Labelled one of the biggest leaks of data in the history of journalism, the Panama Papers offer a rare insight into how some of the world’s wealthiest and most powerful individuals use offshore corporate structures and vehicles to allegedly hide assets and avoid taxes. As the revelations place tax avoidance and transparency in the financial services industry under a global microscope, it remains to be seen whether the leak will be a catalyst for change or another footnote in history.

Background

It began over a year ago, when an anonymous source leaked over 11.5 million encrypted internal documents from Panamanian law firm, Mossack Fonseca, to a German newspaper, Süddeutsche Zeitung.

The Süddeutsche Zeitung shared the documents with the International Consortium of Investigative Journalists ("ICIJ"), who began to coordinate an extensive media collaboration to analyse the data, involving more than 370 journalists from over 100 media organisations. 1

In April 2016, the ICIJ and other news outlets began to publish stories based on the information in the leaked documents, implicating international politicians, business leaders and celebrities. This was followed by the publication of a searchable database in May, releasing the names of nearly 214,000 offshore entities and the beneficiaries, shareholders and directors connected to these entities.2

Who has been implicated?

According to publications by the ICIJ, the Panama Papers connected over 140 politicians and public officials, including at least 12 current or former world leaders, to offshore companies in various so-called ‘secrecy jurisdictions’ such as Panama; Jersey; the British Virgin Isles; as well as Hong Kong, the United Kingdom; and U.S states, Delaware, Wyoming and Nevada.

Prominent people named in the database include the President of the Ukraine, Petro Poroshenko; the President of Argentina, Mauricio Macri; the Prime Minister of Iceland, Sigmundur Davíð Gunnlaugsson (who later resigned after the revelations); associates of President of Russia, Vladimir Putin; relatives of President Xi Jinping of China, as well as soccer star Lionel Messi and FIFA officials.

The law firm at the heart of the leak, Mossack Fonseca, which reportedly specialises in selling offshore companies, has not escaped unscathed either. Its headquarters in Panama have reportedly been raided by authorities looking for evidence of money laundering and other criminal activity, and the firm is facing possible enforcement action in other jurisdictions, with investigations underway in the British Virgin Isles and several other countries. The pressure on Mossack Fonseca continues to mount, with the firm announcing that it would be shutting down its offices in the Isle of Man, Jersey and Gibraltar.

Can offshore structures be legitimate?

Most of the people named in the database deny any wrongdoing and with good reason; the ICIJ itself has said that there are “legitimate uses for offshore companies and trusts” and it has been careful to make clear that merely being named in the database does not necessarily or automatically result in a breach of the law.

Holding money in an offshore company is not illegal. In fact, establishing an offshore company can be a logical step for a broad range of transactions, such as setting up a business overseas, setting up a joint venture between parties of varying nationalities or buying real estate in a foreign country.

Nonetheless, the Panama Papers highlight the ways in which offshore banking systems can be used and abused.

The revelations have sparked investigations across the globe by regulatory bodies and task forces in the United Kingdom, United States of America, France, Sweden, Mexico, Australia and New Zealand (among others), as well as the European Parliament, who recently established a special Panama Papers Committee of Inquiry. The leak has also fuelled the global push for tax reform and financial transparency, with many countries (including Japan) announcing possible amendments to laws in line with increased international efforts to combat tax avoidance.

It remains to be seen how far-reaching the investigations will be, and whether they will lead to any regulatory action or criminal prosecutions. Since the information released to the public thus far is merely a fraction of the entire content of the leaked files, further revelations may be likely as regulators and organisations around the globe continue to explore the database.

In the meantime, companies and individuals named in the Panama Papers should be prepared to receive notifications from regulatory agencies regarding fact-finding inquiries or full investigations. It is important that companies conduct any necessary internal enquiries as early as possible, particularly in circumstances where any connection to a transaction or company named in the Panama Papers may come as a surprise.

Secrecy jurisdictions: The demise of tax havens?

Global tax transparency standards have been on the international agenda for a number of years. Over the last few years, however, the Organization of Economic Co-operation and Development (OECD) has stepped up its efforts to sponsor new and effective international protocols.

Of note, in 2014, the OECD developed the Common Reporting Standards - a single global standard for the collection, reporting and sharing of financial account information on foreign tax residents. This was followed in July 2015 by the Multilateral Competent Authority Agreement intended to facilitate the automatic exchange of information on tax matters between signatory countries.4

Whilst there has been significant buy-in from states for these protocols and agreements it appears that the Panama Papers scandal has motivated even more countries to commit to the exchange of financial account information to tackle tax avoidance (including, notably, Panama itself, who recently committed to the Common Reporting Standard). However, there is general agreement that the system has limited effectiveness (at least for the time being) until the USA signs on.5

Corporate transparency and tax evasion have also been hot topics at international forums. At the Global Corruption Summit in London on 12 May 2016, five countries confirmed they would be joining the United Kingdom to set up fully public registers of company owners and several other countries indicated they may follow suit. At the G7 Summit in Japan on 26 – 27 May, a declaration was issued, reinforcing the push for countries to implement international transparency standards because “improving the transparency of the beneficial ownership of legal persons and legal arrangements is vital to prevent misuse of these entities and arrangements for corruption, tax evasion, terrorist financing and money laundering.”6

Conclusion

The release of the Panama Papers has brought increased public attention to the lack of transparency in the ‘secrecy jurisdictions’, which currently enable the global elite to protect their wealth and avoid regulation.

Although, the immediate aftermath of the Panama Papers has been limited to the naming of various well known individuals, the real impact will depend on the outcome of investigations including any prosecutions that are subsequently brought by authorities and the extent to which countries review their corporate and tax frameworks in response to international pressure, with a view to increasing transparency and closing down tax-avoidance loopholes.

There are some lessons to be learnt from the leak for entities engaging in international business. In particular, when using intermediaries (like Mossack Fonseca) to engage in or to assist with establishing a business in a foreign country, appropriate due diligence should be conducted to minimise any risks associated with doing business through, or dealing with counter-parties from, any of the secrecy jurisdictions.