The color of money: money laundering and the criminal liability

The “Panama Papers”, confidential documents leaked from the firm Mossack-Fonseca by an anonymous source, have sparked public outrage at the tax practices of the elite and have directed the general public’s attention to an aspect of finance and taxation which, despite seeming dubious, had until now been virtually unknown except to a small group of people. Not only are terms like “tax haven”, “opaque companies” and “money laundering” on everyone’s lips now, but they’re also used with ease by the majority. One of these terms (perhaps the most common) is “offshore”. As my partner, Celsa Núñez, explained in an article published on May 8th in La Vanguardia, an offshore company is a company incorporated in a foreign jurisdiction where the company does no business. These territories (offshore areas) are primarily characterized by having little or no direct taxation, and should not be confused (despite occasionally coinciding) with another equally controversial concept: tax havens (tax heavens, paradis fiscaux or das off shore-bankzentrum).

We say controversial because the terms “offshore” and “tax haven” tend to be immediately associated with two criminal activities: money laundering (art. 298 et seq. Spanish Penal Code (PC)) and tax fraud (art. 305 PC).

This isn’t surprising since, as highlighted by the doctrine and abundant case law that exists for these crimes, fraud necessarily entails the laundering of the defrauded amount. One of the most used money laundering methods involves so-called opaque companies (also known as “front companies”). As readers will recall, the media has speculated that the offshore companies set up by Mossack-Fonseca (about 214,488, according to El Confidencial) could be front companies. The Public Prosecutor’s Office of the National Court of Spain has launched an investigation to determine the existence of alleged criminal money laundering activities. It will be a massive task: 1,200 companies that appear in the “Panama Papers” have a Spanish postal address. Presumably, a significant percentage of them are front companies. Given that Organic Law 5/2010 of 22 June introduced the criminal liability of legal entities into our legal system, it’s reasonable to ask ourselves: Will it be possible to criminally punish opaque companies proven to have been used for the crime of money laundering?

Before putting this question on the table, we must briefly address some terminological matters. By money laundering, we mean specific actions aimed at incorporating the proceeds of criminal conduct into the legal financial system, which allows said assets to be used legally. Note: the media often uses the terms “black money” and “dirty money” interchangeably, although they aren’t the same thing. As BLANCO CORDERO explains, the former is the result of legal activities, although the recipient has avoided the tax effects generated by all sources of income. Illegal or dirty money, on the other hand, is the result of illegal activities. Money laundering, as we mentioned earlier, is classified as a crime in art. 298 et seq. of the Penal Code.

With the publication of the “Panama Papers”, the public has had access to details about money laundering operations that were previously only available to a select few. It has also confirmed that the establishment of opaque companies (usually offshore) is an excellent means of laundering black or dirty money through mechanisms such as reinvoicing (two companies located in onshore territories trade with each other using a third offshore company), the fraudulent use of judicial proceedings, or vintage companies.

That said, we can return to the question we posed earlier: Could these opaque companies be held criminally liable for the crime of money laundering?

To answer this question, it will be helpful to examine the first Spanish ruling on the criminal liability of a legal entity(case number 154/2016, of 29 February 2016, by reporting judge Maza Martín) which includes the premises for indicting a legal entity. The first is confirmation of the commission of a crime by an individual who is a member of a legal entity. It must then be determined whether the crime directly or indirectly benefited the company. The court specifies that it is not necessary for a benefit to have been generated. Second, it must be confirmed whether the company breached its obligation to establish surveillance and control measures to prevent the commission of crimes (establishment of Compliance protocols).

On this point, we could say that a front company that had been used for the purposes of money laundering would meet the first requirement since the individual managing or running said company would have committed the crime to benefit the company, themselves, and the person on whose behalf they were acting. The second requirement would collapse under its own weight, because why would a front company establish a protocol to prevent money laundering if its purpose is precisely to commit that crime?

However, in regard to front companies, the court seems to follow the doctrine provided in circular 1/2016 of the Public Prosecutor’s Office, and considers front or opaque companies to be immune from prosecution.

The ruling distinguishes between companies that operate normally in the market and manage their provisions on organizational and management models (sections 2 to 5 of art. 31 bis PC), and those companies instrumentally used for the commission of criminal offenses (second rule of art. 66 bis). Both types of companies are subject to prosecution.

On the other hand, the court describes other types of companies that are of a purely instrumental nature since they do not perform any legal business or do so only on a residual basis. These are front companies, which remain outside of article 31 bis of the Penal Code.

However, the explanation provided in the ruling we’re referring to is logical. The liability regime for legal entities isn’t really designed for front companies (supervision of subordinates, regulatory compliance programs, rules for extenuating circumstances, etc.), which doesn’t mean that the penalties of dissolution or fines expressly provided for legal entities in article 33, section 7 PC cannot be applied to them, as well as other means such as seizure or actual precautionary measures.

From a procedural standpoint, rejecting the prosecution of a legal entity in the case of a front company is significant, because these companies are deprived of the rights and guarantees introduced in the Criminal Procedure Law by Law 37/2011 of 10 October, on procedural streamlining measures, in the image and likeness of the individual. One example of this deprivation of guarantees is the order of 19 May 2014 (Criminal Division of the National Court), which denies the appearance, as the indicted party, of a company that the central court of investigation has seized assets from within money laundering proceedings. The aforementioned order introduces the concept of corporate accountability, distinguishing between legal entities that can and cannot be prosecuted, so that only those legal entities with a sufficient material basis will be criminally liable.

As you can see, opaque companies’ immunity from prosecution is not synonymous with indemnity; on the contrary, their guarantees of defense are reduced by the application of the aforementioned doctrine. This opens a doctrinal debate that promises to be fierce in light of the proceedings that will be initiated as a result of the disclosure of the “Panama Papers”.