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Panama Papers: Creating far-off companies, with few questions asked

Michael Alfred Del Vecchio, once a decorated officer and missile defense system expert, shows up in what is believed to be the largest-ever leak of financial data – data belonging to Mossack Fonseca. Del Vecchio isn’t the most significant source of business for the law firm, but he demonstrates how an industry of middlemen funnel and refer the rich to offshore servicers like the Panamanian law firm.
Michael Alfred Del Vecchio, once a decorated officer and missile defense system expert, shows up in what is believed to be the largest-ever leak of financial data – data belonging to Mossack Fonseca. Del Vecchio isn’t the most significant source of business for the law firm, but he demonstrates how an industry of middlemen funnel and refer the rich to offshore servicers like the Panamanian law firm.

The international law firm for offshores treated Michael Alfred Del Vecchio like a VIP.

In just a few years, the retired U.S. Air Force officer’s clients had become a growing source of business for Mossack Fonseca & Co., one of the top global law firms known for helping the wealthy hide their money.

Even so, Del Vecchio now says he didn’t know that the estimated 200 offshore companies he helped create included an American fugitive and members of an online gaming company accused of illegal gambling. He also is tied to a unfolding political scandal in Malta involving offshores.

“I had no idea about these people’s backgrounds,” the California native said of the offshores in a phone conversation from Madrid. “I can’t really vouch for clients.”

Del Vecchio, once a decorated officer and missile defense system expert, shows up in the largest-ever leak of financial data from the once-secret archives of Mossack Fonseca. Del Vecchio, who keeps an office in the tiny Mediterranean archipelago of Malta, demonstrates how an industry of middlemen funnel and refer the rich to offshore servicers like the Panamanian law firm.

The network of offshore accountants, financial advisers and lawyers, including many in the United States, offers Mossack Fonseca and others a steady stream of clients plus layers of discretion. The advisers and service providers take on roles in these offshore accounts that help shield the identity of the real owners.

“All of them are vital cogs in the offshore machinery,” said Charles Intriago, a former federal prosecutor in Miami who now tracks evasion of economic sanctions through money laundering. “It allows everyone inside the offshore industry to distance themselves from the criminals they serve and the criminal’s money.”

Want to get a secret offshore company? Money laundering expert Charles A. Intriago says its a easy as buying a plane ticket to one of the dozens of tax havens scattered around the world.

The details of such relationships were unearthed in the Mossack Fonseca records and obtained by McClatchy as part of an international collaborative journalism project.

Mossack Fonseca is a world leader in the registration of shell companies. It helps customers with everything from preparing incorporation documents to supplying its own employees as managers, shareholders and directors. It even creates websites, offices and call centers that give an air of legitimacy to the companies it registers.

To be sure, there are legitimate uses for the anonymity provided by an offshore company. A well-known corporation looking to buy land might create one knowing that purchasing under its own name might lead the seller to inflate prices. An elderly patriarch might want to pass on an inheritance without those who’ll benefit knowing in advance.

However, the Mossack Fonseca data exposed offshores set up by indicted and convicted criminals and those suspected of corruption worldwide.

Other discoveries in Mossack Fonseca records include the revelation that associates connected to Russian President Vladimir Putin moved at least $2 billion through banks and a tightly held web of offshores created by the firm.

Offshore corporations have one main purpose - to create anonymity. Recently leaked documents reveal that some of these shell companies, cloaked in secrecy, provide cover for dictators, politicians and tax evaders.

Such examples have already prompted scrutiny from law enforcement officials.

Suddeutsche Zeitung, a leading German newspaper, reported in February 2015 that German law enforcement agencies obtained a smaller portion of the Mossack Fonseca data and as a result had launched a criminal tax fraud investigation into one of the country’s biggest banks, Commerzbank.

Suddeutsche Zeitung, which first obtained the data and shared them with the media partnership, hasn’t revealed the source of the documents.

An earlier breach of financial information involving offshore bank accounts held by Americans prompted the U.S. government to aggressively prosecute Swiss and other global banks in recent years.

Mossack Fonseca, however, denies it has violated the law.

“Filing legal paperwork to help incorporate a company is a very different thing from establishing a business link with or directing in any way the companies so formed,” Carlos Sousa, a spokesman for Mossack Fonseca said in a statement in response to questions posed by the group of journalists. “We only incorporate companies.”

Sousa said his firm merely registers business entities and said it conducts a “thorough due-diligence process,” or background check, before deciding to take on clients and customers.

Spokesman Carlos Sousa-Lennox is besieged by TV crews as he hands out a statement, declining to be interviewed outside the Mossack Fonseca headquarters in Panama City, Panama. He later took questions by email about a massive leak of company data.

 

Del Vecchio echoed the firm’s statement, saying he can’t be accountable for his clients.

“I don’t remember any of these people,” Del Vecchio said, adding, “You can’t really call them my clients.”

The leaked emails show that he did.

“I have some clients who need to open (British Virgin Islands) Companies, and I would like to know the procedures and Cost,” wrote Del Vecchio, who described himself as a “private financial consultant” in a Jan. 2, 2009, email.

No U.S. law or international treaty requires that law firms or registered agents check the backgrounds of their clients or their identities. But there’s a risk. Lawyers or service providers who suspect they’re dealing with criminals, but don’t alert authorities, can face criminal and civil sanctions as co-conspirators.

The legal concept of guilt is known as “willful blindness” and is interpreted by the courts as the equivalent of actual knowledge.

“If you turn your head and say, ‘Bernie Madoff, I’ll move your money but don’t tell me where it came from or how you got it,’ or ‘Pablo Escobar, I’ll move your money but don’t tell me the source’… that’s the same as being told, ‘Look, this came from fraud,’ or, ‘This came from drug trafficking,’ ” said Intriago, the former federal prosecutor in Miami.

Del Vecchio and Mossack Fonseca perhaps didn’t know what kind of clients they were dealing with. But leaked documents suggest there were clues about some of their backgrounds.

Those clients included Americans tied to online gaming, which is banned in most of the U.S.

In 2006, before Del Vecchio approached them with his clients, Mossack Fonseca’s partners had noted with growing alarm that American authorities were cracking down on offshore, online gambling.

While such gambling is permitted in much of the world, it is banned in most of the United States, except New Jersey, Nevada and Delaware. Americans, meanwhile, still flock to online gaming. U.S. authorities don’t generally pursue Americans who gamble online but indicted a flurry of executives from several online gaming companies for doing business in the United States.

“In the case of online casinos, the U.S. government is taking a very tough approach against the business and those who promote it,” founding partner Jurgen Mossack said in an email written in Spanish to employees, adding: “Soon, they will mess with lawyers.”

Mossack Fonseca, nonetheless, continued working with online gaming clients, including those Del Vecchio referred.

When Del Vecchio first visited Mossack Fonseca in 2009, the firm treated him as a special client, with a company car whisking the retired officer to its Panama offices.

“He promised he would be an ever increasingly important client and has kept his word,” one firm employee wrote in February 2014.

Yet the leaked documents indicate that Mossack Fonseca didn’t delve extensively into his financial experience or his background. Instead, the firm zeroed in on his 18-year career with the Air Force, even inaccurately upping his rank to colonel “in charge of a satellite program.”

His military career is impressive.

After attending high school and college in Mexico, the California-born Del Vecchio enlisted in 1979.

He would rise in rank to oversee defense satellite systems at Peterson Air Force Base in Colorado in the early 1990s. His responsibilities included the management of five space surveillance sites across the world.

After retiring in 1997, he took a job with Hughes Space and Communications, at that point the largest satellite manufacturer. Boeing bought Hughes, and Del Vecchio became the aviation giant’s business development regional director and a sales director in Spain.

Del Vecchio, 61, told McClatchy he got the idea for offshores soon after retiring from Boeing in 2005. He said he had started his own business selling aircraft and many clients wanted to create offshores. Such arrangements protect the identity of owners.

“This is how it was done,” he recalled. “If you bought a plane, you would create an offshore company in the Cayman Islands or somewhere else.”

If Mossack Fonseca had looked a little more closely at Del Vecchio’s background, the firm might have questioned its relationship with Del Vecchio.

Throughout his interaction with the firm, Del Vecchio used different names. At one point, he signed himself as Michael Alfred Del Vecchio. At another point, he added his mother’s maiden name of Carranza with a Mexico City address. Later, he simply went by Michael Schmidt on a business website in Malta.

He also had financial problems. The 2009 recession took a toll on his wife’s business and the couple racked up debt. Years later, the debt had mounted and he acknowledged recently that he hasn’t paid all of it off.

Nonetheless, the aircraft salesman with humble roots in the Los Angeles suburbs and Mexico City shuttled the globe from California to Spain to his office in Malta, where two of his former clients are now embroiled in controversy over offshores.

Del Vecchio administered offshores for Keith Schembri, the chief-of-staff for Malta’s prime minister, and Adrian Hillman, the former managing director of the company that owns the English-language Times of Malta, according to the leaked documents.

 
 
 
 

An independent panel, which includes a Maltese judge, is now investigating allegations of impropriety involving the offshores, including accusations that Hillman received secret payments from Schembri's company for purchases by the newspaper group. Both men have denied the allegations.

Del Vecchio unsuccessfully tried to fend off a competitor, tax advisory Nexia BT, which eventually took over the offshores from Del Vecchio’s company, Bald Eagle Services S.A.

"NEXIA (sic) BT is 'Pouching (sic)' companies and clients away from Bald Eagle Services S.A. — one of your most loyal Professional Clients in order to easily build their clientele," Del Vecchio's wrote in an April 20, 2013, email to Mossack Fonseca. "I have copied our Legal Council (sic) in Malta."

Malta’s opposition leader Simon Busattil on Thursday requested a parliamentary vote of no-confidence against Prime Minister Joseph Muscat because of his aides' appearance in the Panama Papers, the Times of Malta reported. The government agreed to have the motion debated next week in parliament, the newspaper said.

 
 
 
 

Del Vecchio’s clients also included Michael Flynn III, an American who ran the online gaming operation, BetCRIS. In 2010, the American was indicted in New York for operating an illegal gambling operation and fled the United States to Costa Rica. The next year, he appears as a shareholder on 10 offshores in the British Virgin Islands created by Del Vecchio’s Bald Eagle Services. The Mossack Fonseca documents show Flynn, now a fugitive, got a Costa Rican passport under the name Michael Richard Flynn Collis early that same year.

McClatchy found at least 16 people referred by Del Vecchio who were tied to gambling or gaming online, including other BetCRIS employees.

 
 
 
 

Mossack Fonseca employees running a background check on Del Vecchio’s clients pulled up a review of a well-regarded book by Reuters reporter Joseph Menn that detailed alleged ties between BetCRIS executives and the Mafia, the leaked records show. The book tied BetCRIS to Ron “The Cigar” Sacco, a convicted felon described by the FBI as one of the largest bookmakers dating to the 1980s.

As early as 1992, Sacco’s operations were handling $100 million a month in illegal bets, according to Joseph Davidson, the supervisory FBI agent who led the investigation into Sacco’s operations.

“Sacco’s operations definitely had connections to the Mafia in New York,” Davidson said. “You don’t do this kind of business without their permission.”

One of Sacco’s former associates, Marisa Lankester, said it was known within Sacco’s upper ranks that shell companies were used to disguise the company’s business. Lankester worked as a clerk for Sacco in the Dominican Republic capital of Santo Domingo. Sacco reestablished himself in Costa Rica through BetCRIS, said Lankester, who details her role in Sacco’s operation in her book, Dangerous Odds.

A former employee of BetCRIS who asked to remain anonymous said Flynn and others in Costa Rica discussed creating offshores so they could move money in and out of the United States.

“They tried on offshores like shoes,” said the former high-level employee, who asked to remain anonymous for fear of retaliation.

By the industry’s own estimates, online gambling generates at least $350 billion a year in revenue across the globe. According to U.S. law enforcement, the profits have attracted the American mafia and other violent criminal organizations in Europe and Asia.

“Organized crime sees online gaming as an opportunity,” said Jay Bartholomew, a unit chief in the FBI’s Criminal Investigative Division who works on organized crime. “It’s very low risk and very lucrative.”

When asked about the offshores, BetCRIS attorney Harold Gewerter of Las Vegas said the company never takes U.S. bets. He denied the company had organized crime ties and wouldn’t explain the need for offshores.

“We know the law,” he said.

Gewerter refused to answer further questions related to Flynn, saying “even fugitives have rights.”

Gewerter then referred McClatchy to James Henderson Sr., a Santa Monica, Calif. defense attorney and a former longtime Justice Department prosecutor who specialized in organized crime. Henderson said he has represented BetCRIS, Sacco and Flynn at various points, including during Sacco’s prosecutions.

Henderson said he never believed the FBI’s insistence that Sacco and later BetCRIS were tied to organized crime. He added that Sacco was retired in Costa Rica.

“Ron plays backgammon now,” he said.

Despite the firm’s initial hesitance to take on online gambling clients, Mossack Fonseca continued to do business with others without Del Vecchio’s participation.

 
 
 
 

The firm, for instance, did business with Gary Stephen Kaplan, founder of BetonSports.com. The Dominican Republic-based company was once the largest gaming site in the world, until Kaplan’s indictment on illegal gambling and racketeering. In 2009, he pleaded guilty and agreed to forfeit $43 million and serve four years in prison.

Both Mossack Fonseca and Del Vecchio refused to respond to specific questions about the offshores or their clients’ backgrounds.

Del Vecchio initially didn’t acknowledge his role in the offshore world. He told a reporter: “Your sources are misinformed. There are thousands of Michael Del Vecchios.”

He then hung up.

Del Vecchio later acknowledged in a phone call that he referred clients to Mossack Fonseca. He described himself as an unwilling and unwitting participant who made little money. He also maintained he didn’t remember who his clients were, nor how he came to meet them.

“I was used,” he said. “I really don’t know anything about offshores.”

He then blamed the law firm and jurisdictions for not catching on to any problems, saying, “The buck should stop with them.”

McClatchy made follow-up calls to Del Vecchio, but never reached him again. His New York attorney Stuart Slotnick declined to comment.

During the last conversation, Del Vecchio did repeat one refrain: “I’m just a small fry. I can’t be held responsible.”

Matthew Schofield, Clarice Silber and Sammy Caiola contributed. This story is part of a larger series, involving McClatchy and other news organizations, working under the umbrella of the nonprofit International Consortium for Investigative Journalists.

An unprecedented look at offshores

A database leak at the Mossack Fonseca law firm in Panama exposes how it hides money for its clients.

THE LEAK: Munich’s Suddeutsche Zeitung newspaper was given the files, which were shared with the International Consortium of Investigative Journalists.

ITS SIZE: 11.5 million emails and client records. It would take 24 hours to download the 2.6 terabytes at normal internet speeds.

THE MEDIA PARTNERS: More than 350 journalists, including a U.S. McClatchy reporting team, in 77 countries examined the data.

WHO WAS FOUND: 12 current and former heads of state and government, 61 relatives and associates of leaders, and 128 other public officials.

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