The International Consortium of Investigative Journalists’ (ICIJ) reporting on a leak of 11.5 million documents from Panamanian law firm Mossack Fonseca continues to make headlines, as examination and analyses of the documents reveal much about the practice of establishing offshore corporations for financial protection or gain.

Yet many in the public – and even some with extensive knowledge of the inner workings of this industry – are wondering how this practice flies so easily under the radar to allow so many people to take advantage.

As a specialist in fraud, as well as asset tracing and recovery, I’ve watched criminals and corrupt governments and their leaders, manipulate the process of setting up an offshore corporation simply to hide the assets they’ve stolen through their commission of crimes elsewhere. This criminalization of a legitimate business strategy to serve multiple jurisdictions and easily move money between them is what the “Panama Papers” have brought to light in a profound and intriguing way.

How Offshore Corporations Work

When a company serves multiple jurisdictions and wants to transfer funds of different currencies easily between its outposts, it will set up an offshore corporation. To do this, it must work with financial institutions and advisors, as well as attorneys acting as incorporation agents. In the case of the “Panama Papers,” Mossack Fonseca acted as incorporation agents with countless financial institutions and clients.

Aside from legitimate companies, criminals also seek to set up offshore corporations. They follow the same path to establish their offshore subsidiaries – working with banks, advisors and lawyers – but their reasons for doing so usually fall into one or several of the following:

  • To commit a predicate offence. They’ve stolen assets or property and need to launder it to make it appear legitimate.
  • To disguise involvement with a commercial transaction. If assets appear to be owned by a company, rather than a criminal, the criminal remains anonymous.
  • To layer criminal property. Similar to above, if property appears to be owned by a company, the criminal distances himself from it but still reaps the benefits.
  • To disguise true ownership.  If the ultimate beneficial owner of these ill-begotten assets remains unknown, while nominees and directors seem to be owners, criminals can reap the benefits without the risks.

How Criminals Take Advantage

The global nature of offshore companies appeals to criminals, especially since regulations governing the establishment and operations of corporations vary greatly. While places like the Crown Dependencies  of Jersey, Guernsey and the Isle of Man have regulatory and legislative mechanisms in place to try to curb illegal activities of these corporations through the robust prudential regulation of corporate service providers, countries like the United Kingdom, Switzerland, Singapore and Hong Kong remain relatively unregulated. Further, certain jurisdictions, including some states in the US, do not require the disclosure of the identity of ultimate beneficial owners of corporations, even to the registered agent. Criminals can simply register their companies, name corporate directors and nominee shareholders and can keep and grow their fortunes, often undetected by law enforcement or fraud investigators. The tightening net has forced some traditionally opaque jurisdictions, such as the British Virgin Islands, to recently tighten their requirements when it comes to disclosure rules.

What’s Next?

Of course, herein lies the thrust of the problem and why the “Panama Papers” are captivating the world. And why as a fraud investigator, I am intently watching this story unfold. If this leak helps frame regulation and helps uncover some of the most notorious abuses of offshore companies, we stand to track and recover assets for some of our former, present and future clients. And new regulations and laws will help ease some of the difficulties we have traditionally encountered tracing assets across multiple jurisdictions.

I won’t be so naïve as to believe criminals won’t come up with innovative ways to circumvent the regulations and laws in the future, but at least for now, we’ll have an extra tool to level the playing field.

Bakers & Partners’ Director of Regulatory Services Ed Shorrock contributed to this report.