FATF standards 22, 23, and 28 (i.e., tranche two). Provide adequate budgetary resources and statutory authorities to the AML regulator (AUSTRAC), the Australian Federal Police, and the Australian Securities and Investments Commission to swiftly implement tranche two, broadly raise awareness in the private sector, comprehensively supervise compliance, and aggressively enforce the law. Conduct a national risk assessment to help inform risk-based AML compliance. Cut the threshold at which casinos are required to identify customers from AUD 10,000 to AUD 3,000.
Extend AML rules to cover non-bank advisors and aggressively prosecute them
A decade ago, after a century of failed attempts, the U.S. Justice Department broke the back of Swiss bank secrecy. But it was a limited victory. Swiss banks now inform the IRS about Americans dodging taxes by keeping their wealth in Swiss bank accounts. But Switzerland’s sprawling industry of non-bank enablers of financial secrecy continue to quietly move and hide vast fortunes of dubious origins for the world’s worst dictators and crooks without any scrutiny or consequences.
For example, the Pandora Papers revealed more than 90 Swiss “advisors” such as lawyers, notaries, and consultants—including 26 firms providing services to clients whose offshore companies have come under criminal investigations—who introduce shady clients to offshore service providers. The examples ranged from a business support service provider who set up more than 30 shell companies for Azerbaijan’s corrupt ruling Aliyev family to a Swiss lawyer who formed a company involved in the construction of Putin’s Black Sea Palace.
These sophisticated professionals almost never conduct due diligence or file suspicious activity reports, because they know how to enable financial secrecy without triggering regulatory requirements, which are too narrowly scoped. Swiss AML law only applies to non-bank advisors when they become parties to financial transactions. By contrast, the Enablers Act proposed in the United States would meet FATF standards by covering any person providing company formation services, any accountant, and any lawyer “involved in financial activity or related administrative activity on behalf of another person.” If Swiss law had that kind of broader scope, it would have covered cases like the law firm in Zurich that the Panama Papers revealed to be the secret backchannel through which Bank Rossiya—controlled by and holding wealth for Putin and his cronies—sent instructions to Panamanian law firm Mossack Fonseca.
Finally, even when crimes are alleged, sometimes seemingly compromised Swiss law enforcement officials have failed to successfully prosecute major cases of international corruption, such as rampant corruption at FIFA or the Swiss connection to the Russian mafia and the Magnitsky affair.
Recommendations: The Swiss Parliament should resuscitate its recently failed attempt to expand customer due diligence and suspicious activity reporting requirements to cover non-bank advisors (such as lawyers, accountants, notaries, fiduciaries, and TCSPs) in circumstances when they are involved in FATF-covered administrative activities (such as the creation, management, or administration of legal entities and arrangements like companies and trusts). Parliament and the attorney general should ensure that the ongoing reorganization of Swiss prosecution ends up expanding resources and strengthening powers and accountability around the need to successfully prosecute enablers of international corruption. The attorney general should launch sweeping investigations into major non-bank enablers suspected of being tools of hostile foreign powers such as the Putin-connected law firm highlighted by the Panama Papers, the company formation agents and verein law firms featured in the Pandora Papers, the massive Geneva art freeport used by Russian oligarchs, and the obscure public relations firm that secretly funds the Alternative for Germany party.
Enforce laws against malign influence and disclose foreign agents and property owners
Like Switzerland, Britain needs financial transparency measures that go beyond the basic international standards set by the FATF, for two reasons. First, London gets showered with ill-gotten wealth more than any other city in the world, not only because of its reliable rule of law and its deep and stable markets for housing and financial capital, but also because Britain spent decades opening its borders to foreign money without asking where it comes from (including through the original invention of offshore finance, proliferation of financial secrecy through partly controlled territories overseas, establishment of a golden visa scheme, ability to anonymously own property, and several other areas of lax rules and weak enforcement). Second, London is also besieged with malign geopolitical influence, as the city is arguably the one Western political and financial center that the Kremlin and its proxies have expended the most resources infiltrating since the end of the Cold War, dispatching elite expats to make big political donations and pay non-bank professionals to manage their affairs, according to a U.K. parliamentary report on the Russia threat.
Both challenges—vast proceeds of corruption being invested in London while British politicians get donations from corrupt sources tied to foreign powers—were thoroughly documented by the Pandora Papers. First, more than 1,500 UK properties have been bought using offshore firms, including London mansions secretly owned by the rulers of corrupt regimes in Jordan, Ukraine, Qatar, Azerbaijan, and Kenya. Second, the largest donors to the U.K. Tory party include oligarchs whose fortunes reportedly flow from the corruption of authoritarian regimes, including Lubov Chernukhin (whose massive donations buy access to secret monthly meetings with Boris Johnson, while her husband—a top former official under Putin—gets millions from Kremlin allies in Moscow via offshore havens, reportedly corrupt money he shares with his wife), Viktor Fedotov (a Russian-born oil magnate who reportedly made a fortune siphoning funds from a Russian state pipeline and now donates heavily to the Tories while seeking ministerial approval to build a sensitive U.K.-France undersea electricity grid connector), and Mohamed Amersi (who got rich allegedly advising a Swedish telecom company on how to bribe its way into central Asian countries, and who now openly characterizes donations to the Tories as “cash for access”).
A clear illustration of how Downing Street could announce plans to kick these oligarchs and their dirty money out of London comes from the words of Theresa May after the Skripal poisoning: “[L]ed by the National Crime Agency, we will continue to bring all the capabilities of U.K. law enforcement to bear against serious criminals and corrupt elites; there is no place for these people—or their money—in our country.” Unfortunately, since then, Boris Johnson and his fundraiser-in-chief have supercharged Tory donations by targeting world’s ultra-wealthy. Meanwhile, Johnson’s government has tried to cover up the parliamentary Russia report, refused to follow up on any of the report’s findings, installed the wealthy son of a former KGB spy in the House of Lords, stopped issuing all unidentified wealth orders, and dragged its feet on several long-promised financial transparency bills, including Companies House reform, a registry of foreign owners of U.K. properties, and a foreign agent registration scheme. Instead, Johnson’s government seeks more “competitive” (i.e., permissive) financial regulations and an elections bill that would strip the Electoral Commission of its prosecutorial powers and allow Britons living abroad for more than 15 years to make political contributions. Whereas other governments are loath to impose financial transparency because they are afraid of standing up to private interests, Johnson’s political machine itself appears to have become compromised by its own reliance upon dirty money from hostile foreign powers. The best chance for any near-term progress might have to come from a hard push by Biden.
Recommendations: Provide all necessary support for the National Crime Agency to bring all the capabilities of U.K. law enforcement to bear in a sweeping campaign to investigate and prosecute cases involving foreign corruption and its U.K.-based enablers and beneficiaries, including any peers, big donors, law firms, or other influential persons potentially funded by corrupt foreign powers or their proxies. To prioritize this mission, return to having a Minister of State for Security and Economic Crime (as it was under Ben Wallace, before Johnson removed “and economic crime” from the title), and make this their top priority. Update the proposed bill for a registry of foreign owners of high-end British properties to feature protocols to verify information and an air-tight definition of beneficial ownership (identifying real humans and including those with substantial economic control), and make parliamentary time to pass it in the weeks ahead. Make parliamentary time to pass a foreign agent registration act, imposing detailed reporting requirements on agents of foreign principals or their proxies, broadly covering British PR agencies and reputation management firms as well as MPs and members of the House of Lords. Make parliamentary time to give Companies House statutory powers to verify information and the resources needed for strong supervision. Reject the bid by Russian oligarchs to build a U.K.-France undersea electricity link. Scrap the plan to revoke the prosecutorial powers of the Electoral Commission.
Reorient financial regulators to serve law enforcement, not commercial interests
In a country that has—since World War II—denied itself the usual outlets for projecting geopolitical power and expressing national pride, German-based corporate powerhouses take on a special role. So do German regulators, which are formally charged with supervising companies, but sometimes also feel the conflicting responsibility to promote multinational conquest and protect corporations from foreigners perceived as aiming to keep Germany down. That is why the worst corporate scandals—from Deutsche Bank to Volkswagen—have been uncovered by more vigilant authorities outside of Germany, and then the response by German regulators has often been to defend the national standard bearers they oversee.
To take a recent case of a non-bank financial enabler, the Financial Times uncovered shady accounting practices at Wirecard, which was a third-party payment processor that got its start by serving pornography and gambling websites before growing to become one of Germany’s largest companies, only to collapse after admitting to a $2 billion hole in its balance sheet (just as the FT had reported). Instead of probing the veracity of the allegations, Germany’s financial regulator, BaFin, mobilized to defend Wirecard, going so far as pressing unsubstantiated criminal charges against FT reporters and banning short-selling of Wirecard shares (based solely on flimsy oral evidence from Wirecard itself, while BaFin sent the finance minister a memo that included xenophobic bluster about the short sellers being “mainly Israeli and British citizens”). Meanwhile, within the finance ministry, Germany’s FIU failed to pass on dozens of suspicious activity reports about Wirecard to the German public prosecutor’s office.
Separate from Wirecard, German prosecutors recently raided the finance and justice ministries as part of an investigation into the FIU failing to share suspicious activity reports with the ministries, even when the FIU takes note of the filings and then conducts “extensive communication” with the ministries. The investigation started after the FIU decided to sit on a report about more than €1 million transferred to Africa to fund terrorism, arms, and drugs, and the investigation seems to have broadened “to the tune of millions of euros.” While the German government argues that it has now addressed these issues through new legislation and organizational changes over the past year, the IMF reviewed these reforms in July and warned that “better demarcation of the regulatory perimeter of non-bank operators, particularly in terms of financial reporting and AML/CFT activities, is still needed.”
Recommendations: Initiate a sweeping review assessing how to thoroughly insulate financial regulators—including, but not limited to, BaFin and the FIU—from perceived or actual commercial interests that risk impeding their independent mission to fight financial crime. This review should be run by a highly prominent and deeply experienced statesman of German law enforcement, and it should include full cooperation with any prosecutions of culpable officials, strict controls around communications that stray outside of law enforcement channels, new organizational reporting structures, recommended names of seasoned officials to fill key roles, and other measures to cultivate a strong professional culture dedicated entirely toward supporting German law enforcement.
It would take bold steps—from new rules to stronger enforcement—by five major democracies to consolidate the international consensus that the enablers of corruption should be required to watch out for dirty money. While the United States and Australia should establish AML rules for non-bank enablers, the United Kingdom and Germany should enforce their existing rules, and Switzerland should do some of each. There are deep-seated domestic political reasons why these five founding members of the FATF have not yet addressed these vulnerabilities, which have now become grave threats to security. That makes the Summit for Democracy a unique opportunity to stand together and commit to strongly regulating and supervising professional enablers of corruption.
Appendix: Also-Ran Country Recommendations
In addition to the five countries that host the most egregious enablers of corruption, all G7 countries and other secrecy jurisdictions have important policy vulnerabilities to address.
Regulate and supervise lawyers, notaries, and TCSPs
Amend regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) to extend AML obligations and FINTRAC supervisory responsibilities to also cover lawyers, Quebec notaries, and company service providers that are not included among trust companies. When crafting suspicious activity reporting requirements for lawyers, meet the Oakes test by limiting the duty to situations with no reasonable alternative and designed to be exercised through case-by-case prior judicial scrutiny, rather than automatic reporting.
Improve supervision of real estate, company domiciliation agents, and lawyers
For real estate and company agents, implement the IMF’s recommendations to (1) have the Directorate General for Competition Consumer Affairs and Fraud Control (DGCCRF) within the Ministry of Economy conduct systematic assessments of money laundering risks of real estate agents and company domiciliation agents and dedicate more resources to this effort, (2) have DGCCRF start monitoring commercial agents engaged in property transactions and make real estate agents accountable for breaches by commercial agents they work with, and (3) have the National Sanction Committee (CNS) impose more severe sanctions and DGCCRF use its new injunction powers to make agents take remedial actions and follow up quickly. For lawyers, implement the IMF’s recommendations to (1) have CNS issue guidance and take other steps to promote a unified understanding of AML risks among local bar associations, (2) develop consistent approaches across CNS and local bar associations to AML monitoring, procedures, and disciplinary actions, and (3) have CNS collect and analyze information on monitoring and disciplinary actions taken by local bar associations.
Promote more suspicious activity reporting by non-bank enablers
Implement the FATF’s recommendations to (1) issue legislation (or at least regulatory guidance) around how individual sectors should implement the AML law through risk-based compliance programs, (2) increase the frequency of on-site inspections of non-bank enablers and other similar supervisory engagements, and (3) introduce administrative sanctions for non-bank enablers that fail to conduct customer due diligence.
Promote more suspicious activity reporting by lawyers and accountants and improve supervision of real estate agents
Come into compliance with the FATF recommendation to impose suspicious activity reporting requirements on legal and accounting professionals if and when they “prepare for and carry out [five specified types of financial transactions] for their clients.” Increase resources, authorities, and other support for the nine ministries and other authorities that supervise AML compliance, particularly for sectors posing higher risks such as real estate. Require non-bank supervisors to develop comprehensive and dedicated programs of risk-based AML supervision, with clear priorities and objectives for oversight and engagement, publication of detailed sector-by-sector practical guidance to effective AML compliance, and dissuasive sanctions for cases of non-compliance.
Get TCSPs to take their obligations more seriously
Implement the FATF’s recommendations to provide more guidance, training, feedback, and enforcement pressure to ensure that all TCSPs—not just the large and sophisticated firms—improve their understanding of their independent legal obligations (rather than assuming they can leave due diligence to the banks to whom they refer customers), as well as the money laundering risks they are involved in and what preventative measures they must take to manage those risks. This ramp-up in the AML compliance of Cypriot TCSPs should be overseen by the Advisory Authority. The guidance and enforcement steps should be undertaken by the respective supervisors at the Cyprus Bar Association, the Institute of Certified Public Accountants of Cyprus, and the Cyprus Securities and Exchange Commission.
The views expressed in GMF publications and commentary are the views of the author alone.