Paradise Papers -
The Shadowy World of Big Money

The Firm

International law firm Appleby organizes offshore companies around the world in ways it claims are clean and professional. But along with companies like Nike, its clients have also included criminals.

By Elisabeth Gamperl, Frederik Obermaier, Bastian Obermayer, Nicolas Richter and Vanessa Wormer - 05. November 2017

Robert Woods was furious. It was July 2014 and the former police officer, responsible for ensuring compliance with regulations and laws at the international law firm and offshore specialist Appleby, had just learned that the firm had accepted an assignment from a dubious client only a few months prior. The businessman in question had sold African diamonds and had already been forced to pay 160 million euros to Belgian authorities to settle preliminary proceedings for illegal trade in precious stones. "The allegations are extremely serious and relate to blood diamonds," Woods wrote to a colleague. "Why was this not brought to my attention?"

Ultimately, Woods agreed to keep the client. It was a big risk for the firm given the proximity to the diamond industry, Woods noted, but there was enough to justify continuing to do business with him. Woods nevertheless saw the episode as a clear violation of internal rules. He explicitly complained of a "failure of our processes." He urgently warned his colleagues against prioritizing profits over responsibility. "What’s done is done, but going forward, whilst being commercial, please let us try to ensure that we don’t get carried away with fee earning potential," Woods told his colleagues.

The law firm Appleby is at the center of the Paradise Papers; a large share of the data obtained by the Süddeutsche Zeitung and reviewed by hundreds of journalists around the world came from the law firm – around 6.8 million documents. Appleby is a leading member of the "Offshore Magic Circle", a global network of lawyers, consultants and other executives who advise companies in tax havens. The offshore business gets its name from the remoteness of the islands where most havens are located, far from any mainland. With its more than 470 employees, Appleby maintains offices in just about every major tax haven in Europe, Asia, the Caribbean and Africa. Aside from Bermuda, the Cayman Islands and the British Virgin Islands, the company's most important offices are located on the Isle of Man and Jersey, both dependencies of the United Kingdom. Appleby's clients include, among others, major banks and auditing firms.

The company, which reports more than $100 million in annual revenues, bills itself as the market leader in the offshore industry. Appleby is proud of the accolades it has received, such as the "Offshore Law Firm of the Year" awarded by industry analysts at Legal 500, and of its handling of the business of shell companies, which it claims is done in ways that are absolutely clean and professional. Its clients include princesses, prime ministers and Hollywood stars, not to mention some of the world's richest oligarchs from Russia, the Middle East, Asia and Africa.

To protect its reputation, the law firm regularly invites its employees to attend private training seminars. In September 2013, for example, the former Appleby employee Adrian Alhassan prepared a PowerPoint presentation to warn his colleagues at the firm's Cayman Islands branch about the pitfalls of the business. The firm has an office in the capital city of George Town, in a dignified, cream-colored high-rise with a blue-windowed facade. The offices are conspicuously upscale compared to the largely functional buildings surrounding it, which are home to many financial service providers and branch offices of major banks responsible for managing billions in assets. Only a few steps away is the other George Town, colorful and full of Caribbean flair, with local guides herding groups of tourists onto boats for a journey to sandbanks off the coast to pet stingrays while listening to reggae music. It’s a place where small fish dart between your feet and the large stingrays really do nestle up to you when you stick your hand into the water. They do have a nasty stinger, but the young men in the boat just laugh. Very few people ever get stung here, they say. You just have to be careful.

Adrian Alhassan offers a similar message in his presentation: So long as you’re careful, he tells his listeners, nothing will happen to you. The point of the presentation was to discuss how Appleby could protect itself from criminal clients and what would happen if such potential clients were not identified or were simply ignored. After all, those who knowingly aid money launderers can, under certain circumstances, be prosecuted for money laundering themselves. In the worst-case scenario, that could result in jail sentences for some and possibly even spell ruin for the law firm. At Appleby, people shudder when they think about the accounting firm Arthur Andersen, which essentially went under in 2002 because of its involvement in the Enron scandal in the United States.

Alhassan's 65-slide presentation, part of the data obtained in the Paradise Papers, serves as a reminder of the basic rules and dangers of the business: the establishment and management of opaque firms in tax havens for wealthy individuals and corporations. Alhassan warns repeatedly that criminals of all stripes use anonymous offshore companies for their purposes and that Appleby cannot allow itself to become an accomplice. "Eighty-percent of the battle is won or lost at the gate", the presentation reads. "If we let in the wrong clients, we set ourselves up for a fall." You have to be careful.

There's just one problem: Appleby has long since taken on a number of dubious clients. Information on many of them – including corrupt politicians, internationally sanctioned businessmen and convicted tax evaders – can be found in the Paradise Papers. Alhassan lists some trenchant examples: a suspected member of the Chinese mafia, a man extradited to Mexico for fraud and a client, who would later be murdered, whose money likely came from criminal activity. Appleby also helped manage a trust for one person who was once listed as a terrorist on the FBI’s "Ten Most Wanted" list. According to Alhassan’s presentation, Appleby filed reports internally and externally to authorities about these particularly controversial clients.

Over time, there was quite a bit of negligence at Appleby. In 2006, the firm concluded that at its Cayman Islands office alone, more than 600 of its some 3,600 clients, or about one-sixth, were viewed as "non-compliant." That could mean that there were no current IDs or contact information for the clients in question. Their identities could be fictitious, used by criminals to gain access to offshore companies for nefarious purposes. Investigators would have no chance of tracking them down. Appleby itself has attributed the high number of non-compliant clients to its own high standards: The company said its rules are so strict that even an expired or improperly certified document could result in the labeling of the client as "not being compliant."

Five years later, in 2011, compliance director Robert Woods compiled a PowerPoint presentation in which he used an image from the TV crime series "The Sopranos" to illustrate the problem while describing the different cases of negligence and rules violations. In one instance of suspected terrorism financing, it stated that Appleby had managed hundreds of thousands of "definitely tainted" euros. In another case, Appleby allowed itself to be paid by a client who wanted to sell a piece of real estate in London without the law office properly asking him about the money’s origins. It later emerged, chief compliance officer Woods himself conceded in the presentation, that the money had come from a former Pakistani government official who had been charged with embezzling public funds and had "infiltrated allegedly corrupt funds into our business."

Ultimately, Appleby's top compliance chief came to an extremely frank conclusion. "Some of the crap we accept is amazing totally amazing." When asked about the remark, Appleby said "crap" was not a reference to new clients, but rather to the poor quality of copies of passport photos that had been submitted, for example, or unreadable proofs of address.

The Süddeutsche Zeitung and its partners under the auspices of the International Consortium of Investigative Journalists (ICIJ) contacted Appleby for responses to the different accusations, asking 63 specific questions about violations of money laundering regulations and other essential business rules. The law firm responded with a general letter, stipulating that no part of its response should be cited. A second and third letter followed, but hardly any answers were given to the questions. Not even a personal visit to Appleby's branch office on the Isle of Man, one of the law firm's most important locations, provided any enlightenment. Appleby later posted two statements on its website in which the law firm claimed there was no evidence of misconduct, either on its part or that of its clients. Moreover, it claimed to have fallen victim to a cyber attack.

Appleby is in many respects different from the Panama-based law firm Mossack Fonseca at the center of last year’s Panama Papers revelations. For one, much of what Appleby does goes beyond establishing offshore companies. Appleby lawyers also draft wills and represent clients in labor courts or divorce proceedings. They assist in the purchase of homes, aircraft and ships, all the while ensuring the lowest possible taxes are levied. Appleby also represents international clients like Nike, Facebook and the commodities trader Glencore – in other words, some of the world's largest corporations. And unlike Mossack Fonseca, which had very few clients in the U.S., the lion's share of Appleby’s clients is in North America. Indeed, the firm represents clients from all 50 U.S. states. In further contrast to Mossack Fonseca, Appleby likes to boast that the work it does is particularly clean and serious. In a written response, Appleby claimed it spends large sums of money each year for top-quality compliance. The fact that the process results in weaknesses being exposed and addressed, the statement said, was merely a reflection of Appleby's diligence.

The millions of internal documents obtained by the Süddeutsche Zeitung, however, raise significant doubts about that statement. They reveal how even a law firm as prestigious as Appleby has conducted business with lawbreakers and oligarchs who are the subjects of international sanctions. The emails, client records, bank documents, court papers and other files provide insights into the law firm's inner workings from the 1950s until 2016. They substantiate two things. First, how some clients use shell companies to conceal criminal behavior or to conceal money from dubious sources. Second, how global corporations like Apple, Facebook, Caterpillar and Nike engage in vast tax avoidance schemes by exploiting loopholes and highly complex legal structures.

Appleby was founded in 1898 in the British crown colony of Bermuda as the private law practice of Major Reginald Appleby, a tea-drinking, cricket-playing and rifle-shooting magistrate who would later become the island’s attorney general. When Major Appleby set sail in 1924 for a holiday in England, the local newspaper, The Royal Gazette & Colonist Daily, predicted that crime would rise in his absence. And when the parliament met in July 1940 to debate the introduction of an income tax, Appleby spoke out and sided with, "those who look on all income tax as man’s last refinement of torture, to be resisted at all costs." And that's exactly what happened – Bermuda resisted and, to this day, locals and foreigners alike enjoy the country’s zero percent tax rate. In 2015, Appleby sold its fiduciary business, which now operates under the name Estera.

As the world focused its attention on Mossack Fonseca and the Panama Papers last year, the financial lobby sought to swiftly marginalize the scandal. They argued that Mossack Fonseca was an exception, but that in and of itself, the tax haven industry was clean. In light of the latest investigation by the Süddeutsche Zeitung and ICIJ, however, a much more obvious conclusion can be drawn: Namely, that there are so many people with dirt on their hands in the world of offshore companies that almost anyone in the industry who does business with clients, intermediaries and suppliers will eventually wind up dirty. "If even the ‘Offshore Magic Circle’ does wrong, one has to assume that the whole offshore finance system is flawed", said John Christensen of the Tax Justice Network, an independent organization that combats tax evasion and tax havens. "These companies are the heart of the offshore system. If they are rotten, the whole system is rotten."

One principle that Appleby seems fond of adhering to is that of the revolving door. The Süddeutsche Zeitung and ICIJ’s investigation shows that numerous Appleby employees previously held important government positions in various tax havens – and vice versa. One example is the aforementioned employee Adrian Alhassan, who before landing at Appleby worked for the Bermuda Monetary Authority. The same agency accused the company’s Bahamas office of having committed grave negligence during 2014. In a damning report, the auditors detailed nine areas in which they insisted Appleby make changes, including risk assessment efforts in the areas of money laundering and terrorism financing.

That warning was neither the first nor the last. Internal PowerPoint presentations from 2007 to 2015 repeatedly raised doubts about whether Appleby knew enough about its clients’ identities and business practices. One presentation from 2012 stated: "We are exposed. This is not the best we can do." An internal audit in 2008 at the Cayman Islands office found a "high" probability that laws and internal regulations were being violated.

Meanwhile, regulatory authorities repeatedly rebuked Appleby. Following an investigation, the Bermuda Monetary Authority in 2015 criticized, among other things, that Appleby knew too little about the origins of its clients' money. It also took Appleby to task for not implementing earlier recommendations issued by the authority. In 2013, regulators in the British Virgin Islands complained that, in several areas, Appleby was either not conforming to rules or was only partly in compliance. Among other things, regulators reprimanded Appleby for its lax dealings with "politically exposed persons", saying it wasn't reviewing them frequently enough.

One particularly remarkable case is that of the Iraqi Abdul Hamid Dhia Jafar, the owner of the Crescent Petroleum oil company and an Appleby client since 1984. Despite persistent rumors about Jafar's proximity to Iraqi dictator Saddam Hussein, Appleby first noticed in 2013 just how close his ties to the former regime had been – he is the brother of the man who had once led Hussein's nuclear weapons program. "We have had this relationship for some time now", one Appleby lawyer wrote angrily, "How can we not have known this any earlier?" Appleby recently wrote on its website: "We do not tolerate illegal behaviour. It is true that we are not infallible. Where we find that mistakes have happened we act quickly to put things right."

A few years later, when the Panama Papers from the law firm Mossack Fonseca were revealed to the public, an external company offered Appleby a refresher course on how to avoid money laundering. Appleby rejected the offer. Existing control measures were already "extremely robust", the law firm declared. "We don’t have the need for sessions this time around."

In a telephone interview with ICIJ, former Appleby compliance manager Alhassan said there was only so much an offshore services provider could do to ensure criminals were not abusing the system. "It's not the FBI", he said, adding that if the law firm spent years doing background research on clients, it wouldn't "get any work done." Alhassan then provided an example. "It's like cleaning a beach", he said. "If you say that you've cleaned it up, at the end of the day, can you really say that you've picked up every piece of seaweed?"

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