Deep Background

Inside a law firm’s vetting of clients

Courtesy of Samantha Curcio

The “Paradise Papers,” a cache of 6.8-million internal documents of the Bermuda-based Appleby law firmleaked to the International Consortium of Investigative Journalists (ICIJ), portray struggles inside the firm over how stringent its background screening of clients should be.  The disagreements often pit the firms’ compliance offices against some other executives about how to handle client accounts that were possibly tied to corruption, ICIJ articles show.

“Won or lost at the gate”

A primary goal of the compliance officials was to perform due diligence on new clients early on, to identify those whose funds were tainted.  Among the Appleby documents the ICIJ described were internal compliance training slideshows from 2007 to 2015 that said in part, “eighty percent of the battle is won or lost at the gate…If we let in the wrong clients, we set ourselves up for a fall.”  An Appleby compliance officer wrote in capital letters in the margin of a slideshow used in 2011 training sessions: “MONEY LAUNDERING IS A DIRTY CRIME…THERE IS USUALLY ALWAYS A VICTIM AT THE BOTTOM OF THE PILE AND A RICH PERSON AT THE TOP.”

“We do not tolerate illegal behaviour”

In October 2017, Appleby, which has about 700 employees and specializes in work offshore, responded to inquiries from ICIJ about its articles: “Appleby operates in highly regulated jurisdictions and like all professional organisations in our regions, we are subject to frequent regulatory checks and we are committed to achieving the high standards set by our regulators. We are also committed to the highest standards of client service and confidentiality… We are an offshore law firm who advises clients on legitimate and lawful ways to conduct their business. We do not tolerate illegal behaviour.” 

ICIJ reported that in 2006 Appleby’s Cayman Islands office had about 600 clients whose records were identified as “non-compliant,” meaning the law firm “had no current IDs, contact information or other particulars needed to make sure it wasn’t setting up shell companies and other structures for criminals or corrupt politicians.”

“Not easy to deal with”

In 2011, a senior compliance manager said in marginal notes for a Power Point presentation that “we have a current case where we are sitting on about 400K that is definitely tainted and it is not easy to deal with.”  The manager’s notes said that Appleby had set up a trust for a different client to buy U.K. property “without question.”  Appleby later learned the trust was owned by a former Pakistani official who had been charged with embezzling public funds and had “infiltrated allegedly corrupt funds into our business…Some of the crap we accept is amazing totally amazing.”

The ICIJ reported that the same compliance official was upset to learn in 2014 that Appleby officers had set up a trust structure for a man who it was later learned was involved in controversies in Africa.  “The allegations are extremely serious and relate to blood diamonds,” the compliance official wrote to a colleague. “Why was this not brought to my attention before the conflict check was cleared??”  

 “Failure of our processes”      

The compliance official told colleagues the incident was a “failure of our processes.” He warned that the law firm’s affiliated business units should not allow a desire for profits to overcome the requirements to assess clients’ risk to the firm.  “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…The law firm must be cognisant of the fact that whilst they may be ‘raking in the fees’, the affiliated trust company carries the significant risk in administering the subsequent structure. The Trust Co. must be aware that at the end of the day, if it all goes wrong, they will be left holding the ‘steaming turd’!”

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