When Captain Francis Drake sailed across the Atlantic in order to claim the new world on behalf of his queen Elizabeth I, little did he expect that his expedition to claim the land and conquer the trade routes of the Spanish, will result in a new regulated pirate corporate realm, namely the off-shore corporate structuring methodology.
This modus operandi has resulted in many pieces of journalistic outputs throughout the years, such as the Panama Papers and Paradise Papers, but the newly published Pandora Papers puts even the most respectable world leaders under an intense lens, that makes a spectacle even of the most robust off shore corporate structures and AML regulatory framework.
It was at the time that the geographical area set the part of the antagonism of Phillip II, King of Spain, towards the English, claiming that Drake is stealing cargo and trade routes from the Spanish, that later led to the Battle of Hastings, in which Elizabeth I claimed her position as Gloriana, and Francis Drake as her partner, in so called, crime.
From cannons to corporate defence companies
It is now the exact same geographical area that sets the world ablaze, but this time not with cannons, but with the banking issues of corporate structures, and a focus on defence companies.
The Pandora Papers have created a regulatory and corporate puzzle that is not only troubling world leaders with their real estate and company structures, but also with the defence industry and their Anti Money Laundering (hereinafter- AML), as a whole.
The new AML Framework of the EU, which entails AMLA, the new anti-money laundering regulation, rekindles the flame of the EU Commission’s novel idea of a sperate AML Authority, which will not be part of ESMA, an additional Regulation of AML (on top of 6 AMLD- which is dire enough to implement within each Member State) and revision of EU Directive 2015/847 of transfer of information between payment institutions towards a joint brink for financial services and capital markets union.
The defence industry has been also greatly affected by the AML change, mainly due to the fact that the risk assessment and scope of the risk has been enhanced by 6 AMLD, which is considered the most extensive piece of implemented legislation to date, due to the fact that AMLA is not implemented yet.
Why is the banking of defence enterprises becoming more difficult?
The scope of 6 AMLD emphasizes the fact the defence industry is considered high risk in the broader sense, meaning that banking of defence enterprises is becoming more difficult. Defence companies are been viewed as high risk, together with the art and crypto currency industry, hence the risk assessment teams of the banks are slightly more hesitant when allowing certain banking activities within the bank.
Considering this reason, many defence companies are beginning to explore the option of banking with financial institutions licensed under the new banking renaissance- fintech.
Electronic Money Institutions (hereinafter- EMIs) are operating as digital banks for this specific purpose. Be that as it may, even EMIs are subject to a strict regulatory framework- Payment Service Directive II (hereinafter- PSD2) and 6 AMLD, which mandates that defence companies need to be considered as a high-risk entity, even within this banking framework.
Pandora Papers have set a novel operational need, in which the banks not only need to check the typical due diligence list that is typically mandated by the central bank and PSD2, but also the indication that Pandora brings to the defence market. Pandora creates a unique approach, in which the compliance and risk assessment of the banks and EMIs needs to take into consideration au courant lists, that are published by journalists, and not just regulators.
The Market will still have to adapt to this new operational- regulatory due diligence, which begs the inescapable question, of how will the defence companies find the correct approach to mitigate their risk once indicated in Pandora. The undeniable answer will be issued by the operational and risk departments of banks, which will form the de-facto regulator for this ever-changing money laundering realm.
By Aviel Marciano, Strategic Adviser and Co- Founder at Armada, and Ella Rosenberg, EU Regulatory Consultant and Co- Founder at Armada