Money Laundering Typologies Evidenced in the “Panama Papers”

Abstract

This chapter details the fact that commonly properties are been paid through the misuse of the market. To launder their criminal proceeds, money launderers transfer large sums of money, many times using cash, wire transfers, remittance companies, NGOs, offshores, trusts, or black market moneychangers, which make them impossible to identify the real owner, the beneficial owner. From a unique judicial perspective, the author provides insight on how market grapple with the challenging issues that arise in such complex and international cases revealed by Panama Papers.

There have been many initiatives in the war on organized crime. In Mexico for instance, the war on drugs has had a central focus, with strategies built on the involvement of civil and military agents and where records have been set for cash forfeitures , drugs apprehended, and extraditions. The war on drugs has also had a central focus in Colombia. On September 10, 2007, in the municipality of Zarzal in the northeastern part of the department of Valle, the Colombian army captured Diego Montoya, better known as Don Diego, one of the top ten most wanted criminals on the DEA, CIA, and FBI lists. According to Juan Carlos Garzón, this arrest was probably the most notable achievement in the war on drugs for that year, in which over 57,000 people were arrested, with over 100 extradited to the United States.¹

Eric Olson reveals that there are many similarities between Italian mafia organizations and Mexican criminal gangs. In his view, “Mexican organized crime is more market focused, less stable, and less durable. Moreover, Mexican criminal organizations are much more willing to attack the state. Additionally, the violence they employ is more gruesome and has different goals, including intimidating their rivals and terrorizing the public. Finally, they seek to shape public perceptions about organized crime by targeting the media either through violence and intimidation or to control the stories that are published.”²

With regard to Italian mafia organizations, Francesco Messineo observes that white-collar criminals “not only help the Mafia, but also commit crimes in their specific sector. This can be said of all crimes dealing with public bidding processes, even where the hand of the Mafia is not involved, although it generally is, or in such cases as corruption , collusion, and other well-known crimes against the public.”³

Important initiatives in the war on transnational organized crime also occurred in Brazil. In 2007, Colombian drug Lord Juan Carlos Ramirez Abadia, also known as Chupeta, was arrested in São Paulo and sentenced, with several others, to more than 30 years in prison. He was later extradited to the United States.⁴ Other important actions were taken against the First Command of the Capital (PCC), a powerful criminal organization involved in miscellaneous crimes such as robbery, extortion, and drug trafficking in São Paulo. The police have also stepped up their actions in the shantytowns of Rio de Janeiro.

Despite these initiatives, organized crime is still active and adapting itself to enforcement efforts—whether by moving to new territory or spreading out its activities in the so-called baby cartels or micro organizations. It has kept up its strength through well-armed groups, assuring its control over extensive regions and the ability to respond to government enforcement efforts.

Organized crime has indeed defied government control, and not just in poor suburbs or rural areas. One Brazilian example occurred in May 2006, when over eighty people were killed, thirty buses set on fire, and a large number of private homes attacked because the government had announced the transfer of PCC leaders to maximum security prisons.

One of the most effective instruments for crime fighting is to cut off crime’s financing, that is, to confiscate the proceeds of drug sales and to cut off, limit, and control the flow of money across borders. The movement of money between States through the transportation of large sums of cash must be stopped. Further, the illegal transportation of money through prepaid access cards, stored value instruments, and black market moneychangers must be stopped.

Money laundering can also occur through the mechanism of fraudulent payments . This involves fixing the price below market value, or simply leaving out part of the amount payable, and then paying the price in cash or some untraceable means and delivering it to the seller under the table. When prices are pegged at artificially high levels, the launderer may wish to have illicit financing of his acquisition and, to that end, will resort to bad appraisers and fake documentation . Any time such facts or possibilities are known to authorities, all of them mindful that such crime is well-financed, no crime should go unpunished because this will surely lead to increased perpetration by others and ultimately to the financing of terrorism.

There is much intelligence work to be done, more than that involved in simply controlling one’s borders. Intelligence forces need to work together because if they are kept apart, each may, in isolation, feel that someone else is responsible for the problem.

Because money is fungible, prosecution has difficulties when money subject to forfeiture is mixed with money not connected to illegal activity. This is why some federal prosecutors in the United States have tried to seize and forfeit all of the money based on a facilitation theory. This theory is based on the possessor’s intent would be a good policy. The intent test explains why a bank account involved in routine transactions is not subject to forfeiture and why all funds in a transaction made by someone suspected of money laundering are forfeitable.⁵

We must therefore approach the problem from a technical angle, for in many countries, there is an atmosphere that fosters the adoption of solutions that are ineffective, scattered, poorly coordinated, and not cohesive, especially owing to considerable social inequality.

It is not at all uncommon for officeholders to announce before elections that they will establish strategies to take the money out of crime. After elections, little is actually done other than budget cuts to the detriment of public safety.

The perception that money laundering is a victimless crime must come to an end. Society, politicians, and journalists must give money laundering more attention.

3.1 Offshore Companies and Concealing the Beneficial Owner

We are facing today unusual methodologies to launder money. For instance, through artworks, football, churches or temples, and so on. What do these methods have in common? Certainly, offshores are been used in an extended way in order to make it possible for the owner of some properties to conceal them.

For instance, an interesting case was featured by the seizure of works of art, their forfeiture and cooperation between the governments of Brazil and the United States in repatriating several of them back to Brazil.

Defendant Edemar Cid Ferreira was found guilty in December 2006 and sentenced to 21 years in prison and payment of 73 days equivalent in fines (a total of 7980 minimum monthly wages, which is some R$5,187,000 or US$2,594,000), for racketeering, fraudulent management of a financial institution (Banco Santos S.A.), exchange quota violations and money laundering through artworks. His wife and others were also convicted and given harsh terms in the lower court. There is no final decision yet.

The complaint reveals the creation of the Bank of Europe (sometimes called simply “BoE” or “BofE”), based in Antigua, which was intended to operate, in an international version, transactions that were concluded at the national level with “frontage” companies. Offshore companies headquartered abroad and indirectly linked to the Bank in Brazil (Banco Santos) used the BoE to conclude operations considered illegal. BoE would present the same graphic structure of the meeting minutes of Banco Santos, in addition to the coincidence of the initials of the names of several of its permanent members, were considered suitable elements to delineate the narrow link that united it to Banco Santos. Formally, it was stated as the parent company BoE to Dome Securities Limited, named beneficial owner. Valence Enterprises Inc., the parent company of that holding company, was entitled “ultimate beneficial owner”, as described in its Articles of Association. At the time of its institution, and because it had no physical existence, Beauford Financial Services Uruguay Sociedad Anônima was created, with the purpose of providing “technical support services and representation of foreign financial institutions and institutions”, among others, aiming at the structure of the institution (BoE), as described in the Statute of Beauford. Some accused initially appeared as BoE prosecutors on a current account with the Swiss Bank Corporation of New York Branch.

The defendant Edemar stated that he and his family owned a bank abroad, the BoE, but that they could no longer be related to it (BoE). This would belong to the Trust called Friborg, which, in turn, was owned by Edemar’s family. The name of the Trust, i.e. Friborg was changed to Eurotrust, with the support of lawyers. Just below this structure were the offshore companies Simington Investments Inc., based in the British Virgin Islands, Beauford Services, based in Friborg/Switzerland, and Beauford Bahamas, which controlled the BoE.

Their assets were confiscated (cash , computers, real estate , wine and works of art). The works of art were turned over to cultural entities (Museum of Archaeology and Ethnology at the University of São Paulo, the Paulista Museum or Museu do Ipiranga, the Museum of Contemporary Art at the University of São Paulo, Institute of Brazilian Studies Sacred Art Museum, the Latin America Memorial Foundation, the Navy Cultural Center in São Paulo, and the Secretariat of Culture for the State of São Paulo), to be permanently incorporated into their holdings—usually considered the beginning of the process of being declared a treasure by the São Paulo City Council for the Preservation of Historical, Cultural and Environmental Patrimony (CONPRESP).

The artworks consisted of framed art, photographs, archaeology, ethnography, sculptures, Brazilian regional literature and antiquities by renowned artists going back to the fourteen to ninth century B.C. (Togatus Romanus) and even contemporary pieces (Basquiat, Hirst, etc.), totaling over 12,000 pieces.

The decision was made to turn the defendant’s home (Rua Gália 120, borough of Morumbi), furniture and all artworks within it over to the State Secretariat of Culture as they were deemed cultural goods subject to state protection.

Artworks that had been shipped abroad were also decreed a forfeiture , and INTERPOL was formally notified, which made possible the repatriation of some of the works through diligent efforts by U.S. authorities.

Regarding the final destination of artworks, there was an interesting debate in the Courts.⁶

The managers of Banco Santos S.A. took pains to give the necessary appearance of legitimacy to their criminal acts, even though, in compliance with the rules of the Central Bank, they did organize a department for the prevention of money laundering , which was itself unable to detect suspicious transactions by the directors of that very institution.

It was found that money from the financial management of Banco Santos S.A., sometimes from operations in Brazil, other times from operations abroad, returning afterward to Brazil, was used to benefit managers and directors (who received large bonuses from affiliated companies Alpha and Maremar), when not from their own customers, and primarily from defendant Edemar Cid Ferreira and his family members, sometimes through persons from outside of his family environment. The diverted money was used for several different purposes: maintenance of cash flow for Banco Santos S.A. and its nonfinancial companies listed on its organizational chart, payment of bonuses to directors and employees, and investment in real estate and works of art. Finally, sums obtained through the commission of antecedent crimes were brought back into the formal economy with no connection to their shady origins.

Brazilian companies, whose partners are offshore companies, were provided with large sums brought into Brazil, in part through exchange contracts recorded at the Central Bank under the heading of foreign investments by partners, clothing them with legitimacy which, however, gave way before the discovery that these companies were credited abroad with money deriving from crimes committed in Brazil.

There was considerable resistance to the obtaining of vital information from tax havens, and the issue was resolved with the valuable cooperation of U.S. authorities who sent Brazil a considerable amount of important banking information that made it possible to access and check the names of those responsible for offshore companies operating bank accounts in the United States.

The unlawful acts could only be carried out, in theory, thanks to the efficient and comfortably large holdings of its controller who, oddly enough, owned practically nothing in his own name (no vehicles, no artworks, just two lots and an apartment in Pompéia in São Paulo).

For this there was good reason. The evidence produced showed that the holdings of Edemar Cid Ferreira and his wife, Márcia de Maria Costa Cid Ferreira, had no legal foundation. The property owned by the couple was always involved in events related to the diversion of money from Banco Santos S.A.

Indeed, as of their entering into the bonds of matrimony, in anticipation of events, they decided to harden their assets—actual preparation for the crimes they had decided to commit.

Márcia revealed that her husband had decided to keep his property separate in order to protect her from the ups and downs of his business activities, and also because, should bankruptcy occur, the couple’s children could keep money having to do with the Bank. When questioned as to whether the cash spent in constructing the home at Rua Gália 120 might have come from her husband’s activities at Banco Santos S.A., she was emphatic: “Of course. On account of the profits he had at the bank, right? All of it, I believe.”

She asserted that she was included among management personnel at several companies at the request of her husband, who saw to that in order to protect her. This strategy, in the words of the accused, was certainly in his interest while seeking to engage in the laundering of money. With the couple’s every new acquisition, Edemar signed the property over to her, with the exception of the bank and the brokerage house.

Dissimulation as to the origin and ownership of sums used for the purposes named and the deception of Brazilian authorities became discernible on account of systematically repeated organization of companies and amendment of articles of association, most notably in tax havens.

On its organizational chart, Banco Santos S.A. was subdivided into several committees, each managing a given area. The credit area was called upon to approve Proposed Credit Operations (POCs) for the officers—the account managers working on the business platforms. In addition to this committee there was an informal committee consisting of Edemar Cid Ferreira, Mário Arcangelo Martinelli, Álvaro Zucheli Cabral, Ricardo Ferreira de Souza e Silva and Rodrigo Rodrigues de Cid Ferreira.

Acting as planned then, toward a common purpose, they dissimulated the origin and ownership of the proceeds of crimes committed against the National Financial System by the criminal organization using, among other mechanisms, conversion of part of the money into legal assets.

It became clear that the controller, with the avid cooperation of others, acquired assets thanks to the commission of financial felonies by a criminal organization which garnered him a large sum of money, real estate—especially the house at 120 Rua Gália—a veritable work of art,⁷ in addition to thousands of other works of art comprising one of the largest, if not the largest collection in Brazil, which sadly, was the result of unlawful activity.

The use of football as a way to money laundering can be summarized in the following typologies, well portrayed in the discussions by the Financial Action Task Force—FATF : acquisition and investments in football clubs; the international market for transfer of players; their “acquisition”; handling game tickets for unlawful purposes; bets; misuse of the image rights; sponsorship and advertising.⁸

Regarding investment in clubs, it can be said that many cases were reported by the FATF and ill-gotten money were laundered with the appearance of regular application in the economic system. In fact, football investments have not been clear enough. The darkness is a rule and causes too much trouble to verify the origin of funds because presents hard evidence of the entrance of dirty money. Investments have been made from amateur clubs to the most graduated ones, but it is curious that they often find themselves in precarious financial situation, requiring more and more resources, although some are the most prestigious clubs and objects of large commercial contracts.

There were reports of drug traffickers also invested in football. A case reported by Mexico showed that a humble person from the countryside moved to the coast and subsequently brought a vast amount of money and set up several companies. There was the acquisition of a soccer team in the third division, which had no reason to attract such investments. Salaries and infrastructure paid for with the new administration were high and the team finished climbing the second division. It gave some legitimacy to the investor, but after it was found that the investment had origin from drug trafficking, specifically from the network headed by him.

It is known the “emotional launder,” i.e., the possibility of investment in clubs without giving due importance to the origin of the funds invested. Investments in football can give rise to one secured favorable status.

Investments in the acquisition of clubs can be reversed through fictitious loans or transactions that actually would mean an effort to allow ill-gotten gains. The investor, through an agent, located in an offshore tax haven, buys players and the seller company pays fees through this agent. Such fees are passed on to another offshore controlled by original investor. The value of the fees is similar to the investments. To avoid such methods of money laundering , it is important to obtain appropriate documentation and further information in order to identify the people, the transactions involved and the source of funds for each club or player. It is also relevant to recognize the real beneficiary (beneficial owner) and the real controllers of the club.⁹

Regarding to the use of churches and temples as means for money laundering purposes, given the suspicion with new religious movements which are often regarded whether the faith as a whole is fraudulent, or whether particular instances of conduct are fraudulent.¹⁰

It is a well-known fact that some religious institution acts in a very controversial way when it comes to collecting financial resources through donations from church members—especially protestant churches of neo-charismatic orientation, which are commonly referred in Brazil as “evangelicals.” On some occasions, there has already been reports and investigation from the press and governmental bodies based on evidence of criminal activity related to financial collection and administration. Some leaders of those organizations are, sometimes, target of charges regarding crimes such as money laundering , participating in organized crime, larceny by fraud, among others.

A high-profile case, one of the first scandals of this kind in Brazil, came out after the arrest of the Universal Church of the Kingdom of God’s leader (IURD’s leader), bishop Edir Macedo Bezerra, on charges of larceny, “false-healing” and quackery. After 15 days, the pastor was released, but, since then, the church was involved in many charges regarding various criminal activities. That is what happened in 2007, when some charges, made by state congressman Afanásio Jazadji, led to an investigation by Federal Police of Edir Macedo to verify the occurrence of crimes of misrepresentation against public faith, money laundering and tax evasion.

Acting under the command of Bishop Macedo, the money raised in the services was supposedly transferred to companies Cremo and Unimetro that, in turn, remitted it to other two companies based in tax havens: Cabeinvest and Investholding. The money would then return to Brazil in the form of loans simulated in contracts between the two companies located in tax havens and intermediaries, members of the group charged. The repatriated funds would then be used to buy media companies such as TV record.

According to the investigation by state prosecutors, adding atypical transfers and bank deposits made by people connected to the IURD, the financial volume of the temple from March 2001 to 2008 was nearly $4 billion. Such information was confirmed by the Council for Financial Activities Control—COAF (Brazilian Intelligence Unit).

Initially the case was filed in 2009 at the state court of São Paulo (Case No. 1121/2009) and the charges were upheld by a single judge, as following:

There are enough elements of materiality and indication of the participation of each and every one of the defendants in the infractions imputed to them for the criminal charges to be received.

Indication of the commission, by the group, of the behaviors described by the criminal charges stand out from the case file, especially from: the Council for Financial Activities Control – COAF (Brazilian Intelligence Unit) report; from the successive atypical contracts (pages 115/285 and 978/995); from the financial operations that are incompatible with the economic and physical conditions of Cremo S.A. (pages 328/329), including interbank transactions (TED, transferência eletrônica disponível) with significant amounts received from the Universal Church of the Kingdom of God - IURD; from the information from the State Treasury Office and from the Brazilian Internal Revenue Service; from the statements of its ex-delegates and church followers (pages 422/426, 955/957, 968/970, 1246/1249); from bank statements; from other documents including those sustaining the preliminary injunction.

According to the result of initial investigations, there were many peculiar transfers of resources - that were allegedly collected through illegal means during religious services – to companies that were not really practicing activities consistent with its corporate purpose, but, instead, were passing them on to businesses interesting to the defendants. By effectively controlling legal persons or participating in simulated transactions, they increased private assets, without any exchanges, thus ultimately thwarting the goal of tax exemptions given to Churches. The dynamics of facts preconized by prosecution is consistent, theoretically, with the subsumption of the acts to the criminal offenses cited.

Thus, in face of a preliminary and perfunctory analysis of the aforementioned investigation data, the charges presented are reputed admissible, considering the presumption of innocence and the due process of law.

It is impracticable for the description of the facts to be more specific, for each defendant, than those presented in the diagrams contained in the prosecution’s pleading, whereas the evidence of the adherence of each one of them to the undertakings is crucial for the establishment of the procedural relationship. Those undertakings are glimpsed, by the way, through: contracts signed – especially those supposedly simulated -, performance in positions within the companies involved, and personal references made by witnesses.

Considering the principles of the presumption of innocence and the due process of law, any profound evaluation of the inquest’s evidence, any conclusion regarding the preceding behaviors, any final judgment about the simulations or any incursion in the subject of description and classification of the actions attributed to each defendant would be unnecessary and premature.

It is of interest the fact that the content of the indictment allows each one of those accused to defend and contemplates concrete cogent evidence, obtained during the inquisitorial phase, especially by virtue of investigations and documents’ analysis. Under these conditions, the pleading cannot be considered vague or devoid of a just cause, thus authorizing criminal persecution under the scrutiny of an adversarial process.

Therefore, in light of the aforementioned reasons, I RECEIVE the current indictment. Let all necessary measures be taken in order to preserve the secrecy of the information referred to on page 120 of the appended records.

Let the defendants be summoned to present written responses to the charges within ten days, according to article 396 of the Brazilian Code of Criminal Procedure, altered by Act No. 11.719/2008.

In the summons document, let it be clear that those accused must present their responses through a lawyer and, in case they do not have financial conditions to appoint one, a Public Defender shall be appointed to represent them.

The court clerk charged with the summons shall collect forthwith the manifestation of the defendants regarding potential interest in appointing a Public Defender.

If the summon is done by letter rogatory, let the requested judge be asked to send us a copy of the court clerk’s certificate by fax, not forgetting to send it by usual means.

Once expired the established time lapse, if there is no response, let the judicial staff certify the expiry of the deadline and appoint the Public Defender.

If there is response, let the case file return to me.

Let the criminal record be requisitioned, asking, first and foremost – independently from any other order, certificates from the Assignment Office, the Criminal Enforcement Judge of this jurisdiction and from the criminal procedures potentially notified in the first one, as well as the Criminal Enforcement Judge potentially indicated in the last, if it is the case. The documents shall be attached in their own appended records.

I grant the Public Prosecution’s request in page 1274, item 3.

Let the orders be followed.

São Paulo, August 10, 2009.

Glaucio Roberto Brittes De Araújo

STATE JUDGE

The 9th Criminal Court of São Paulo—SP accepted the indictment against the bishop and nine other members of the church, arguing that there had been diversion of social purpose when resources from donations were employed on corporations that only sought to profit for church leaders. According to the indictment, part of the tax immune money collected by the church was transferred to fake shelf companies. Then, the funds were transferred to foreign companies on tax havens. In order to return the money to Brazil, these foreign companies used financial operations that involved money loans to natural persons on the Country linked to Edir Macedo, who allegedly used these funds to acquire companies, real estate property and other goods.

In October 19, 2010 (published on October 26, 2010), the case was dismissed by the State Appellate Court,¹¹ considering that when the charges involve international money laundering . It was granted habeas corpus annulling the criminal procedure, determining that it should be judged by Federal Justice.¹²

The charges in the 2nd Federal Trial Court were partly upheld by the federal judge Marcelo Costenaro Cavali on Sept. 16, 2011, as demonstrated by the following decision¹³:

Finally, the prosecution describes those mechanisms by which the money collected from IURD’s followers was supposedly transferred in a clandestine and reiterated way, according to statements given by Waldir Abraão.

One of these mechanisms for transferring unreported currency from Brazil allegedly counted with the participation of partners and operators, initially from IC Câmbio e Turismo Ltda., and, between 1993 and 2005, from Diskline Câmbio e Turismo Ltda. – based in São Paulo, with a branch office in Rio de Janeiro.

Luiz Augusto Cunha Ribeiro and Cristina Marini Rodrigues da Cunha Brito, defendants in a criminal procedure ascertaining illegal transfers to foreign countries (pages 17/19 of the Police Investigation No. 2550-78.2010.403.6181, and pages 13/16 of the Police Investigation No. 2550-78.2010.403.6181, respectively), were partners at Diskline and described in detail the operations with IURD, which were summarized by Public Prosecution:

‘Between 1991 – IC Câmbio e Turismo Ltda.’s creation year – and 1993, when they became partners at Diskline Câmbio e Turismo Ltda., along with Sílvio Roberto Anspach, aka ‘Fifo’, a notorious money changer from this capital, the operations for sending values to foreign countries happened exclusively in Rio de Janeiro. Since then, IURD started to operate with Diskline in Rio de Janeiro and São Paulo.

The aforementioned money changers’ statements demonstrate the enormous amount of bills brought to currency exchange houses using vehicles and armed security guards from IURD. Marcelo says that the bills came in bags and many of them were ‘crumpled, torn, glued with Durex, sweaty and scribbled’, which made it difficult for the money to be counted by the machines at the currency exchange house. Higher value bills – fifty and one hundred reais – came from the so-called ‘businessmen masses’, with greater contributing capability. The values received were counted and checked, always in presence of a IURD pastor. Cristina stated that, because of the security needed to handle such a great amount of money in cash , she and IURD rented adjacent vaults in financial institutions and transferred the cash between vaults on such institutions. In other occasions, the cash transfer was made by putting the money in the trunks of some vehicles in the IURD temples’ parking lots. Luiz Augusto, which left Diskline around the time of 1997, stated that, because of these operations for transferring money, he had intense contact with IURD members, mainly Mauro Macedo – Edir Macedo’s cousin – and Paulo Roberto Gomes da Conceição. Luiz Augusto also gathered with Edir Macedo in New York. By that time, Edir asked him to study other ways to fulfill the operation structured to send values to foreign countries, so that these operations ‘sounded legitimate’. On that occasion, Edir also mentioned to Luiz the possibility of IURD creating a bank in foreign countries[…]”

“[…] from the aforementioned reports, the accusation concludes that, directed by EDIR MACEDO, mentor of IURD’s criminal policy, and JOÃO BATISTA, national president of the Church, ALBA MARIA and PAULO ROBERTO determined and oriented the illegal money transfers to the following foreign bank accounts, which received, according to documents adduced as evidence, millions of reais from IURD’s believers between 1999 and 2005:

• (i) Chase Manhattan Bank – NY: (a) account No. 3100 6678 0465, owned by Genesis Holding Group; (b) account No. 140 094 221, of Lehman Brother Inc. subaccount No. 74326634-1-2-115; (c) other three accounts owned by the Universal Church of the Kingdom of God (IURD).

• (ii) Republic Nacional Bank – NY: account No. 310 407 915 owned by I.F.P.C. Inc.

• (iii) HSBC – NY: account No. 610 114 948, owned by T.I.F.P.C. Inc;

• (iv) Northern Trust International Banking Corp – NY: account No. 238 522 of Merryl Lynch, as a beneficiary: (a) subaccount 163-07Q32, of Harman Holdings; (b) subaccount 163-07158, by Steele Resources or Steele Internacional Ltda.;

• (v) JP Morgan – NY: account owned by Universal Church of the Kingdom of God (IURD).

Based on these facts, the accusation imputes to EDIR MACEDO, as an organizer of criminal activities, according to article 62 of the Brazilian Penal Code, to JOÃO BATISTA, president of the IURD in Brazil and partner of Cremo, to ALBA MARIA, representative of offshore companies in Brazil, operator of Cremo, signed by her, along with PAULO ROBERTO, director of Banco de Crédito Metropolitano, succeeded by Credinvest Facility, the following criminal offenses […]

[…] As to the crime of transferring unreported currency to foreign countries (Act No. 7.492/1986, article 22, single paragraph), I understand the indictment must be received.

The accusing pleading narrates the means by which the values were sent clandestinely to foreign companies had already been shown, in an incipient way, by the notarized statement of Waldir Abrão. However, more recently, with the statements given by money changers responsible for the transactions, the modus operandi was really made clear.

Such money changers supposedly were operators of IC Câmbio e Turismo Ltda. companies and, between 1993 and 2005, of Diskline Câmbio e Turismo Ltda. Luiz Augusto Cunha Ribeiro, Cristina Marini Rodrigues Cunha Brito and Marcelo Bismarcker, defendants in a procedure ascertaining the occurrence of the remittance of unreported money to foreign countries, were partners at Diskline Câmbio e Turismo Ltda. and described in detail the operations supposedly made in favor of IURD (pages 13/16, 17/19 and 20/22).

An important amount of money that would be clandestinely – merely by accounting operation – sent, as it happens in underground banking systems, came, according to Marcelo Bismarcker, in bags, with many crumpled, glued, torn and scribbled bills. The money was supposedly delivered by IURD security guards, armed with shotguns, pistols and revolvers (page 20).

Luiz Augusto Cunha Ribeiro affirmed that the intense contact between members of IURD was done mainly by defendant PAULO ROBERTO, as well as Mauro Macedo. EDIR MACEDO also allegedly gathered with him in New York, where he supposedly asked him to search for operations for money remittance that ‘sounded legitimate’ (pages 17/19).

Cristina Marini Rodrigues Cunha Brito affirmed that ALBA MARIA was responsible for giving orientations about the clandestine remittance of funds, also stating that IURD was Diskline’s main client (page 15).

Many documents were gathered that are able provide sustainable evidence to such statements, demonstrating, thus, the clandestine remittances (pages 23/77 and 91).

As national president of IURD, JOÃO BATISTA, along with EDIR MACEDO, was supposedly the one responsible for controlling the facts, orienting the way the funds should be sent abroad by illicit means. PAULO ROBERTO and ALBA MARIA, on their own turn, were, allegedly, the operational branch for these transactions, the members of IURD responsible for ordering money changers to send money abroad by clandestine ways.

The requisition for bank secrecy for the accounts that supposedly received money in this way was granted. The bank account statements and/or documents linked to accounts No. 365-1-024410, No. 365-1-018248, No. 365-1-007852 – kept at MORGAN CHASE – No. 365-5-00081565, No. 365-5-0010265 – kept at THE CHASE MANHATTAN BANK -, No. 610114956 and No. 610114948 – kept at HSBC BANK USA – all obtained by the international cooperation request completed by the USA, are contained in the CD appended to page 98.

Appended to the case file, there is also the notarized statement of Waldir Abrão, specifying this supposedly illegal mechanism (pages 153/175).

The underground banking operations correspond, in my view, to article 22, caput. The operation occurs with a structure for withdrawing currency at distance: an amount of a determined currency is deposited in the account of the seller in Brazil, which delivers a corresponding amount of money abroad […]”

“[…] Only during the examining phase of the procedure it will be possible to compare all documents gathered with the pleading and the statements given by money changers, as well as other evidence, to ascertain if there was, in fact, remittance of unreported money in a clandestine way to foreign countries from Brazilian territory.

Thus, the pleading must be received, in order for the facts to be verified with due deepness, in light of the adversarial system and full defense rights.

In regard of the attribution of conspiracy (Brazilian Penal Code, article 288), the definition of the crime demands the association of more than three persons in a gang, aiming to commit crimes.

At first, the facts narrated fulfill the minimum requirements for the pleading to be received. In fact, it can be extracted from the pleading that the defendants EDIR MACEDO, ALBA MARIA, JOÃO BATISTA and PAULO ROBERTO allegedly associated, in a stable, longstanding, pre-adjusted way and with unity of desires for committing the crimes of larceny, misrepresentation and unreported remittance of funds to other countries.

Departing from the offenses of larceny and misrepresentation, as previously demonstrated, the money-laundering and unreported remittance of funds to other countries still remain.

One concludes, from the imputation, that the defendants acted in a concerted manner to enable the delivery of national currency in Brazil in exchange of the equivalent in foreign currency abroad by means of a clandestine mechanism– i.e., disregarding the Central Bank of Brazil control – known as underground banking. Also in a concerted way, these assets were sent abroad without any communication regarding its existence to authorities in Brazil.

The pleading shows - even though in a generic manner, which is admitted in crimes practiced within legal persons – the participation of each and every one of the accused in contacting money changers, attributing to EDIR MACEDO the role of leader of this kind of actions.

Supposedly, the defendants also acted in an associated manner in constituting and administrating shelf companies – Cremo Empreendimentos S.A. and Unimetro Empreendimentos S.A. – with the aim of occulting its true owner, which, in theory, can characterize the misrepresentation offense.

JOÃO BATISTA e PAULO ROBERTO allegedly were directors of Cremo Empreendimentos S. A. and ALDA MARIA director of Unimetro Empreendimentos S. A. EDIR MACEDO, on his own turn, as leader of the group composed by entities connected to the IURD, was supposedly the greatest beneficiary and mentor of these deceits.

All those accused were key figures in structuring the actions of IURD, which consisted in using shelf companies, simulated legal businesses and clandestine remittances of assets to other countries, always intending to hide, from its followers and competent authorities, the true owners of the high financial movement verified.

At the moment the pleading was received, the coherent narrative of the supposedly illegal facts is enough, at least, to give the defendants the opportunity to express themselves about the imputations, without disconsidering its reanalysis after written responses to the accusations were presented.

Lastly, regarding the crime of money laundering , the pleading attributes its commission to the accused, identifying larceny and criminal organization as precedent crimes (page 135).

According to the typical structure of money laundering offenses adopted by Brazilian criminal legislation, these infractions can only be characterized if a precedent crime – included in article 1st’s list at Act No. 9.613/1998 - can be pointed out.

That is to say that capital laundering is a crime dependant on a preceding crime. If the illegal character of the supposed larceny offenses is removed, as demonstrated earlier, as a logical result, the imputation of money laundering cannot be sustained.

However, Federal Public Prosecution also attributed to the defendants the crimes of sending unreported currency to foreign countries, a crime against the national financial system, which is equally a preceding crime for money laundering , as stated by article 1st, item VI, at Act No. 9.613/1998.

In order to hide those assets that resulted from sending unreported funds to other countries, the defendants allegedly included straw-men as partners in their companies, even though these were not real owners.

Some legal businesses were also simulated – real estate sales in Niterói/RJ, aircraft sales of a Cessna, money lending – between Cremo Empreendimento S. A. and Record S. A. or IURD, which were able to demonstrate that these intermediaries were not the real owners of those companies.

At first, at least in this perfunctory analysis typical for receiving the pleading, if these facts are confirmed, then it is possible that some funds resulted from unreported currency remittance to other countries – which were covertly retransferred to Brazil, as described by prosecution - were occulted.

There are documents appended to the case file related to such businesses and alleged shelf companies (pages 140/152 and pages 115/285 from records No. 0001910-41.2011.403.6181), by which the Federal Public Prosecution intends to demonstrate that these offenses really happened.

The link between the facts, in my view, is complexly ascertained, in such a way it is not admissible to overcome the in dubio pro societatis principle that guides the judgment about receiving or not the pleading […]”

“[…]In view of these arguments, I RECEIVE PARTIALLY THE PLEADING presented by Federal Public Prosecution in face of EDIR MACEDO BEZERRA (hereinafter called ‘EDIR MACEDO’), Brazilian, married, religious entity administrator, born in February 18, 1945, bearer of RG: 26.995.020-SSP/SP and CPF No. 066.929.747-04, ALBA MARIA SILVA DA COSTA (hereinafter called ‘ALBA MARIA’), Brazilian, married, economist, born in May 11, 1952, bearer of RG No. 26.995.020-SSP/SP and CPF No. 066.929.747-04, JOÃO BATISTA RAMOS DA SILVA (hereinafter ‘JOÃO BATISTA’), Brazilian, married, economist, born in February 24, 1944, bearer of RG No. 1.984.491-IFP/SP and CPF No. 002.402.221.72, and PAULO ROBERTO GOMES DA CONCEIÇÃO (hereinafter called ‘PAULO ROBERTO’), Brazilian, married, born in August 29, 1955, bearer of RG No. 336.540.777-49 IFP/SP and CPF No. 336.540.777-49, regarding the imputation of the crimes of conspiracy (Brazilian Penal Code, article 288, caput), unreported currency sending to other countries (Act No. 7.492/1986, article 22, single paragraph, first and second figures) and money laundering /IndexTerm> (Act No. 9.613/1998, article 1st, VI). I REJECT THE COMPLAINT, however, with regard to the allocation of commission of offenses of embezzlement (Penal Code, article 171, caput), based on article 395, I, Criminal Procedure Code, given its manifest ineptitude, and perjury (Penal Code, article 299, caput), based on article 395, item II, Criminal Procedure Code, given the occurrence of the statute of limitations claim. They include the accused to submit reply to the complaint within ten (10) days in which they could claim all that interests their defense and may give rise to their acquittal, provide documents and evidence, and specify the evidence sought, call witnesses, calling them and demonstrating the relevance of their hearing as well as their relation to the facts described in the complaint. I emphasize at the outset that, in the case of merely provides confidence witness, the witness must be submitted by written declaration, which will be given the same value. In that time, the defendant were aware that the expiry of the statutory period without manifestation, or in case it does not have a financial position to hire a lawyer, something which should be reported to the bailiff upon their communication, this Court appointed dative advocate to act on his defense, who should be aware, though, that he should follow this criminal action in all its terms and acts until the final judgment, in accordance with article 367 of the Criminal Procedure Code: “the process will continue without the presence of the defendant, who personally summoned or cited for any act, fails to appear without good reason, or in the case of change of residence, not to communicate the new address to the court.” The defendant must be also aware that further subpoenas related to the case will be made in the persons of his lawyers made through published in the official press. Due to adversarial principle which must govern the Brazilian criminal proceedings for constitutional order, particularly in light of the recent reform of the Criminal Procedure Code, the initiative and subsequent evidential burden should be primarily in the hands of the parties and only complementarily in the hands of that judicial body. Federal prosecutors are responsible to bring to the court criminal record/or other records about the defendants (article 8, II, III, V, VII and VIII of Complementary Law No. 75/93), because such papers relate to their institutional prerogatives (article 129, VIII, of the Constitution and article 236, III, Supplementary Law No. 75/93). Such information must be provided and attached to the file until the end of if, in accordance with article 231 of Criminal Procedure Code. In this sense, moreover, it has been oriented by jurisprudence (Habeas Corpus 200503000451893, Second Panel of the Federal Appellate Judge of the Third Region, Judge Rapporteur Cotrim Guimarães, published on Sept. 22, 2006; COR 2009.04.00.041563-0, Eighth Panel of the Federal Appellate Court of the Fourth Region, Judge Rapporteur Paulo Afonso Vaz Brum, published on Dec. 9, 2009; …). The office must expedite up request for international cooperation for citation and summons of the defendant EDIR MACEDO in the U.S. The course of the limitations period is suspended until the fulfillment citing of defendant EDIR MACEDO, under article 368 of the Criminal Procedure Code. In addition, in view of the existence of documents in the record that are protected by confidentiality, and in order to safeguard the interests of any persons involved, I determine the confidentiality of the documents under article 792, 1st paragraph, Criminal Procedure Code, and article 155 of the Civil Procedure Code, by analogy with article 3 of the Criminal Procedure Code, article 7, 1, item 2, of the Statute of the Brazilian Bar Association (Law no. 8906, April 7, 1994). They should have access only by authorities who officiate the case and the defendants, according to Binding Precedent n. 14, Feb. 2, 2009, from the Supreme Court, and Resolution n.º 58, May 25, 2009, of the Council of the Federal Judiciary (restricted advertising). However, except for these documents that are limited to tax and banking data, I highlight that the decisions and proceeding are public, according to article 93, section IX, of the Federal Constitution.

São Paulo, September 11, 2011.

Marcelo Costenaro Cavali

FEDERAL JUDGE

On an international level, aside from cases as those above, some of the most famous scandals involving religious entities—this time connected to the Catholic Church—concern the Institute for the Works of Religion (the so-called “Vatican Bank”).

So far, the most known crisis involving the Catholic Church was the sexual abuse of minors by some members of the U.S. Catholic clergy. The aforementioned crisis led to two fundamental issues regarding to how individuals with disposition to prey sexually upon minors gained admission to the priesthood and managed to remain in that condition even after allegations and evidence of such abuse. Although it is not possible to pinpoint any cause of the problem, it could be said that dioceses and orders would not have screened candidates for the priesthood properly, and seminaries would not form candidates for the priesthood adequately.

The United States Conference of Catholic Bishops in June 2002 considered a collective response to the crisis. The Charter for the Protection of Children and Young People, chartered by the U.S. aforementioned Conference, set forth national standards for dealing with abuse cases involving minors. The Essential Norms, which include, among other things, a mandate that nay priest who has engaged in a single act of sexual abuse of a minor be removed permanently from ministry.¹⁴ It is not recommended feeling more comfortable forgiving, forgetting and immunizing, rather than punishing or condemning conduct that violated both canon and civil law, even where condemnation was demanded by the nature of the offence. The Catholic Church, assuming that priests bring the “word of God” to the “People of God,” and that this would be impossible without a strong spiritual life, consider that sexual abuse represents a failure in maintaining a daily prayer life.

The Institute for Works of Religion (IOR) is a privately held financial institution located inside Vatican City. Founded in 1942, the IOR’s role is to safeguard and administer property intended for works of religion or charity. The bank accepts deposits only from top Church officials and entities, according to Italian legal scholar Settimio Caridi. It is run by a president but overseen by five cardinals who report directly to the Vatican and the Vatican’s secretary of state. Because so little is known about the bank’s daily operations and transactions, it has often been called “the most secret bank in the world.” Hence, the IOR is a sort of central body of the Holy See (as the Church’s government is called) whose profits are at the Pope’s disposal. Its purpose is to provide for the protection and administration of moveable and immovable assets transferred or entrusted to the institute and destined for religious works or charity. Financial transparency and successful cooperation with Europe’s anti-money laundering agency Moneyval should continue to remain a priority for the institution, especially in recent years.

The Vatican bank is not a true bank. There are no check books. It does not make loans. It is more a fund deposit and transfer institution than a bank. The IOR generates income by placing deposits in short-term government securities and in interest-bearing accounts at other banks.

On September 21, 2010, Italian police declared that it was investigating Gotti Tedeschi and another manager from the IOR under charges of money laundering . On that occasion, 23 million Euros were blocked after a Banco d’Italia’s division alerted authorities about two suspicious transactions from an Italian bank to JP Morgan Chase and the Banca del Fucino bank. The original account, as well as the two destination accounts, was controlled by the IOR, which allegedly defied Italian law by not declaring the origin of the values.¹⁵

As an answer to those suspicions, the former pope, Benedict XVI, established on December 30, 2010, a Financial Information Authority to supervise all monetary and commercial activities from all institutions related to the Vatican. The organ had the function of ensuring that such operations met the requirements of international norms against money laundering and terrorism financing. Apparently, as an answer to the Vatican initiative, Rome’s prosecutor liberated the previously blocked values. Besides, in June 2013, Pope Francis determined the creation of a Special Investigative Pontifical Commission to evaluate the Institute.¹⁶

Shortly after the creation of this commission, a new scandal hit the Holy See, when Monsignor Nunzio Scarano was arrested under charges of aiding an attempt of smuggling 20 million Euros from Switzerland to Italy. According to the investigation, the cleric was accused of money laundering for hiding a sum of 560 thousand Euros, attributing to them, as source, the donations of worshippers.

In 2012, Italian prosecutors have detained the former head of the Vatican’s bank after searching his home and former office for suspected criminal behavior. The Vatican’s bank appeared to be embroiled in yet another financial scandal. After a number of very embarrassing episodes in recent years, Pope Benedict XVI pledged to comply with international standards on illicit finance and clean up the bank’s image. The European Union had an important role to play in helping the Vatican mitigate risks and come into full compliance; the Financial Action Task Force (FATF) , set up by the G-7 to combat money laundering and terrorist financing.

The bank’s president, Ettore Gotti Tedeschi, a well-known and well-regarded figure throughout European banking and social circles, was effectively sacked when the board passed a unanimous “no-confidence” vote in May 2012. Hired in 2009 with the hope that he would clear the IOR’s reputation, he was fired, according to the Vatican announcement, because he failed to fulfill the “primary functions of his office.” Tedeschi echoed this when he told prosecutors that he came to the office only two days a week, spending the vast majority of his time as the head of Spain’s Banco Santander office in Milan.

According to Forber, it appeared that the Vatican’s promise to comply was nothing less than controversial in the Holy See’s inner circle. A book published in 2012 by Italian journalist Gianluigi Nuzzi details intrigue, corruption , power struggles, bribes, money laundering , and a lack of desire to follow the dictates of the Financial Action Task Force/FATF (from the Organization for Economic Cooperation and Development/OECD)—and its European sister organization, MONEYVAL (the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financial of Terrorism)—to fight illicit finance. The “Vatileaks” scandal, as it has come to be known, is based on over 4000 internal Vatican documents. It has embarrassed the Vatican and cast a cloud over its effort to demonstrate financial transparency and shed its reputation as a tax haven.

In November 2011, MONEYVAL carried out an assessment to determine how well the Vatican has complied with best practices, and to what degree it has implemented controls to curtail abuse of the international financial sector—according to MONEYVAL insiders. The Vatican had made a request to be put on MONEYVAL’s money laundering “white list,” a coveted grade in the international financial market. Both Nuzzi’s book and Tedeschi’s removal as head of the bank casted doubt on the Vatican’s ability to achieve this status.

As the international community reviews its options vis-à-vis the Vatican, both the FATF and the MONEYVAL are uniquely placed to pressure the IOR to reform. Both organizations have scores of trained staff members who can assist the Vatican to implement a robust anti-money-laundering regime that would satisfy both the EU and the international community.

It would also be beneficial if the Italian government were to step in, given its close ties with the Vatican. Traditionally, the Ministry of Economy and Finance has designed the policy aspects of Italian money laundering and terrorism finance efforts, while the financial intelligence compliance functions fall under the Ufficio Italiano dei Cambi (UIC), in collaboration with the Guardia di Finanza (GdF). Italy has received high marks from the international community for its part in ensuring the safety and soundness of the international financial sector. Italian government agencies would thus seem to be the ideal candidates to lead the Vatican back to the straight and narrow road.

In July 2013, however, there are reports that the charges against Tedeschi—who had been ousted from its functions were dropped.

In July 11, 2013, Pope Francis signed a Decree changing the criminal law of the Vatican to make crime the facts of sexual and financial abuse or misconduct and the leakage of sensitive information.

In January 14, 2014, Pope Francis changed four out of five members of the cardinals commission established to deliver the conclusions of its recent analysis of the Institute for Religious Works to the Pope.

Last year, Pope Francis charged the pontifical commission with drawing up an “exhaustive” report into the juridical standing and activities of the Vatican’s financial institution.

The pontifical commission—issued via a chirograph with immediate effect on June 24—is chaired by Cardinal Raffaele Farina and is composed of five people.

Retired pontiff Benedict XVI renewed the cardinals commission on Feb. 16 of 2013. Because members of the commission serve for 5 years, the mandate of the IOR Cardinal Commission for Oversight will expire in 2017.

Benedict XVI nearly confirmed all the members of the IOR cardinals commission: the then Secretary of State Tarcisio Bertone, and cardinals Odilo Pedro Scherer, Telesphore Toppo, and Jean Louis Tauran.

Only Cardinal Attilio Nicora left the commission as he was also president of the Authority for Financial Information, which could have leaded to a conflict of interest.

The cardinals commission is by custom chaired by the Cardinal Secretary of State. As Cardinal Bertone is no longer in charge of the post, Archbishop Pietro Parolin, now Secretary of State, would be inserted in the ranks of the commission.

The cardinals commission convenes at least biannually and oversees the compliance of the IOR with its statutory norms.¹⁷

The Pope has stepped up the fight against corruption at the Vatican by strengthening supervision of financial transactions at its internal bank. Pope Francis issued in 2013 a decree designed to combat money laundering and prevent any financing of terrorism. It was the latest move to stamp out abuses at the Vatican bank, which handles funds for the Catholic Church.

In 2013, the Vatican froze the account of a senior cleric, Monsignor Nunzio Scarano, suspected of involvement in money laundering. He and two others were arrested by Italian police in June on suspicion of trying to move 20 m euros ($26 m; £17 m) illegally.

The Vatican bank handles the payroll for some 5000 Vatican employees. It also handles the funds for the central administration of the Catholic Church and holds the accounts of cardinals, bishops, priests, nuns and religious orders around the world. It does not lend money and has assets worth $8.3bn (£5.4bn; 6.2bn euros). It was found that the bank had not always exercised due diligence.

The Guardian revealed that few passing London tourists would ever guess that the premises of Bulgari, the upmarket jewellers in New Bond Street, had anything to do with the pope. Nor indeed the nearby headquarters of the wealthy investment bank Altium Capital, on the corner of St James’s Square and Pall Mall. But these office blocks in one of London’s most expensive districts are part of a surprising secret commercial property empire owned by the Vatican. Behind a disguised offshore company structure, the church’s international portfolio has been built up over the years, using cash originally handed over by Mussolini in return for papal recognition of the Italian fascist regime in 1929. Since then the international value of Mussolini’s nest egg has mounted until it now exceeds £500 m. In 2006, at the height of the recent property bubble, the Vatican spent £15 m of those funds to buy 30 St James’s Square. Other UK properties are at 168 New Bond Street and in the city of Coventry. It also owns blocks of flats in Paris and Switzerland.

According to the mentioned newspaper, the surprising aspect for some will be the lengths to which the Vatican has gone to preserve secrecy about the Mussolini millions. The St James’s Square office block was bought by a company called British Grolux Investments Ltd, which also holds the other UK properties. Published registers at Companies House do not disclose the company’s true ownership, nor make any mention of the Vatican. Instead, they list two nominee shareholders, both prominent Catholic bankers: John Varley, recently chief executive of Barclays Bank, and Robin Herbert, formerly of the Leopold Joseph merchant bank. Letters were sent from the Guardian to each of them asking whom they act for. They went unanswered. British company law allows the true beneficial ownership of companies to be concealed behind nominees in this way.

The company secretary, John Jenkins, a Reading accountant, was equally uninformative. He told the Guardian journalists the firm was owned by a trust but refused to identify it on grounds of confidentiality. Research in old archives, however, revealed more of the truth. Companies House files disclose that British Grolux Investments inherited its entire property portfolio after a reorganisation in 1999 from two predecessor companies called British Grolux Ltd and Cheylesmore Estates. The shares of those firms were in turn held by a company based at the address of the JP Morgan bank in New York. Ultimate control is recorded as being exercised by a Swiss company, Profima SA.

British wartime records from the National Archives in Kew complete the picture. They confirmed Profima SA as the Vatican’s own holding company, accused at the time of “engaging in activities contrary to Allied interests”. Files from officials at Britain’s Ministry of Economic Warfare at the end of the war criticized the pope’s financier, Bernardino Nogara, who controlled the investment of more than £50 m cash from the Mussolini windfall.

Nogara’s “shady activities” were detailed in intercepted 1945 cable traffic from the Vatican to a contact in Geneva, according to the British, who discussed whether to blacklist Profima as a result. “Nogara, a Roman lawyer, is the Vatican financial agent and Profima SA in Lausanne is the Swiss holding company for certain Vatican interests.” They believed Nogara was trying to transfer shares of two Vatican-owned French property firms to the Swiss company, to prevent the French government blacklisting them as enemy assets.

Earlier in the war, in 1943, the British accused Nogara of similar “dirty work”, by shifting Italian bank shares into Profima’s hands in order to “whitewash” them and present the bank as being controlled by Swiss neutrals. This was described as “manipulation” of Vatican finances to serve “extraneous political ends.”

For The Guardian, the Mussolini money was dramatically important to the Vatican’s finances. John Pollard, a Cambridge historian, says in Money and the Rise of the Modern Papacy: “The papacy was now financially secure. It would never be poor again.”¹⁸

From the outset, Nogara was innovative in investing the cash. In 1931, records show he founded an offshore company in Luxembourg to hold the continental European property assets he was buying. It was called Groupement Financier Luxembourgeois, hence Grolux. Luxembourg was one of the first countries to set up tax-haven company structures in 1929. The UK end, called British Grolux, was incorporated the following year.

When war broke out, with the prospect of a German invasion, the Luxembourg operation and ostensible control of the British Grolux operation were moved to the US and to neutral Switzerland.

The Mussolini investments in Britain are currently controlled, along with its other European holdings and a currency trading arm, by a papal official in Rome, Paolo Mennini, who is in effect the pope’s merchant banker. Mennini heads a special unit inside the Vatican called the extraordinary division of APSA—Amministrazione del Patrimonio della Sede Apostolica—which handles the so-called “patrimony of the Holy See.”

Car Wash Operation was a criminal investigation in Brazil that revealed how money launderers use offshore accounts and conceal beneficial owners . Specifically, Brazilian construction companies Norberto Odebrecht and Andrade Gutierrez used companies in Panama and Uruguay to control accounts that paid kickbacks to former directors and managers of Petrobrás, a Brazilian oil company with mixed capital and state participation. These paper companies were used to open secret accounts, particularly in Switzerland.¹⁹

Mossack and Fonseca firm, revealed by the so-called Panama Papers (the International Consortium of Investigative Journalists—ICIJ information publishing), was subject to a judicial search warrant in 2014 in Brazil. There is some evidence that this firm also has been used to launder money for people linked directly or indirectly to Petrobrás.

The so-called Panama Papers (through the International Consortium of Investigative Journalists) revealed that the Mossack Fonseca firm was subject to a judicial search warrant in 2014.

Three offshore companies are being investigated by the Operation Car Wash task force in search for more evidence of the alleged involvement of Odebrecht and Gutierrez in the cartel scheme involving corruption and money laundering with Petrobrás between 2004 and 2014. With the respect of Odebrecht, there are two opened offshore companies in Panama and Uruguay: Constructora Internacional Del Sur SA and Hayley SA, respectively. Opened by third parties, the companies were created on paper outside Brazil to move bribes in a sophisticated money laundering, according to evidence discovered so far by federal prosecutors and federal police.

An article by journalist Fausto Macedo mentions the following statement by District Attoeny Carlos Fernando Lima about the offshore companies: “[T]he relationships that have been reported are of a relatively simple scheme and very easy to prove, because it was built here in our country.”

A central player in the use of Constructora Del Sur by Odebrecht is the currency broker Bernardo Freiburghaus, identified by informants as a corrupt payment operator who lives in Switzerland and is considered a fugitive.

“The finding that Constructora Internacional Del Sur made deposits in offshore accounts of at least three directors of Petrobrás, Paulo Roberto Costa (former supply director), Pedro Barusco (former engineering manager), and Renato Duque (former services director), shows its connection with the criminal cartel scheme and kickbacks that affected Petrobrás,” stated federal judge Sergio Moro, according to the article of Fausto Macedo, in a decision that ordered the arrests of executives.

Documents held by the Operation Car Wash task force indicate that Constructora Del Sur was the source of at least five deposits made in secret accounts of Petrobrás’s former supply director. Freiburghaus was be the operator of those accounts.

As the first whistleblower, Costa admitted in September 2014 that the $23 million he had in a secret Swiss bank account, which he returned after a tipoff agreement, were bribes from Odebrecht. Costa identified accounts in the name of the offshore companies Sygnus Assets SA, PKB PrivateBank SA, Quinus Services SA, HSBC, Sagor Holding SA, and Julius Bae, all at Deutsche Bank, were controlled by Bernando Freiburghaus but owned by him. One of these accounts had a value of US$9 million in October 2012.

The currency broker Alberto Youssef, also a whistleblower in Operation Car Wash, said to the federal court that he operationalized payments of bribes to Odebrecht, having been in contact with the executives Márcio Faria and Cesar Rocha. In this case, the path taken by researchers led to another destination: Hong Kong. Accounts were owned by the offshore companies FRY and DGX, a holder at Standard Chartered, and HSBC banks in Hong Kong, all controlled by the money changer Leonardo Meirelles.

Constructora Del Sur is also being examined for transactions with Odebrecht and the alleged bribery in the Pretrobrás services area through the former director Renato Duque. His former right arm, then Engineering Manager Peter Barusco, another defendant who confessed, confirmed the use of Constructora Del Sur by Odebrecht and traced the money to his account in the name of the offshore company Pexo Corporation. The former manager reported that Odebrecht did not perform deposits from its accounts, but instead used a registered account in the name of the offshore company Constructora Del Sur.

Report 0777/2015 from the federal police identified from bank documents that Pexo Corporation deposited US$1,020,672.00 from an account of Constructora Del Sur, held at the Union des Banques Suisses AG (UBS AG). The same report identified two deposits from account Constructora Del Sur held in Credicorp Bank S.A for the offshore account Milzart Overseas Holdings Inc., in the Bank Julius Baer, located at the Principality of Monaco. Renato Duque is the sole beneficiary in this regard, according to the Operation Car Wash task force and based on documents submitted by the Monaco authorities.

Constructora Del Sur was dissolved on August 25, 2014, five months after being identified as a suspicious entity in Operation Car Wash.

Other offshore targets of the investigations were Odebrecht SA Hayley opened in Uruguay and Hayley of Brazil Empreendimentos e Participações opened by former Odebrecht former executive John Antonio Bernardi Filho. There was evidence of the use of Hayley in bribe payments according to the federal prosecutors. Hayley paid bribes totaling US$125,000 (in Brazilian Currency Reais, R$406,250²⁰) to Renato Duque. Hayley, represented by Bernardi Filho, also sold to the company D3TM Consultoria e Participações, opened by Renato Duque after leaving Petrobrás, two commercial properties in Rio in November 2013. The recorded value of the transaction was US$192,500 (R$625,625). Hayley was investigated by the Operation Car Wash task force after the lobbyist Julio Gerin Camargo said he used it to pay part of the US$30 million fee to lobbyist Fernando Antonio Falcon Soares, Fernando Baiano, and Nestor Cervero. Camargo said that Hayley kept an account at the Banque de Commerce et Placement in Geneva, Switzerland, where two installments of approximately US$500,000 were deposited in September and October 2011 at the request of Fernando Soares.

Andrade Gutierrez, in the report provided to the IRS, said that it hired the company Technis Planejamento e Gestão em Negócios Ltda., owned by Fernando Baiano, his sister Claudia Soares Furlan, and his brother Armando Furlan Junior, for a supposed service totaling US$950,000 (R$3.1 million). A judicial order breaking bank secrecy confirmed the transfer of around US365,000 (R$1,187,975.82) in 2007 from Andrade Gutierrez to that company (Technis), leaving unclear the transfer mode for the remaining amount. According to the Operation Car Wash task force, the “use of Technis Planejamento e Gestão em Negócios Ltda. by Fernando Baiano for the laundering of funds from Andrade Gutierrez and Petrobrás is clear.”

Publicist João Santana, responsible for the political campaigns of former President Luiz Inácio Lula da Silva (2006), known as Lula, and President Dilma Rousseff (2010 and 2014), was aware that the money deposited in their accounts abroad had illegal origin, according to the federal police. He was one of the targets of the 23th stage of Operation Car Wash, initiated on June 22, 2016. According to federal police chief Philip Hille Pace, Santana and his wife “knew it was not a mere evasion of taxes. […] They worked directly with a person who was a representative and bribery operator of Petrobrás.”²¹

The Operation Car Wash investigators also received information from Citibank in New York, which provided data through legal cooperation with Brazilian authorities. “Citibank’s statements make clear reference that these deposits were made on the basis of false contracts to justify shipment of money,” said the federal police chief. Santana was arrested, and his apartment in an upscale neighborhood of Salvador and his house in Camaçari were raided.

In all, about three hundred federal police officers executed 51 warrants, including 38 searches, two arrests, six temporary detentions, and five mandatory attendances.

In investigation continues as new bribes from operators linked to Odebrecht were discovered. According to the federal prosecutor Carlos Fernando Lima, evidence was discovered involving a group of employees linked to Odebrecht and controlled payments abroad. The company’s former president, Marcelo Odebrecht, was arrested in June 2015.

There is evidence that former president Luiz Inacio Lula da Silva, target of the 24th stage of Operation Car Wash, and his institute, the Lula Institute, received US$9.23 million (R$30 million) between 2011 and 2014, from contractors investigated in the corruption scheme in Petrobrás.²² According to prosecutors, the former president and his family also received undue advantages from contractors, including payments for renovations of properties in Guarujá and Atibaia. Prosecutors say that they believe that the former president owns the real estate , but he denies being the owner. According to district attorney Carlos Fernando Lima, 60% of the donations to the Lula Institute and 47% of the amounts paid to LILS Lectures, Events and Publications (a company that has the former president as partner) came from major contractors involved in Operation Car Wash. Resources benefited people linked to the Labor Party (PT) and close relatives of Lula. Odebrecht, OAS, Camargo Correa, Queiroz Galvao, Andrade Gutierrez, and UTC are considered the central cartel that squandered the assets of Petrobrás, according to the prosecutor. According to the Prosecutor’s Office were made “sizeable payments “ of contractors involved in Petrobrás scheme in favor of the entity and lectures company.²³

In sum, the details of Operation Car Wash in Brazil revealed the illegal use of accounts in the name of offshore companies, which makes it possible to hide the real beneficiary of the accounts, the beneficial owners .

On June 18, 2009, the U.S. Senate Homeland Security Committee considered a bill introduced by Senators Levin, Grassley, and McCaskill titled the “Incorporation Transparency and Law Enforcement Assistance Act” (the “Levin Bill”). The Levin Bill requires that states maintain an accurate and updated list of all beneficial owners of corporations and limited liability companies created in the state and make that list available to law enforcement and others by subpoena. “The [Levin] Bill’s uncertainty over the definition of ‘beneficial ownership’ makes honest compliance difficult, and the risks the [Levin] Bill introduces of public knowledge about proprietary business information could destroy business development projects. The general philosophy behind the Levin Bill is founded on an erroneous assumption of reliable self-reporting of ownership information from individuals who are simultaneously engaged in fraud.”²⁴

The justification of the bill is thus described as following²⁵:

Congress finds the following:

• (1) Nearly 2,000,000 corporations and limited liability companies are being formed under the laws of the States each year.

• (2) Very few States obtain meaningful information about the beneficial owners of the corporations and limited liability companies formed under their laws.

• (3) A person forming a corporation or limited liability company within the United States typically provides less information to the State of incorporation than is needed to obtain a bank account or driver’s license and typically does not name a single beneficial owner.

• (4) Criminals have exploited the weaknesses in State formation procedures to conceal their identities when forming corporations or limited liability companies in the United States, and have then used the newly created entities to commit crimes affecting interstate and international commerce such as terrorism, drug trafficking, money laundering, tax evasion, securities fraud, financial fraud, and acts of foreign corruption .

• (5) Law enforcement efforts to investigate corporations and limited liability companies suspected of committing crimes have been impeded by the lack of available beneficial ownership information, as documented in reports and testimony by officials from the Department of Justice, the Department of Homeland Security, the Financial Crimes Enforcement Network of the Department of the Treasury, the Internal Revenue Service, the Government Accountability Office, and others.

• (6) In July 2006, a leading international anti-money laundering organization, the Financial Action Task Force on Money Laundering (in this section referred to as the “FATF”), of which the United States is a member, issued a report that criticizes the United States for failing to comply with a FATF standard on the need to collect beneficial ownership information and urged the United States to correct this deficiency by July 2008.

• (7) In response to the FATF report, the United States has repeatedly urged the States to strengthen their incorporation practices by obtaining beneficial ownership information for the corporations and limited liability companies formed under the laws of such States.

• (8) Many States have established automated procedures that allow a person to form a new corporation or limited liability company within the State within 24 h of filing an online application, without any prior review of the application by a State official. In exchange for a substantial fee, 2 States will form a corporation within 1 h of a request.

• (9) Dozens of Internet Web sites highlight the anonymity of beneficial owners allowed under the incorporation practices of some States, point to those practices as a reason to incorporate in those States, and list those States together with offshore jurisdictions as preferred locations for the formation of new corporations, essentially providing an open invitation to criminals and other wrongdoers to form entities within the United States.

• (10) In contrast to practices in the United States, all 28 countries in the European Union are required to have formation agents identify the beneficial owners of the corporations formed under the laws of the country.

• (11) To reduce the vulnerability of the United States to wrongdoing by United States corporations and limited liability companies with hidden owners, to protect interstate and international commerce from criminals misusing United States corporations and limited liability companies, to strengthen law enforcement investigations of suspect corporations and limited liability companies, to set minimum standards for and level the playing field among State incorporation practices, and to bring the United States into compliance with its international anti-money laundering standards, Federal legislation is needed to require the States to obtain beneficial ownership information for the corporations and limited liability companies formed under the laws of such States.

U.S. House Representatives Carolyn B. Maloney and Peter King reintroduced their legislation in the House of Representatives to require the disclosure of a corporation’s beneficial owner on February 3, 2016.

According to Carolyn B. Maloney, the introduction of the Incorporation Transparency and Law Enforcement Assistance Act follows a groundbreaking investigation by Global Witness, which exposed the common practice of using U.S.-based shell corporations to launder money linked to criminal enterprises. She considers “this is unacceptable, and it has to stop. Our national security and our law enforcement priorities depend on it. And it is the right thing to do: our legal system should not protect the rights of bad people to do bad things in secret. The bill I am introducing this week would require the states to obtain information about the true ownership of the corporation when incorporation papers are filed with the state. And if the states don’t collect this information, then the Treasury Department would. Our message is simple: tell us who the real owner is, or take your business elsewhere.”

For his part, Peter King stated that “criminals are taking advantage of state laws by establishing firms—often without a physical presence or business activity—to access our banking system.”

So the Incorporation Transparency and Law Enforcement Assistance Act would target this problem by requiring a company that has the characteristics of a shell corporation to disclose who benefits from the company’s operations and makes that information available only to law enforcement.²⁶

At the beginning of 2016, the Brazilian IRS set out to establish rules for defining “final beneficiary” or “beneficial owners ” of legal entities and legal arrangements, such as trusts and asset managers, especially for those located outside the country. IRS Normative Instruction No. 1634, of May 6, 2016, defines the final beneficiary as the natural person who ultimately, directly or indirectly, has, controls, or significantly influences a particular entity. The Legal Companies National Registry’s knowledge of this relationship is essential for tax and customs administration and for proper accountability and punishment of the behaviors outside the law (article 8). The Normative Instruction closed a gap in Brazil with regard to access to information by supervisory, prosecutorial, and enforcement bodies. Furthermore, opening procedures, modification, and closure of companies have become more simplified. The obligation to inform the final beneficiaries has a specific deadline, allowing the adaptation of the register of investors to Brazilian rules, up to the limit of December 31, 2018 (article 52).²⁷

On the other hand, the Financial Crimes Enforcement Network (FinCEN), the U.S. financial intelligence unit, amended the existing Bank Secrecy Act regulations to clarify and strengthen customer due diligence (CDD) requirements for certain financial institutions. According to the FinCEN guidance, the “CDD Rule outlines explicit customer due diligence requirements and imposes a new requirement for these financial institutions to identify and verify the identity of beneficial owners of legal entity customers, subject to certains exclusions and exemptions. Within this construct, as stated in the preamble to the Rule, FinCEN intends that the legal entity customer identify its ultimate beneficial owner or owners and not ‘nominees’ or ‘straw men.’ The CDD Rule applies to covered financial institutions, i.e., federally regulated banks and federally insured credit unions, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities. The CDD Rule requires covered financial institutions to establish and maintain written procedures that are reasonably designed to identify and verify the beneficial owners of legal entity customers. These procedures must enable the institution to identify the beneficial owners of each customer at the time a new account is opened, unless the customer is otherwise excluded or the account is exempted. Also, the procedures must establish risk-based practices for verifying the identity of each beneficial owner identified to the covered financial institution, to the extent reasonable and practicable. The procedures must contain the elements required for verifying the identity of customers that are individuals under applicable customer identification program (“CIP”) requirements. In short, covered financial institutions are now required to obtain, verify, and record the identities of the beneficial owners of legal entity customers. The CDD Rule amends the AML program requirements for each covered financial institution to explicitly require covered institutions to implement and maintain appropriate risk-based procedures for conducting ongoing customer due diligence, to include: understanding the nature and purpose of the customer relationships; and conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.”²⁸

The CDD Rule requires title insurance companies to identify the real owners behind shell companies making all cash purchases for high-end real estate applying only where there is no mortgage issued, and at least some of the proceeds are paid in currency or bank checks, personal business checks, traveler’s checks, or money orders.

Also, the expanded geographic targeting order, which came into effect Aug. 28, went beyond Manhattan and Miami to include all five boroughs of New York City, as well as two more counties in southern Florida, Los Angeles, the San Francisco area and the county that includes San Antonio, Texas.

The order requires title insurance companies to identify the real owners behind shell companies making all-cash purchases for high-end real estate in each of the markets. It applies only where there is no mortgage issued, and at least some of the proceeds are paid in currency or bank checks, personal business checks, traveler’s checks or money orders.

Treasury’s Financial Crimes Enforcement Network—FinCEN, stated that “a significant portion” of the purchases covered in the initial order “indicated possible criminal activity” associated with the individuals reported to be beneficial owners behind shell company purchasers in Miami and Manhattan. It “corroborates FinCEN’s concerns” that the transactions covered by the order are vulnerable to money laundering, and state and local authorities told FinCEN that information generated by the initial order has generated leads and “provided greater insight” into potential assets held by people of investigative interest.

Under the expanded order, all-cash purchases of real estate in Brooklyn, Queens, the Bronx and Staten Island of more than $1.5 million would be covered. Purchases in cash of more than $2 million in San Diego, Los Angeles, San Francisco, San Mateo and Santa Clara counties would be covered. In Florida, cash purchases of more than $1 million in Broward and Palm Beach counties would require the disclosure. And in Bexar County, Texas, which includes San Antonio, cash purchases of more than $500,000 would be tracked. The requirements on Manhattan ($3 million) and Miami ($1 million) remain the same.²⁹

By June 2016, the Panama Papers had already identified 214,000 shell companies with hundreds of thousands of people behind them, including impressive names from political figures and business moguls to celebrities. In the wake of all these discoveries, the importance of due diligence to identify beneficial owners and final beneficiaries and to monitor transactions and payments has become even more significant. Certainly, there is increasingly greater international and political interest around shell companies and their role in anti-money laundering and tax avoidance activity.

The Panama Papers has affected correspondent banking and third party entity identification, with possible transaction monitoring. The issue raises glaring gaps in anti-money regulations and possible implications for global banks.³⁰ As banks mitigate risk and keep in line with existing compliance requirements, forensic accountants will find themselves quite busy and recruited by financial institutions. There will be more stringent guidelines to follow and more stringent Know Your Customer procedures. Banks have to flag and or block transactions directly associated with Mossack Fonseca (a prolific generator of offshore shell companies and questionable accounting advisory services) to comply with Know Your Client and internal processes. Regulators will alter their expectations in relation to customers, who must be reclassified and subject to Know Your Customer (KYC), Customer Due Diligence (CDD), Politically Exposed Persons (PEPs), and Transaction Monitoring (TM) processes and evaluations. In the wake of the Panama Papers , significant revisions and updates will be necessary for any clients identified. The cost of declaring “innocent” will be expensive and individuals and firms may take a significant hit on their reputations.

The collective consciousness of how risky banking has become is clear. For example, on February 23, 2016, Bahraini authorities discussed with the U.S. Treasury the problem of international banks becoming reluctant to deal with banks in Bahrain and the Gulf because of tight U.S. regulations. Bahrain’s central bank governor, Rasheed Mohammed al-Maraj, commented that “[m]any international banks have curtailed their correspondent services with regional and local banks. Some of the banks have refrained from dealing with exchange houses…. This has affected a wide sector of the population, especially the expatriates.” The tight U.S. regulations include scrutiny for potential tax avoidance and anti-money laundering rules. These impose extra costs on U.S. banks, prompting many to reduce the number of foreign institutions with which they do business, and making international banks operating in the United States more wary of ties with the Gulf.

According to an article in Reuters, “Some banks in the Gulf have been under particularly close scrutiny by U.S. authorities because of a drive to curb financing of Islamist militancy and flows of money to Iran. United Arab Emirates (UAE) central bank governor Mubarak Rashid al-Mansouri complained of the problem in December, saying it had become harder for UAE banks to obtain dollar clearance services—the processing of transactions in the U.S. currency. Maraj said Bahrain was engaging with U.S. authorities including the Federal Reserve and the Office of the Comptroller of the Currency, as well as with international banks, to convince them that the compliance standards of Bahraini and Gulf banks were in line with global practices.”³¹

The questions here are: can the credibility of any action against money laundering imposed by international law greatly undermine the inclusion of measures aimed at limiting international tax competition? May favorable tax regimes coexist with actions against financial crime?

“Interests of the powerful have dominated discourse in a rapidly changing globalized world, and the shift of power from the people to the market and from state to the corporation under the rubric of globalization has resulted in imbalanced structures of international trade and investment, uneven distribution of new technologies and an unjust allocation of resources as well as employment practices that work against the interests of the poor.”³²

Deterring money laundering today requires the adoption of comprehensive transparency-enhancing measures, as well as the abandonment of various regulatory and corporate devices allowing for investor anonymity and the non-traceability of assets. Persistently noncooperative Offshore Financial Centers (OFCs) may and should be deemed to be violating their obligations under international law with respect to fighting crime. These OFCs, for sure, according to Antoine Cousin and Jean Albert, “contribute to the occurrence of a continuous damage that the OECD countries should consider remedying.”³³ This has no opposition.

In addition to the Panama Papers , Bahamas Leaks has revealed owners of offshore accounts involving front companies that were used to conceal money.³⁴

3.1.1 Remittance Companies and Black Market Moneychangers

According to Michael Levi and Peter Reuter, “by the early twenty-first century (and long before), there was a large and growing range of methods for moving money across international boundaries, yet another facet of globalization. Thus there has evolved a highly differentiated set of financial institutions to meet the needs of various population groups such as low-income migrant workers who repatriate earnings home to poorer countries, very rich investors seeking to find the most politically secure and profitable location for their capital, and a broad array of businesses, from jewelry shops and car dealers to financial services firms themselves.”³⁵

When people or companies seek to send or receive money from unlawful behavior across national borders, undetected by government institutions, they have come to rely more and more on transfers known as dollar wires or Euro wire, operated by agents known as dollar changers (doleiros) whose activities stretch the legal envelope.

Along these lines, Terry Goddard informs us that the Arizona Financial Crimes Task Force searches for financial anomalies, disproportionate events unconnected with economic reality. “They immediately saw that Arizona was a huge net importer of wired funds. At the top-ten Arizona wired-funds locations, over $100 were coming in for every dollar wired out. Wire transfers into Arizona from other states, in amounts over $500, totaled more than $500 million per year. Since there was no apparent business reason for this imbalance, the investigators took a closer look.”³⁶

To preclude the use of fake identities for structuring or fragmentation of operations by companies and individuals in order to keep below the regulatory daily limit of $10,000, which would justify reporting the operation to the authorities, the State of Arizona established Geographic Targeting Orders (GTOs) that require additional identification, such as fingerprints and signatures from all persons receiving wire transfers in excess of $500. Based on such information, 25 warrants were issued in 2001 through 2006 for the seizure of wire transfers supposedly made in payment for human smuggling or narcotics trafficking.³⁷

The FATF recommends that participating nations obtain detailed information on all parties to wire transfers, both senders and beneficiaries, for monitoring purposes. This would enable the barring of transactions by certain people in accordance with UN Security Council Resolutions 1269/1999 and 1373/2001 on the prevention of terrorism and its financing (Recommendation No. 16).

The idea is eliminating the flow of funds through underground channels by making formal channels a better option for consumers.

Brazil’s foreign exchange legislation spells out a number of issues that are often unheard of, even in the United States. Take, for instance, Law No. 4131 of October 19, 1962,³⁸ which requires contracts for currency exchange operations in its Sect. 7, included by Law No. 11371/2006:

Article 23. Operations on the free exchange rate market shall be conducted through establishments licensed to conduct foreign-exchange operations, with the intervention of an official broker whenever the law or regulations so provide, both of entities being required to know the client’s identity, and how to correctly classify information provided by said client, pursuant to regulations established by Brazil’s Currency and Credit Authority.

(…)

§ 2 False statements of identity on the form which, in number of copies and following the model established by the Brazilian Central Bank shall be required in each operation to be signed by the client and checked and initialed by the banking establishment and broker therein intervening, shall render the banking establishment subject to charges for infraction, which carry a penalty of a fine in the amount of fifty percent (50%) to three hundred percent (300%) of the amount of the operation assessed against each of the violators. (New language given by Law No. 9069 of 1995)

(…)

§ 7 Completion of the form referenced in § 2 of this article is not required for foreign currency purchase and sale operations of up to three thousand dollars (US$3000) or its equivalent in other currency. (Included by Law No. 11371 of 2006).³⁹

Because of Brazil’s currency exchange regulations, remittance companies are required to conduct all of their operations exclusively through financial institutions duly licensed by Brazil’s Central Bank, and this also holds for international banking institutions. They must have agreements on file with accredited banks to engage in exchange operations in Brazil, under penalties provided by several regulations, in particular, Law No. 9069 of June 29, 1995 (the Lei do Plano Real),⁴⁰ which established the real as Brazil’s legal tender. It is the currency used to settle all transactions in Brazil.

Its Article 65 provides:

The entry into and departure from Brazil of domestic and foreign currency must be processed exclusively through bank transfers, where banking establishments are required to fully establish the identity of the customer or beneficiary.

§ 1 Excepted from the provisions contained in the heading of this article is the transportation, in cash , of the following amounts:

I – When in Brazilian currency, up to ten thousand reals (R$10,000);

II – When in foreign currency, the equivalent of ten thousand reals (R$10,000);

III – When it can be shown to have entered or left Brazil in accordance with pertinent regulations.

§ 2 The National Monetary Council shall, according to the guidelines from the President of the Republic, regulate the provisions of this article and also provide limitations and conditions for entry into and exit from Brazil of national currency.

§ 3 Failure to comply with the provisions of this article shall, in addition to sanctions provided in specific legislation and following due legal process, entail forfeiture to the National Treasury of all amounts in excess of those set forth in § 1 of this article.

Legislative Decree No. 857 of September 11, 1969,⁴¹ requires the use of national legal tender in all domestic operations, rendering null and void all operations stipulated in foreign currency or which would, in effect, restrict or refuse Brazilian currency as legal tender, but lists several exceptions to the ban.

In this regard, it provides:

Art. 1 – All contracts, securities and documents, and bonds callable in Brazil, which stipulate payment in gold, in foreign currency, or in any way serve to restrict or refuse the cruzeiro as legal tender, are null and void by law.

Art. 2 – The provisions of the preceding article do not apply to:

I – Contracts and paper relating to the importation and exportation of goods;

II – Contracts for financing or putting up bonds or guarantees relating to the exportation of nationally produced goods, sold abroad on credit;

III – Foreign-exchange purchase and sale agreements in general;

IV – Loans and any other obligations in which the creditor or debtor is a person residing and domiciled abroad, excepting only contracts for the lease or rental of real property within Brazilian territory;

V – Contracts for purposes of assignment, transfer, delegation, assumption or modification of obligations referenced in the preceding item, even if both parties to the agreement are residents of and domiciled in Brazil.

Sole Paragraph – Real property lease or rental agreements stipulating payment in foreign currency must, to be enforceable, and be registered in advance with the Brazilian Central Bank.

For its part, Decree No. 23,258 of October 19, 1933,⁴² provides that the purchase and sale of foreign currency shall be made exclusively in institutions authorized by the Brazilian Central Bank to engage in currency exchange operations, and establishes that:

Art. 1 All foreign exchange operations conducted between banks, natural persons or legal persons domiciled or doing business in Brazil, with any entities abroad—whenever such operations are made other than through banks licensed to operate in foreign exchange through prior accreditation by examiners on behalf of the Brazilian Central Bank—are considered illegal exchange operations.

This set of codes (Law No. 4131/1962, Article 23; Law No. 9069/1995, Article 65, heading, and Legislative Decree No. 23258/1933, Article 1) makes foreign exchange agreements mandatory (or, for operations of up to US$3000, more simplified forms), thereby establishing Brazilian currency (the real) as legal tender while requiring identification of customers and declaring illegal all foreign exchange operations not conducted through banks accredited by the Central Bank.⁴³

Pursuant to the rules of Brazil’s Financial Intelligence Unit (COAF), the item “Cash Transfers” covers remittances and applies only to the mail and Brazilian postal money orders, both domestic and international, since everything coming from abroad and involving currency exchange operations comes under Central Bank supervision.

There is an official market in the United States that often made use of gray market operators (currency brokers) to allow transfers of money belonging to uninformed foreigners residing in Brazil. To stock its operations, Brazilian currency (reals) usually in cash (from illegal conduct in Brazil) was deposited by the Currency Exchange into the accounts of beneficiaries of wire transfers coming from abroad, while the dollars or euros received from the senders (easy prey) are diverted to redeem and deposit money as part of this bartering in funds. This is the so-called wire operation.

One should bear in mind that whenever the number of immigrants in a given location increases, there is a proportional increase in the gray market transfer of money. Similarly, wherever there is an increase in illegal immigration,⁴⁴ it is easier to commit financial crimes .

Another topic of concern is the entry of several factoring companies, which pump money into the accounts of wire transfer beneficiaries in the receiving country, thereby contributing to the offsetting of amounts in furtherance of an illegal black market in unauthorized financial dealings. Quite apart from their main purpose, which is short-term business financing of creditors’ claims for goods and services provided on credit, the factor, or invoicer, is only required to keep a record of sales and perform administrative work relating to accounts receivable, receiving no sums and guarding against debtor insolvency.

According to the 1988 Convention on International Factoring held in Ottawa, a factoring contract is a contract between two parties, the client (supplier) and the factor. The factoring company should perform at least two of the following functions: (1) provide financing for the supplier, including loans and advances on payments ; (2) maintenance of accounts relating to the receivables; (3) collection of receivables; and (4) protect against default in payment by debtors.⁴⁵ Nothing is said, therefore, about assisting remittance companies or currency brokers so as to obtain financial compensation on their balances.

Something similar to what occurs in the Black Market Peso Exchange, which has long served international drug traffic, also applies to Brazil, with the establishment of the black market in reals.

According to COAF Resolution No. 13, factoring companies are required to report to COAF, even if not accredited as financial institutions by the Central Bank, which is why they do not apply for licenses or registration. The COAF code is intended, however, to make it possible to identify their owners and directors, perform due diligence on customers, and check whether internal controls are in place.

The Brazilian Federal Reserve (Central Bank Circular No. 3542 of March 12, 2012), establishes in its Article 1, XI, a requirement to notify the Financial Intelligence Unit if, for instance, the customer does not provide justification for the origin of the money, or where the amount is incompatible with the customer’s financial strength (item f); upon the realization of resources from abroad, check for financial incompatibility or absence of proper grounds (item g); or should payments occur abroad after deposit of credit in reals into accounts held by persons named in the currency exchange operations, absent any business or financial links (item j). In the United States, FinCEN requires banks to perform due diligence on wire transfers to foreign agents or counterparties (31 CFR § 103).

This is why irregular deposits show up in the accounts of recipients of wire transfers with no identification of the depositor, cash transfers to a beneficiary account from a company not authorized by the Central Bank to operate in the currency exchange market, or cash transfers to beneficiary accounts from individuals, for only financial institutions are eligible to receive Central Bank authorization to operate in currency exchange markets.

An occasional such operation may be deemed acceptable if it has, in addition to an investigation as to the origin of funds, proof of deposit through a financial institution accredited by the Central Bank (such as a letter from the bank responsible for settling the operation).

Due diligence is not called for when the sending company has its home office in the United States (where that is the source of the dollars).

In the United States, money transmitters are regulated at both the federal and state level, but for different purposes. At the federal level, they are subject to regulation under the Bank Secrecy Act (BSA). The BSA was enacted in 1970 to prevent money laundering and focuses primarily on creating a paper trail of all large financial transactions. FinCEN is tasked with promulgating and enforcing BSA Rules. FinCEN regulates money transmitters with an eye toward preventing money laundering and terrorist financing. A wide range of potential money transmitters is subject to regulation because the scope of FinCEN’s authority is drawn broadly. FinCEN regulates money services businesses “wherever located doing business, whether or not on a regular basis or as an organized or licensed business concern, wholly or in substantial part within the United States,…[operating in any of the listed categories].”⁴⁶ Money transmitters are one of those categories and encompass any “acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.”⁴⁷ Effectively, any business or person that accepts value from one entity to transmit to another would count as a money transmitter.

Fortunately, FinCEN has spelled out several exemptions from this broad definition. In particular, the Rule exempts a person from money transmitter regulation in six circumstances: (1) providers of network infrastructure to money transmitters; (2) certain payment processors; (3) certain clearance and settlement systems; (4) physical transporters of currency; (5) providers of prepaid access; and (6) persons accepting and transmitting funds only integral to the sale of goods or services. These exemptions carve out businesses that pose lower money laundering risk, again reflecting the BSA’s primary focus on preventing money laundering rather than enhancing consumer welfare. FinCEN’s basic premise appears to be: if a business transmits funds between well-regulated entities and well-understood channels, it is less likely to require regulation as a money transmitter. Its administrative guidance on the various exemptions supports this view.⁴⁸

Cases have been observed of payments for drugs through the use of remittances from the United States in a triangle involving Colombia, the United States, and Europe. Euros were brought in by mules (or smurfs) to Colombian currency exchanges, which shipped them to the United States, where they were bundled and sent to Europe, where the receiving company exchanged them for dollars which were then wired to the United States. These operations usually involve immigrants. With the arrival of greater numbers of immigrants in any country, the number of transfers from one person to another increases annually.

International banks are shutting remittance accounts in the Pacific islands in response to global financial regulation aimed at hampering money laundering . But the closures are hitting companies and families that rely on international money transfers.

According to Michael Field, “Westpac Group, one of two Australian banks that until recently dominated banking in the Pacific, said in April [2016] that it would cut business ties with the government of Nauru, having ceased operations in five other Pacific island countries last year. Australia and New Zealand Banking Group, the other Australian bank with major operations in the region, is also thought to be considering reducing its exposure—a move that would mark a significant backward step for the islands.”⁴⁹

Mr. Field considers that “anti-money laundering laws have been tightened globally, in part to reduce the flow of funds to terrorist groups. As part of these efforts, banks have been reducing their exposure to potential risks—a procedure known as ‘de-risking.’ In the Pacific this has included closing the accounts of money transfer operators (MTOs), the financial groups or middlemen through which remittances are sent. For the islands, this is bad news. The World Bank has estimated that Pacific island countries receive annual remittances of around $470 million. The funds can be crucial—remittances account for up to 26% of gross domestic product in Tonga and 20% in Samoa, according to the bank. The Reserve Bank of New Zealand says that MTOs handle most of the transfers. If MTOs were to be unable to operate, families could end up having to pay hundreds of dollars in transaction fees for bank transfers. Mark Flaming, regional project manager for the Pacific Financial Inclusion Programme, a UN administered nongovernmental organization based in Fiji, said it would cost Tongan families $950 a year in fees to receive remittances from banks. ‘This is really bad for [financial inclusion],’ he said.”⁵⁰

“Pacific MTOs, which range from global groups such as Western Union to small village and island-based suppliers, handle most of the remittances from Australia, New Zealand and the U.S. to families in the Pacific. Ranil Manohara Salgado, the International Monetary Fund’s chief of Asia and Pacific regional studies, said the organization was working with international bodies to create an environment where banks would not have to withdraw their services. ‘There are signs that some of the Western banks could withdraw, and that’s raising concerns,’ he told Nikkei Asian Review.”⁵¹

In turn, Lauren Resnick, considers that “in the environment of increasingly aggressive regulatory and criminal enforcement of anti-money laundering (AML) violations, concerns about de-risking—when financial institutions close accounts or restrict access to new clients because of high AML or counterterrorist financing (CFT) risks—have risen to the fore. Regulators and policy groups are concerned that ‘wholesale’ de-risking restricts financial inclusion and may violate competition laws. It goes without saying that financial institutions must appropriately manage their AML risks in light of the increased enforcement and civil liability exposure. Nevertheless, in lieu of wholesale exclusion of large segments of commerce, financial institutions should develop enhanced diligence protocols during the customer account opening process and monitor account activity to manage these risks effectively. By doing so, financial institutions can ensure continued banking access to the communities these alternative money service businesses (MSBs) serve.”⁵²

Besides this, authorities must designate virtual worlds, very often used by remitters, subject to the anti-money laundering or anti-terrorist financing regulation in order to be able to verify user identity during registration and ensure that each virtual transaction can be traced back to identifiable senders and recipients.⁵³

Although Informal Funds Transfer Systems (IFTS), as known as Hawala networks, have distinct operational characteristics—efficiency, adaptability, affordability, anonymity, cultural sensitivity, and trust through relational contracts,⁵⁴ it must follow some standard regulation. Formal remittance banking must provide access to their services in a much quicker way to encompass more relational contracts.

Here it is important to highlight the fact that “the World Bank and the Federal Government of Somalia [have been] working together to help support the flow of remittances to Somalia, to ensure they continue to reach people who depend upon them as a critical source of income. Remittances in 2015 were estimated to reach a total of US$1.4 billion in Somalia and support 23% of the GDP. Over the past two years, many banks in the United States, United Kingdom, Canada and Australia have closed the bank accounts of Somali remittance companies purportedly due to the perceived high risks of money laundering and potential links to terrorism.”⁵⁵

“The World Bank has been working alongside the Central Bank of Somalia (CBS) to implement a number of activities aimed at tackling key deficiencies in the Somali financial sector affecting remittance flows to the country. The World Bank has selected and appointed ‘Abyrint AS’ to act as the ‘Trusted Agent’ to the CBS and assist the authorities in comprehensively regulating and supervising money transfer businesses.” The World Bank has also been assisting with the implementation of new regulations and guidelines for the money transfer business sector within the new regulatory regime.⁵⁶

What is surprising in discourses on global migration is the neglect of the household as a vital institution not only in social reproduction, but also as a center for decision-making and motives for migration.⁵⁷ Remittance companies must be seen as a key social institution in local and global socioeconomic systems. Data and cases must be brought together to reveal remittance companies’ importance in contemporary globalization processes. Being out of compliance justifies the power to deny or revoke their licenses. Noncompliant Informal Value Transfer Systems obstruct the implementation of an effective anti-money laundering scheme because they attract legitimate transactions, making illegal transactions more difficult to identify, and do not provide adequate paper trails for law enforcement.⁵⁸

3.1.2 NGOs and Trusts

Just as the work of beneficent entities has been important, scandals have stained some of their images and opened the door to an increase in judicial actions against their directors, increasing skepticism in proportion to news coverage of events.

Because their work is philanthropic, and they are generally motivated by altruism and compassion, charities have been immune to legal proceedings. They may be made answerable on account of internal management issues or even external problems (everything from labor suits to fraud, and even money laundering by reason of insolvency, negligence, or poor practices). A charity’s entire board of directors might be held liable for some failure of accounting or diversion of funds.

Nongovernmental organizations, trusts, associations, and foundations tend to be as diverse as a country’s population. People are increasingly getting involved in some kind of social or charity efforts. Donations to these social entities have been large.

Recent disclosures have tarnished the images of certain entities and brought the glare of publicity onto the conduct of some of their managers. A backlash of skepticism has brought about a proportional reaction affecting the volume of donations and volunteer work.

Because philanthropic work is normally motivated by feelings of generosity and empathy, charitable organizations often imagine themselves immune to legal proceedings. Liability could surface based on some poorly handled internal activity, or some other cause occurring outside the organization. This is why the role of the manager is so important.

By the simple fact that they operate with personal and institutional donations, charity organizations are often temples, churches, mosques, NGOs , and educational associations, and they believe that they are not required to reveal the source of their funds, nor to be examined for the large financial transactions they conduct.

The U.S. Congress has, since 1917, allowed deduction of donations to charitable, religious, educational, and other such entities organized as nonprofit NGOs . Citing a 1938 report from the House Committee on Ways and Means, Erin Thompson explains that tax revenue losses due to charitable donations are offset by easing the financial burden, which, through the resulting benefits, promotes the general welfare.⁵⁹

According to Andrew Cuomo, philanthropic organizations “contribute substantially to our society. They educate our children, care for the sick, preserve our literature, art and music for us and for future generations, house the homeless, protect the environment and much more.”⁶⁰

The correctness of granting large tax deductions has been the subject of frequent assessment of its effectiveness, purpose and potential for abuse. All of this has, according to Mr. Cuomo, brought about changes in the law, statutes, and regulations governing charitable deductions. Thus, a philanthropic transfer in the United States must satisfy a complex set of rules to qualify as a tax deduction. These rules are grouped, according to Mr. Cuomo,⁶¹ into three main requirements: the transfer must be sent to a qualified addressee⁶²; it must clearly state the purpose of the donation, that is, not is an exchange of goods or services⁶³; and it must consist of a payment or other allowable goods.⁶⁴

The third and last requirement brings us back to the question of payments .

In the state of New York, for instance, in order to set up a foundation or NGO, a license must be obtained to qualify for tax exemption, and returns must be filed to the State tax authorities, under penalty of being closed down, by means of Form No. 990, dated and properly signed on penalty of perjury, and containing the name and telephone number of the person who keeps books and records for the organization.⁶⁵

The form must be filled out to include a detailed list of all of its activities and management, its revenues, overhead, and liquid assets. It must state the name and purpose of the institution; number of members; whether it has more than 25% of its liquid assets on hand; number of voting members listed within or outside of the entity; number of employees; number of volunteers; revenues from unrelated businesses and taxes paid; contributions and donations; resources invested; benefits paid by and for members; total assets and obligations; basic description of all assistance programs; whether any loans or benefits are granted to or for employees, directors, trustees or any other persons; the names, hours worked, and job descriptions of all employees and former employees (including directors, trustees and key personnel); their earnings, and their expenses (including travel or leisure).

For gross revenues of up to $100,000, no external audits are required. From $100,000 to $250,000, the information must be entered by an outside auditor (and documentation reviewed by that professional), who does not, however, check the truthfulness of information obtained. In other words, it is not the auditor’s job to check donor transactions (to conduct the due diligence). But NGOs with gross annual revenues in excess of $250,000 are required to turn in an outside auditor’s report, and that auditor must perform the due diligence.⁶⁶

The Foundation Center, a U.S. center for information on foundations, has published some 29 standards. Brazil, meanwhile, has six unpublished standards (a true case of living in a glass house).⁶⁷

Management and employees of nongovernmental organizations must be answerable for their management and for the protection of the goods and services that benefit us all.

A primary responsibility is to ensure proper accounting for social programs they play a role in, and for funding received from their supporters (public or otherwise). This means they must strictly comply with the law and ethical standards, be committed to the mission of the NGO they represent, protect the rights of their members and, indirectly, of those assisted, and prepare annual reports for their country’s federal revenue service and regulatory authorities having jurisdiction—reports that should be available to all interested parties.

They should therefore have technical information at their fingertips to enable them to monitor and record all assets and amounts received, spent or entrusted to their care.

The website of the National Association of State Charity Officials (NASCO)⁶⁸ contains important information on recording and reporting required of NGOs . NASCO members are employees of U.S. government agencies charged with regulating NGOs and their funds.

Marion R. Fremont-Smith, who teaches Public Policy at the John F. Kennedy School of Government, produced an important comparison for Harvard University on the bookkeeping requirements for such organizations. She showed, for instance, that most U.S. states (for example, New York, California, and New Jersey) require that they have at least three directors.⁶⁹

FATF Recommendation No. 08, in the spirit of clearly delimiting the rights and responsibilities of directors and employees of nongovernmental organizations, encourages countries to establish good policy whereby information on their activities, size, and other important characteristics such as transparency, integrity, openness, and best practices can be had in real time for purposes of supervision and monitoring.

It is not enough to only dimly perceive here a preoccupation with the financing of terrorism, for they could be the means of commission of any number of crimes.

In Pakistan, for example, the Central Bank has placed much stricter controls on NGOs and beneficent societies, ordering a complete review of all of their accounting before the end of 2012, on pain of making them subject to penalties. The purpose was to establish a policy and a set of rules for compliance (to strengthen due diligence) and to protect them from the risk of money laundering and terrorism financing. All of the country’s financial institutions are being required to open accounts in the name of NGOs that match the documents submitted to them. In the event of an organization publicly soliciting donations or the like, accompanied by a bank account number, those financial institutions must promptly take note of and report that account in the event that the account owner of record does not match that of the publication.⁷⁰

Similarly, two government intelligence cells were created in India to detect sources of funding used to finance terrorist activity. Analysts there believe that terrorist attacks in India are funded by neighboring countries through NGOs and nonprofits. Up until recently, they had no way of checking on how funds from abroad, purportedly intended for health and education, would actually be used.⁷¹ In 2010, there were some two million NGOs in India, but of that number, only 71 had requested any reimbursement for taxes paid. In 2009, there were 38,600 registered with the government to receive donations from abroad. Some are suspected of being money laundering channels for the return of illegal cash received from Indian politicians or for terrorism financing, much of it qualifying as investments coming through Mauritius.⁷²

NGOs , associations, and foundations lacking proper controls are recognized today as channels for money laundering for organized crime. In fact, the FATF has found that sums transferred from NGOs abroad have provided funding for the financing of terrorism on a par with counterfeiting, drug trafficking, extortion, and corruption . This has prompted India, for example, to assemble an umbrella database listing them all.⁷³

Money laundering is usually carried out using a layered structure to give the appearance of legality. One such method would be to establish trust companies through which the company manages business for its clients, the beneficiary being one or more holding companies, or a series of companies in several tax havens, to create a separation between the aforesaid holding companies and their ultimate beneficiary. Moreover, the discovery of the real beneficiary would require considerable cooperation on the part of authorities in those tax havens. Some means would have to be established to require the trust to provide its beneficiaries’ names whenever requested by the authorities.

It is not even easy to establish who is in charge of the trust, for there is no obligation that that name be revealed. Hence, being its legal beneficiary is an enviable business—which may explain the rather timid recovery of illegal assets.

There are efforts underway in India to publicize the names of organizations (religious NGOs or trusts) requesting tax exemptions. One of India’s wealthiest trusts collects huge sums of cash . There are a number of laws and several states seeking to monitor the activities of these entities. Yet Parul Soni (of Ernst & Young Pvt. Ltd.) believes that federal legislation will be required to achieve bookkeeping transparency and to strengthen the reporting of suspicious activity in that sector.⁷⁴ Trusts, though they may be temples, churches or mosques, nongovernmental organizations, or educational institutions registered as NGOs , must now reveal the sources of their funds and have their financial transactions closely scrutinized. This is because of new jurisprudence requirements under India’s Prevention of Money Laundering Act of 2002. Indian attorney Bhusham Bahal tells us that the laundering of illegal money has been largely made possible by NGOs operated by powerful businessmen and top politicians, so that this new instrument should prove of valuable assistance to the authorities.⁷⁵

Pakistan has also adopted strict measures to curb money laundering and terrorism financing by NGOs by putting in place a very broad know your customer policy. It requires photocopies of customer photo IDs (identification card or passport), and a copy of the assignment, if done through power of attorney. Companies must produce their charter and bylaws, and a list of directors. Similar documentation is required of individuals, along with audit documents required of clubs, associations, and nonprofit associations.⁷⁶

The trump card in the Indian case is the requirement that sources of funds be revealed, so that know your customer policies have to be in place for donations received by the NGOs , as is already the case for financial institutions. They must also provide detailed information on investments and donations received, and anonymous donations are henceforth barred.⁷⁷

In Canada, nongovernmental organizations are as diverse as the population. Many Canadians are involved in charity work, with estimates running to some 36% of the population. Economically, the sector is a major player, inasmuch as two million people are employed within it, with another two billion hours voluntarily contributed. There are over 160,000 NGOs operating nationwide and 85% of the population makes financial contributions to Canadian social entities.⁷⁸

Considerable customer due diligence is required. The donor’s name or job title is no longer enough (photo ID is preferred). For instance, the donor’s purposes and actual financial position must be known (preferably face-to-face), along with his signature or the signatures of those acting on his behalf. The source of funding must also be disclosed and supported by documentation. In the case of a donor company, a copy of the bylaws is required (in order to check the list of directors) from the civil or deed registry having jurisdiction. The true directors of the NGO must be known, again with photo ID, along with the scope of their authority, all of that backed by documentation to properly support the information provided.

Terrorists and their supporters have targeted domestic organizations, often religious organizations, which generally enjoy less governmental scrutiny and have long been considered upstanding pillars of many western societies. Part of the American government’s response to this terrorist infiltration of the charitable community was to seek to ensure a regulatory climate in which donors can give to charities without fear that their donations will be misused to support terrorism. Abuses by terrorists and their private supporters have tainted the reputations of some charities, and to some extent corrupted the sanctity of charitable giving. Governments must be wise in waging its financial war on terrorism.⁷⁹