White-Collar Crime, Organised Crime and the Regulation of ‘Enablers’

By Prof Michael Levi (Cardiff University)

Once upon a time, the demonology of crime was a straightforward affair.  In the black corner, there were shady, full-time ‘villains’ – usually from ‘the dangerous classes’ – who were labelled as ‘Organised Crime’.  In the white corner, there were elites and their ‘servants’ (nowadays, employees) who, when they temporarily strayed or were the black sheep of otherwise respectable families, were labelled as ‘White-Collar Crime’.  In truth, this was always an over-simplification: business and political elites sometimes teamed up with gangsters in Racketeering or Mafia-Type Associations (a special legal category). Both categories often needed lawyers and accountants as well as banks to exercise morally neutral assistance, but beyond the Fagin-type ‘fences’ of stolen goods, we had not yet shifted our thinking from ‘Organised Crime’ to ‘the organisation of crime’, in which professional ‘enablers’ play a nodal role. 

The Riviera isn’t only a sunny place for shady people (Somerset Maugham, Strictly Personal)

Nowadays, it is harder to distinguish white-collar and organised crime.  We have VW and some other car makers deliberately fixing emissions targets or choosing not to report serious safety violations against millions of consumers – conduct which arguably meets the criteria of ‘organised crime’; some bankers illegally fixing prices on currency exchanges and inter-bank rates (LIBOR, EURIBOR, etc.);  apparently legitimate lawyers and bankers funnelling funds for corrupt kleptocrats; state-sponsored or state-tolerated cybercriminals both defrauding and stealing intellectual property from our businesses and government organisations; and bankruptcy scams, identity thieves and mass marketing fraudsters proliferate.  Indeed, fines totalling $150bn – 14 percent of their equity capital – have been imposed on 10 US and European banks between 2009 and 2015.  Though these sanctions are unevenly distributed among the financial services firms, in the aftermath of the Panama Papers leak, there may be many more fines and civil settlements/ prosecutions of clients, raising issues of how reputational risk ‘works’ when so many major elite corporate actors are exposed.

The natural experiment of the Leakers of Panama has shown how much global capital has been shifted by legal legerdemain, and understandably, the main focus to date has been on the political and business celebrities involved. Yet the light has not yet been shone on what the episode tells us about the regulation of the legal profession and the extraordinary international relations soft law mutual evaluation process that has been developed by the Financial Action Task Force, mostly by regional peers but in some cases by the IMF and World Bank units who specialise in this area. After an over-soft review in 2007, Panama was critically reviewed by the IMF in 2013, and the 2015 IMF Article IV review  reiterated the need to strengthen anti-money laundering/terrorism finance to sustain Panama’s economic performance: the lack of regulation of lawyers there was singled out for criticism.  Following this, Panama was put on the ‘grey list’ of countries to be monitored by the FATF, which took it off the list in February this year following ‘significant improvement’.

The requirement that lawyers and all financial institutions not just identify their clients (and the ‘true’ beneficial owners of accounts) but also report any suspicions of laundering the proceeds of any crime to national Financial Intelligence Units has been a significant and difficult measure that has taxed most jurisdictions.  In Europe, it was made compulsory except where legal professional privilege applies in the conduct of a defence, but the mechanisms vary widely and a comparative study in 2004 by Levi, Nelen and colleagues showed that the UK accounted for most reports by European lawyers, a situation that remains unaltered since (though no aggregated figures are collated by officials): see Middleton, D. and Levi, M. (2015) ‘Let Sleeping Lawyers Lie: Organised Crime, Lawyers and the Regulation of Legal Services’.  The US, a key driver of action in most spheres of transnational crime, has hitherto avoided tackling the legal profession and state registry incorporators of business.  The new evaluation regime is intended to be based more closely on how well anti-laundering measures deal with real problems rather than the approach that Halliday, Levi and Reuter (2014) critiqued for its exclusive attention to institutional and legal building blocks (Report here).  One of the effects of the controversy surrounding the Panama and other leaks will undoubtedly be to make it harder for countries to resist the transparency agenda.

But who, if anyone, is responsible for regulating transnational law firms?  Firms are regulated according to the different rules in each country in which they operate. Those who expect the Panamanian Bar Association to be looking vigorously into the allegations will find it has no remit for AML regulation.  A year ago, the Law Society of England and Wales and the National Bar Association of Panama signed a friendship agreement, committing to engage in ongoing dialogue on the regulation of foreign lawyers.  There is much to do.  In Panama, there are currently no guidance notes in place on how to identify and deal with money laundering suspicions; lawyers do not need to belong to a professional association in order to practice; and the Bar Association is not involved in supervising and enforcing any compliance.  Codes of ethics are not legally enforceable, and though lawyers are required to conduct Know Your Customer enquiries, retain records, etc., they are not obliged to report suspicions of money laundering to the much-criticised Financial Intelligence Unit, which was undergoing reforms before recent revelations.

Some Panamanian lawyers are on the Specially Designated Sanctions list published by the US Treasury. However, the test for designation would be active membership of criminal organisations rather than the sort of morally neutral client facilitation alleged in the Papers.  Nevertheless it is professional suicide not to check against the list of sanctioned persons, and to act for those on the list: the leaks suggest that Mossack Fonseca may not have done this thoroughly enough, and may not have discarded such clients rapidly if at all.  Time will tell what action follows.

In 2013, Panama got 11 convictions for money laundering: the number of lawyers prosecuted is unknown.  All convictions were tied to bulk cash cases with an obvious connection to a predicate crime.  The US International Narcotics Control Strategy Report  highlights Panama as a major money laundering country:  but since it highlights 67 jurisdictions, including the UK and US, there is nothing special about that!   However, we need a new lexicon if we are not mistakenly to attribute transnational activities to any particular country.  It makes more sense to conceptualise Mossack Fonseca and the activities it facilitates as state-less than as particularly Panamanian. 

Could it happen here?  The firm, like Panamanian financial services generally, is a product of its time, when apparent formal compliance was sufficient to receive freedom from interference: and who checked, where?  British and probably American lawyers would be much more careful in checking the provenance of their clients, and certainly checking them against the sanctions lists.  Very few lawyers anywhere have been struck off for failed AML due diligence alone. The alleged knowing supply of false beneficial owners to hide the true ones could be fatal to the firm’s survival in the context of the present push for process transparency, but reflects the cynicism of some firms who wanted to serve their clients and suspected that if they didn’t, someone else would. For large firms, Money Laundering Reporting Officers might have to double-check AML front end compliance, while small firms may feel pressurised to cut corners to retain clients. We may not know how common this is until the next set of leaks comes along. 


Professor Michael LeviMichael Levi is Professor of Criminology at Cardiff University, a former ESRC Professorial Fellow and a member of the Strategic Advisory Group on the Partnership for Conflict, Crime & Security Research.  He has been conducting international research on the control of white-collar and organised crime, corruption and money laundering/financing of terrorism since 1972.  He is an Associate Fellow of RUSI and a Senior Fellow at RAND Europe. In 2014 he was awarded the Sellin-Glueck prize for international and comparative criminology by the American Society of Criminology.