The Panama Papers and the Magnitsky Case

On May 9th 2016, The International Consortium of Investigative Journalists (ICIJ) will release the Panama Papers data to the public. A searchable data base of much, but not all, of the Panama Papers data will be available to citizen analysts everywhere! That data will be added this existing data base of offshore company information which was released a few years ago on the site: "Offshore Leaks"

What will citizen analysts and others be able to do with this offshore data? Let's take a look at some possibilities and what has already been done with existing data.

Much of the talk about the Panama Papers is about the wealthy and their tax avoidance and tax evasion schemes using offshore companies. I am more interested in how offshore entities are used in money laundering of ill-gotten assets -- stolen money. An interesting case of how stolen money has been laundered is the so-called Magnitsky Case. Sergei Magnitsky was a Russian financial investigator who discovered a massive tax fraud, was arrested for what he discovered, and later beaten and died in jail. The Magnitsky Case revolves around how a $230 million fraudulent tax refund was re-routed and then laundered through dozens of banks and offshore entities.

Figure 1 below shows the flow of the stolen money from the Russian Treasury to various offshore entities. First the money ran circuitous routes through Russia shell companies and bank, then was transferred to Moldova where two two shell companies were created to further launder the money via various Baltic banks and offshore entities registered in all of the famous offshore havens. Much of the data in Figure 1 is available in the original ICIJ Offshore Leaks data base and via reports from investigative journalists in eastern Europe: Re:Baltica and Organized Crime and Corruption Reporting Project (OCCRP).

Figure 1 - Follow the Money

Figure 1 shows us how the money got out of Russia -- the first wash cycle, and how it was spun in Europe. Hermitage Capital was the UK firm whose tax payments were illegally changed to a refund and stolen via corrupt tax officials. The red nodes in Figure 1 are banks and the green nodes are offshore entities and shell companies.

To dig deeper into the various laundering schemes, we will show subsets of the total money flow network, that focus on specific flows. Figure 2 shows how the complete wash and spin cycle of a portion of the $230 million stolen from the Russian Treasury. It shows the flow of the dirty money from the original corrupt tax officials and their associates(Kyluev Gang) through multiple steps, back to them, -- all laundered and clean.

Network distance distorts and deceives

In Figure 2 we see an interesting dynamic of networks -- distance distorts and deceives. The more steps/links between any two events/people in a network the easier it is to claim/feign plausible deniability of any real or intended connection. The more indirect links between two nodes, the harder it is to show any relation or influence between them. Figure 2 shows us how the criminal group (Kyluev Gang), discovered by Sergei Magnitsky, washed their dirty money through very long loops of international banks and offshore entities. The small world theory tells us that we are all connected to each other via 5 intermediaries (the famous "6 degrees of separation"). Yet, this money took a journey of over 10 steps! Distance distorts and deceives... yet, it is trackable via electronic bank records.

Figure 2 - Multi-step money laundering cycle

Next, we look at another sub-network of the Magnitsky case that ties to America.  Some of the illicit tax fraud funds reached New York City and were used to purchase pricey Manhattan real estate.  The NYC prosecutor has brought a case against the shell company Prevezon Holdings and it's owners/directors -- all Russian nationals.  Figure 3 shows us the flow of money between shell companies to Prevezon Holdings, the path is not as long and convuluted as what we saw in the laundering loop of Figure 2.

Figure 3 - From Russia with Fraud

Finally, we take a sneak peak into what is to be found in the Panama Papers to be released.  The ICIJ last week released a story about a set of connections that link some of the tax fraud money to Vladmir Putin's friend, and godfather to his daughter, the cellist Sergei Roldugin. Roldugin is listed as owner and director of many offshore shell companies. It appears that some of the Tax fraud money was used to buy stocks of a Russian company (cleaning up dirty money). Some assume that Putin's ill-gotten money is managed by his friend, Roldugin, but the definitive financial connection has not yet been made.  Figure 4 show's a sub-network of how Roldugin is connected to the stolen tax fraud money uncovered by Magnitsky.

Figure 4 - From Russia to Russia

We have now seen three interesting subnetworks of the original flow of money from the $230 million Russian tax fraud.  There are still many subnetworks to examine.  We just do not have the data to trace them out at this point.  There are many offshore companies, shown on the far right of Figure 1, of which we do not know their further connections.  Where does the flow of money go from them?  What laundering cycles are they a part of? Hopefully the Panama Papers data will allow us to trace new connections from old players and see those who benefited from the tax fraud theft.

The offshore company data from the Mossack Fonseca clients will be useful, but it will not provide the full picture of the offshore ecosystem that is shuttling and hiding money around the world.  More data will need to be obtained, from more sources, to assemble the full picture of the alternate money flows that still remain mostly hidden.