On April 3, 2016, disclosure of 500-plus offshore companies incorporated in Panama and other tax havens with peripheral links to Indian tax residents and Indian postal addresses was made public. Whilst that alone connotes no manner of wrongdoing, given the information now resides in the public domain, this Alert outlines the following potential risks that may emerge for banks, account holders and fiduciaries engaged in putting together the corporate structure.

  • The absence of distinction between proper and improper corporate structures viewed against the extant regulatory regime in India indicates it is not unlikely that several legitimate corporate structures and their banks and fiduciaries will be the subject matter of regulatory scrutiny by the regulatory agencies and the Special Investigation Team (SIT) constituted by the Supreme Court of India.
  • Where the account holding bank or fiduciary relied on the source-of-wealth checks of a correspondent bank (whether in India or overseas) or even otherwise, it is likely that information in relation to pending tax and exchange control regulatory proceedings in India was not sought or obtained.
  • The potential risk exists of being enjoined to regulatory proceedings in India as a facilitator of tainted transactions, as has already been the case with a few international banks and intermediaries.

If the SIT’s pronouncements were to be taken at face value, swift enforcement actions are likely to commence on a variety of account holders who are now in the public domain, both in relation to corporate structures in Panama and to other overseas holdings. Accordingly, the following mitigation measures should be considered.

  • In light of the matters in the public domain concerning investigation of overseas corporate structures and bank accounts, the standards of continuing due diligence will involve looking afresh at the profile of the clientele and establishing conclusively for current and historic accounts that their books were not tainted with the aforementioned types of proceeds.
  • Potentially, the only defence against being a wilful abettor to the offences made out against the account holder may be demonstrating continuing due diligence and adherence to strict monitoring standards prescribed by law.
  • Cooperation with and reporting to jurisdictional regulators under the Egmont Principles are likely to be necessary at the earliest if any wrongdoing is discovered in the current or historic accounts after the stage of continuing due diligence.

It is possible that one of the above risks identified may resonate with those who may have interfaced with the tax/exchange control authorities in India.