Two global companies were under mounting pressure, and threats were flying.
For years, the Swiss banking giant UBS Group AG and a Panamanian law firm named Mossack Fonseca & Co. embraced each other. UBS had customers who wanted offshore shell companies to keep their finances hidden. And Mossack Fonseca, one of the world’s largest creators of offshore companies, sold them.
But in 2010, under threat of U.S. criminal prosecution for tax evasion and money laundering, the UBS board of directors wanted out of the shell-company business. Tensions boiled in a meeting in Zurich on Sept. 28, when UBS asserted that Mossack Fonseca — not the bank — was responsible for identifying the owners of the shell companies.
Mossack Fonseca employee Dieter Buchholz argued that his firm had no idea who really owned some of the companies created for UBS customers, because the bank had withheld that information. UBS executive Patrick Kung objected, saying Mossack Fonseca was “in violation of the Swiss money laundering code” and he was “seriously” contemplating reporting the law firm to the authorities, according to emails describing the encounter.
The emails appear among more than 11 million internal Mossack Fonseca documents obtained by the International Consortium of Investigative Journalists (ICIJ), Suddeutsche Zeitung and other media partners, including McClatchy and its 29 newspapers.
The leaked records provide evidence of the UBS-Mossack Fonseca spat, but also an unprecedented picture of how major global banks work with other players to help the very rich, politicians and criminals conceal assets.
More than 500 banks, their subsidiaries and branches registered nearly 15,600 shell companies with Mossack Fonseca, according to ICIJ’s analysis. The vast majority of them were created since the 1990s.
The British banking giant HSBC Holdings Plc and its subsidiaries alone account for more than 2,300 of the companies, and UBS accounts for more than 1,100. Other big banks doing business with Mossack Fonseca included Credit Suisse Group AG (1,105), Societe Generale SA (979 companies), the Royal Bank of Canada (378) and Commerzbank AG (92).
The American investigation into banks’ role in offshore tax evasion quickly broadened beyond UBS. Credit Suisse pleaded guilty to criminal conspiracy charges in 2014 for, among other things, “assisting clients in using sham entities to hide undeclared accounts” and paid $2.8 billion to settle. The Swiss bank Julius Baer Group AG settled for $547 million earlier this year. Wegelin & Co., Switzerland’s oldest bank, closed down in 2013 after paying the U.S. $58 million for aiding tax evaders. In all, at least 80 Swiss banks have settled with the U.S. since the UBS investigation began.
“In all cases, UBS knows the identity of the beneficial owners of the companies that its customers ask the bank to work with and we apply the same strict anti-money laundering rules to all of our bank and business relationships,” a UBS spokeswoman said in a statement. “UBS proactively decided to discontinue” setting up companies for customers in 2010 “due to changes in regulation in some of the jurisdictions where offshore companies were held and due to a further tightening of UBS’s internal policies.”
A Mossack Fonseca spokesman said in a statement, “We conduct thorough due diligence on all new and prospective clients that often exceeds in stringency the existing rules and standards to which we and others are bound. Many of our clients come through established and reputable law firms and financial institutions across the world, including the major correspondent banks, which are also bound by international ‘know your client’ protocols and their own domestic regulations and laws.”
In 2010, Mossack Fonseca initially felt betrayed by UBS.
“UBS has totally changed and because of the problems they had to face they are now reacting in an outrageous way,” wrote Mossack Fonseca’s Geneva representative Adrian Simon in reply to Buchholz’s email about the tense meeting.
“Looks like they just want to push their responsibility away!” added Christopher Zollinger, one of Mossack Fonseca’s three senior partners.
UBS and Mossack Fonseca worked out a deal. The law firm would take over administration of UBS’ shell companies and give “special treatment” to the bank’s customers, who would retain their UBS bank accounts.
Normally Mossack Fonseca required banks to provide “due diligence” information verifying owners’ identity and confirming that they were not involved in overt criminal activity.
But it now agreed to accept “DD light” from UBS, requiring less documentation on the true owners and why they were using shell companies, according to a December 2010 email.
As a result, Mossack Fonseca would deal with the customers directly, not through the bank, and UBS would put some distance between itself and shell companies.
Mossack Fonseca made similar arrangements with other major banks so they also could insulate themselves from their customers’ offshore companies, the files show. “It would be ideal that the special treatment of customers ex-UBS is extended to all banks in Geneva,” the law firm’s partners decided.
In 2010 and 2011, Mossack Fonseca reached agreements with Credit Suisse and HSBC to give “special treatment” to their customers’ shell companies.
For French multinational Societe Generale, that VIP service started as early as 2008 and involved companies that had been set up for customers of the bank using so-called bearer shares.
Companies that have bearer shares don’t record an owner’s name. If they’re in your hands, you are the owner. They have long been considered a vehicle for wrongdoing and have been gradually disappearing worldwide under tighter regulation.
When Societe Generale refused to tell Mossack Fonseca who really owned the bearer share companies, Mossack Fonseca went along, agreeing to require no due diligence documents from the bank, according to the files obtained by ICIJ.
Contacted by reporters, a spokesman for Societe Generale said, “Bearer shares, in the jurisdictions where they exist, can be used for legitimate (non tax) confidentiality reasons, for example the protection of a well-known family in a country where there is a genuine safety risk for the family. Societe Generale has not bypassed and did not ask Mossack Fonseca to bypass any due diligence requirements. SG identifies and knows the beneficial owners of every company.”
A spokeswoman for Credit Suisse said that since 2013, the bank has been implementing “tax regularization programs” that require private clients to provide evidence of tax compliance. “For Credit Suisse it is key that its clients use structures only for legitimate purposes, e.g., organizing the wealth of families that have a wide range of financial assets which are held in different countries,” the spokeswoman said.
Mossack Fonseca said that “due diligence procedures were carried out in accordance with the laws in place at the time the companies and cases you made reference to were incorporated and in existence.”
An RBC spokeswoman said the bank has an extensive due diligence process “to ensure we understand who the client is and what their intentions are, and will not proceed with a transaction until we do.”
Commerzbank declined to comment.
The leaked files suggest that the U.S. criminal investigation of UBS and other banks, starting in 2009, helped slow — but not end — banks’ use of the offshore companies. Some banks unloaded companies onto offshore middlemen but continued to offer banking services to customers through the offshore companies. And there are other adaptations.
In April 2013, for instance, a Mossack Fonseca employee met with a Credit Suisse banker named Philippe Dudler. According to notes of the meeting taken by Mossack Fonseca, Dudler told the firm that “German clients are moving their assets to Miami, as the banking secret there is solid, Delaware companies are not asking for the (true owner), and the U.S. government never has responded … regarding bank accounts that potentially could be used for tax fraud.”
Credit Suisse said it has toughened requirements in the past three years. It said that it “terminates the banking relationship” if clients fail to comply with requests for evidence of “tax compliance.”