The state of global finance: laundering, hacks and whistleblowers

August 2016 | PROFESSIONAL INSIGHT | BANKING & FINANCE

Financier Worldwide Magazine

Characterised as the largest data leak in history, the so-called Panama Papers have joined a growing list of leaks and hacks that lay bare troubled global leadership and financial infrastructure.

In April of this year, a team of investigative journalists revealed their work on a trove of financial documents leaked to the German newspaper, Sueddeutsche Zeitung, from the Panamanian law firm, Mossack Fonseca.

Working for over a year in secret, the International Consortium of Investigative Journalists (ICIJ) reviewed 11.5 million confidential files that illuminate the questionable financial activities of officials, politicians and others.

Ensnaring the leaders of countries, their friends and relatives, the Panama Papers will make front page news – and topple careers – for years to come. While the use of offshore companies to avoid tax is not necessarily illegal, the leaked documents suggest leaders and associates went further, engaging in illegal commercial transactions and large-scale money laundering.

Impacts of the revelations to date include: (i) the revelation that approximately 140 politicians, from over 50 countries, use Panamanian law to shelter funds and avoid regulatory and tax consequences (the offshore leaks database identifies approximately 360,000 names of companies and people using secret offshore havens); (ii) evidence of extensive use of offshore shell and shelf companies to conceal assets or to shield wealth in anticipation of a high asset divorce; and (iii) governmental leadership is under fire – the prime minister of Iceland Sigmundur Gunnlaugsson resigned after undisclosed offshore interests were revealed, and at least 12 heads of state are identified in the documents.

Internationally, calls are growing to battle corruption through stricter regulation and prohibitions on still-legal measures that amount to tax evasion and fraud. American president Barack Obama called for international tax reform, even as states in the US like Delaware, Wyoming and Nevada face increased scrutiny over financial transparency.

In May, the anonymous party responsible for leaking the Panama Papers transmitted an 1800 word ‘manifesto’, declaring: “I decided to expose Mossack Fonseca because I thought its founders, employees and clients should have to answer for their roles in these crimes, only some of which have come to light thus far. It will take years, possibly decades, for the full extent of the firm’s sordid acts to become known.”

A cyber crime

Despite this posture, Mossack Fonseca is pursuing the release of its business documents as a cyber crime. Clients were notified of an email breach and partner Ramon Fonseca said: “This is a hack... The only crime that has been proven is the hack. No one is talking about that. That is the story.”

In other parts of the world, details continue to emerge about a potentially systematic attack on the Society for Worldwide Interbank Financial Telecommunication (Swift). Swift, an 11,000 member consortium of financial institutions, is a global messaging system used to transmit sums of money around the globe.

In February, Swift revealed a member institution, the Bangladesh Bank, suffered a loss of $81m in an expertly planned digital heist that involved network compromise, customised malware, and the Federal Reserve Bank of New York. By May, Swift notified client-banks of a second digital invasion, suggesting the hack was part of a “wider and highly adaptive campaign targeting banks”. Swift claimed “the attackers clearly exhibit a deep and sophisticated knowledge of specific operational controls within the targeted banks – knowledge that may have been gained from malicious insiders or cyber attacks, or a combination of both”.

Tattered by inadequate cyber security practices, and coloured by mounting disillusion and economic divide, the current global financial landscape is not a pretty picture.

ESG – the impact of digital and financial disorder on markets and confidence

Though unrelated, these events remind enterprise and organisational operators of the disabling one-two punch of poor governance and ineffective cyber security.

Evidence that sophisticated hacking groups from North Korea and Pakistan collaborated with a third hacking operation in the most recent Swift intrusion demand the full attention of the finance industry. Criminal enterprise is quickly overtaking white hat capabilities to protect and preserve financial security nationally, and internationally.

Like documents leaked by Edward Snowden, the contents of the Panama Papers are disruptive and compelling. Yet, attention is drawn away from the vulnerability of electronic storage of sensitive documents and identifying information.

The Organisation for Economic Co-operation and Development (OECD) notes: “The Panama Papers describe in detail how a veil of secrecy is still allowing funds to be transferred between jurisdictions and held offshore, where it can be hidden from tax authorities”.

The Panama Papers, combined with global electronic insecurity, highlight the environmental, social and corporate governance (ESG) issues that play an important role in sustainability, investment, business, and national and global confidence.

Until governance, tax havens, tax evasions and digital criminal enterprise are collectively addressed, global financial instability – and insecurity – will continue.

Cheryl Tyler is the chief executive officer of CLT 3 Consulting. She can be contacted on +1 (240) 481 7756 or by email: cheryl.tyler@clt3consulting.com.

Cheryl Tyler

CLT 3 Consulting