This is an abridged version of the presentation delivered at ‘Dark Havens: Confronting Hidden Money & Power’, a conference held in Berlin on 5–6 April 2019
The corrupt need a safe place to hide their illicit gains. No one wants to simply keep money under their mattress at home.
That’s when tax havens become an important part of the dirty money puzzle. The great majority of grand corruption schemes feature offshore, anonymous shell companies to hide the identity of those who benefit from dirty money. These are remarkably easy to set up. So easy that a recent study by Global Financial Integrity shows that in all 50 US states it is easier to set up a company than get a library card.
Even with an anonymous company through which to operate, without a bank account even the corrupt will struggle to transform their illicit money into beach-side property or luxurious yachts. Banks are the vital link in the flow of illicit money around the world.
Transparency International is currently analysing 50 cross-border corruption cases — from Brazil, to Ukraine, to Malaysia — to understand how the corrupt have used banks and if and why financial institutions have failed to identify wrongdoing and stop transactions. One case from the forthcoming study illustrates many of the issues our analysis has identified so far.
Operação Lava Jato
The case is a very small part of the largest corruption scandal in the history of Brazil — known as Operation Carwash, or Lava Jato, in Portuguese. The scheme was first uncovered by Brazilian prosecutors in 2014 and continues to be the subject of investigations.
As part of the scheme, Brazilian politicians appointed executives for high-level positions at Petrobras, the Brazilian state-owned oil company, who then negotiated public contracts with construction companies in exchange for bribes. These bribes were subsequently shared with the politicians and their political parties.
One particular case involved the purchase of an oil block in Benin.
Two Swiss banks played a key role in facilitating this scheme: BSI and Julius Baer (formerly Merrill Lynch).
It all started back in 2009, when a manager at Petrobras named Pedro Bastos was approached by CBH, a company registered in Benin that had a concession rights to explore for oil in the country. CBH wanted to sell 50 per cent of its exploration rights. After internal discussions, Petrobras recommended not to proceed with the deal, but Bastos ignored the recommendation and two years later the deal was approved.
Follow the money
As part of the agreement, on 3 May 2011, Petrobras transferred US$34.5 million to CBH.
The same day, CBH transferred the money to an account held by its parent company, Lusitania Petroleum, at the Swiss bank BSI. Lusitania Petroleum is an offshore company registered in the British Virgin Islands, owned by a Portuguese businessman, and with no previous experience in the oil sector. That fact alone would make one question how the Benin government awarded the concession to this company in the first place, but that’s a question for another time.
Two days later, Lusitania transferred part of the money — US$10,000 — to another offshore company, Acona. Acona is a shell company created by Panamanian law firm Mossack Fonseca and registered in the Seychelles upon the request of David Muino Suarez, Vice President for Latin America at BSI. Acona later received other transfers from Lusitania Petroleum, totalling US$22 million — more than half the total amount paid by Petrobras to CBH.
Acona then made others transfers to yet more offshore companies. One of them was Sandfield.
Sandfield was also established by Mossack Fonseca, this time in Panama, upon the request of Muino Suarez, just one month before Petrobras made the payment to CBH. Muino Suarez then opened Sandfield’s bank account with BSI.
Documents show that the only person with authorisation to manage the Sandfield account was Pedro Bastos — the same Pedro Bastos involved in the negotiations of the oil field in Benin.
To cut a long story short…
The money left Petrobras, passed through two offshore companies with the help of a Swiss bank and returned to a manager at Petrobras.
Payments were also made from the Sandfield account to purchase luxury goods in different parts of the world. There is even evidence of a payment (possibly a bribe) to a Brazilian customs official, possibly to ensure that Bastos could return to Brazil with his purchases without any problems. Bastos presented the bank with documents that showed he worked for Petrobras (there is even a copy of his business card in the bank files). Yet, no measures were taken to investigate the origin of the money entering the account.
Acona also made transfers to accounts in another Swiss Bank, Julius Baer (formerly Merrill Lynch). In spite of strong evidence of money laundering, this bank also chose to turn a blind eye.
The political connection
In 2011, US$1.5 million was transferred from Acona to Orion, a trust formed in Scotland in 2007. Eduardo Cunha, a Brazilian politician who at the time was the Speaker of the Lower House, created the trust and was its beneficiary. The bank held several files that stated Cunha was the beneficiary of this and other accounts used in the scheme, including a copy of his passport.
Cunha was also the politician who suggested Bastos’s name for the position with Petrobras.
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Close, but no cigar
After noticing that a significant percentage of the money was transferred to someone with no specific credentials and who was not directly involved in the deal, the compliance department of BSI requested further information. Muino Suarez, as the account manager, described Acona’s role as follows: “External consultant for Petrobras for international services/questions. Intermediary between Petrobras and Lusitania Petroleum.” The question came up at least one more time a year later, when the compliance system of the bank flagged another suspicious transaction. Muino Suarez made a reference to his prior explanation. Surprisingly, Muino Suarez’s explanations were deemed sufficient. This and other transfers were allowed to continue and no suspicious transaction reports were submitted.
David Muino Suarez is now under arrest in Brazil. According to the investigations, he played a key role in setting up the structure that allowed illicit funds to be laundered. But this is rare; it is more common for senior managers not to be held responsible for their role in money laundering schemes.
There is no publicly available information indicating that these two Swiss Banks were punished by Swiss authorities for their role in these schemes.
BSI was punished for their role in the 1MDB scandal in Malaysia, which took place at the same time and involved more than 100 accounts with the bank. Yet, there are questions about whether the sanctions applied were proportionate. Swiss authorities ordered the disgorgement of profits made by the BSI for passing these transactions, but no actual fine was issued. Authorities also approved BSI’s integration by EFG International on the condition that BSI would thereafter be dissolved — which does not seem like a real punishment either.
We won’t win the battle against corruption and money laundering unless authorities and those regulated and supervised by them take enforcement seriously. In this case, we saw that banks did part of their job and identified the real people behind the offshore companies involved in the transactions. They even flagged some transactions as suspicious, yet very simple (and frankly unconvincing) explanations by management were sufficient to allow corruption to flourish.
As important as the Panama Papers and other leaks are for understanding the inner workings of offshore corruption schemes, we can’t always rely on whistleblowers, journalists and civil society to uncover all cases. It is time for the authorities to start doing their jobs.
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