By Scott Lane, executive chairman of The Red Flag Group

The Panama Papers showed how various people, including government officials, had opened various offshore companies and presumably used those companies to acquire assets and hold funds in offshore bank accounts in the name of those companies, without disclosing these to any necessary authorities. They also revealed a number of interesting things for compliance officers to keep in mind. Here are our top 10 in no particular order:

  1. Corruption is alive and well. The Panama Papers show that government officials worldwide continue to hold investments in offshore locations. This should be of no surprise to compliance officers and should be front of mind when third parties involved in transactions have companies involved from markets that do not disclose share ownership.
  2. Due diligence efforts will never disclose everything. Many due diligence efforts stop at a dead end when a company from a “closed search jurisdiction” is identified. Searching the registry of this entity will not help to identify beneficial ownership. Identifying the ownership is down to “good faith” in the people involved telling you the truth and relying on that information at your peril.
  3. Wealthy individuals often use tax havens. If you are dealing with wealthy individuals in business, it is quite possible that they will have corporate entities and many of those are likely to be located in markets with “closed search jurisdictions.” This should not be surprising and can be effective and legal tax planning. The key is to understand why these exist and why they are being used and why this supports your business.
  4. There are lots of reasons for creating offshore entities — some good and some bad. While the media is focused on tax mitigation or tax avoidance, the other reasons that offshore entities are created is the ease of doing business. Often these entitles can be set up in days, have very simple procedures, have strong governance requirements, and support simple approvals for share transfers. Many of the reasons are around currency restrictions or restrictions on the movement of money out of a country (for example, China and India). Hence, the perceived need for having an entity offshore to hold that earned money offshore and not brought into the country where it might be taxed or subject to other restrictions.
  5. Checking intermediaries against lists is not due diligence. It is a failed strategy for companies to resort to checking their intermediaries against a “list database,” seeing if there is a hit or not, and then deciding whether to do more due diligence. There is no magical list of potential tax evaders, although the new lists from the Panama Papers will certainly be a large addition to that list.
  6. Second tier banks are second tier for a reason. Second tier banks are unlikely to have the controls around compliance that a first tier global bank has. While this is a massive generalization of second tier banks, our observations over the years is that second tier banks lack the systems, tools, technology and, most importantly, people to really implement compliance effectively.
  7. Due diligence and background checks are not routine process-based actions. Due diligence and background checks require skill. They require intelligence and assessment of risk and red flags. They should not be mechanical, they should not be automated and they should involve the skill of a professional compliance officer that knows markets, understands global business and “how things work.”
  8. Global taxation is broken. The reason that people take steps to create offshore entities is often for ease of doing business (compared to their home country) or in order to minimize tax. Whether they might be subject  to tax in their home country or not is a complex question. When you combine various jurisdictions that do not communicate or have tax treaties with each other, this creates even more uncertainty.
  9. The issue is transparency in corporate filings information. The issue at the heart of all of these issues is transparency, not really taxation. Knowing who is behind companies and what their interests are is highly important to compliance. You have to be asking yourself questions when countries ban the media from talking about their politicians, leaders and scandals.
  10. Check your contracts. While it is a bit late now, outside legal partners such as Mossack Fonseca may have poor technology controls yet hold enormous amounts of important and topical information. Check relevant data security laws and make sure your data is protected.

For further reading, download the ACC Leading Practices Profile “Crafting A Global Anti-corruption Program: Company Leading Practices for Ensuring FCPA, UK Bribery Act and Related Anti-corruption Compliance”. This Leading Practices Profile provides practical information on the procedures that six companies are following to ensure compliance with global anti-corruption and anti-bribery requirements. Featured in this Profile are multi-jurisdictional compliance programs designed to protect against misconduct and unethical business practices and ensure adequate due diligence with respect to third party partners and acquisitions.