Citizens around the world have been shocked by reports of the “Panama Papers”, the 11.5m confidential records of the Panamanian law firm Mossack Fonseca obtained by the International Consortium of Investigative Journalists (“ICIJ”). The ICIJ claims the Panama Papers detail the affairs of over 200,000 offshore companies, and allege many of them have been used by heads of state, criminals and celebrities to hide wealth, evade taxes and launder money. The demonstrations in Reykjavik may be the first expression of popular anger against a politician who is accused of obscuring personal interests through offshore companies, but they will probably not be the last.

However, the Panama Papers also shine a light on how offshore companies can be abused by wrongdoers to engage in fraud and bribery at the expense of legitimate businesses.

What are offshore companies?

In this context, an offshore company is typically registered in a high secrecy jurisdiction (e.g. Panama) where it is difficult or even impossible for third parties to understand who really owns and controls the company. Although there are often good reasons to structure investments offshore, NGOs like Transparency International and Oxfam have long argued the lack of transparency around the beneficial ownership and real control of many offshore companies means they are highly susceptible to abuse.

Indeed, the ICIJ claims a network of professionals advised politicians and others on leveraging secrecy protections around offshore companies so that clients’ real interest in those companies was concealed from regulators and tax authorities. The leaders of Pakistan, Azerbaijan and Ukraine are named in the Panama Papers, as are 128 other public figures. NGOs’ criticism of offshore companies will likely gain traction if allegations against any of those persons is substantiated.

How do offshore companies get used for fraud and sanctions busting?

In the experience of Eversheds, legitimate businesses also suffer as a result of the lack of transparency around offshore companies. Even large organisations that follow best practice and do due diligence on prospective customers and suppliers may find it difficult to identify who they are really dealing with. This can cause real difficulties when that due diligence is critical to financial institutions and other companies fulfilling their obligations under money laundering, anti-bribery and sanctions laws. Examples of this include:

  • a consultancy was invited by an offshore company to submit a joint bid for a government tender in a Southeast Asian country. The offshore company had no profile or presence in the relevant country or industry, and public filings did not identify who really owned or controlled it. Only after investigation was the offshore company found to be controlled by a senior public official of the country in question;
  • a financial institution was asked to open accounts in the name of an offshore company which in turn was owned by another offshore company in a low-disclosure jurisdiction. The financial institution was unable to comply with its “Know Your Customer” obligations; and
  • a manufacturer of high tech equipment received an order from an offshore company. It was impossible to confirm the bona fides of the prospective customer or where the equipment would be used. There were suggestions that the offshore company was really controlled by a sanctioned regime.

Equally, Eversheds has conducted a large number of high value criminal and civil investigations in which we discovered offshore companies had been used to perpetrate massive frauds and launder the proceeds of those crimes. It is usually possible to obtain court orders in jurisdictions to gather information about offshore companies’ real activities and ownership – but it is often expensive and time-consuming to do. Examples of such schemes identified by Eversheds include:

  • a disaffected business partner used companies from the British Virgin Islands and Panama to defraud a Ukrainian manufacturer of millions of dollars. The offshore companies presented themselves as independent suppliers of services, but in fact were owned by the business partner and the contracts were a sham. By the time the fraud was discovered, stolen money had been laundered through three offshore jurisdictions;
  • a corrupt procurement manager demanded a million dollar kickback in return for awarding a major project to a European manufacturing company. The manager arranged for the bribe to be paid to an offshore company in the British Virgin Islands that had no public link to him; and
  • the directors of a bankrupt company in Greece transferred the assets of the company to a series of offshore companies located in low disclosure jurisdictions that were secretly controlled by them. Creditors and tax authorities had to incur significant costs to reclaim the money that had been improperly extracted from the bankrupt company.

What are the implications of the Panama Papers for businesses?

Neill Blundell, head of the Fraud and Investigations team at Eversheds says: “The Panama Papers appear to show companies registered in high secrecy offshore jurisdictions being used to commit crime. This is no surprise to us – when we conduct investigations on behalf of our clients, we often see offshore companies being used to defraud legitimate businesses and facilitate money laundering. We use sophisticated investigative techniques in order to understand offshore companies and sometimes have to seek court orders to get the information we need. The secrecy that exists in some jurisdictions causes unnecessary costs and delay to many of our corporate clients”.

The Panama Papers may provide victims of fraud and tax authorities with an opportunity to identify assets and recover losses through the courts. Polly Sprenger, Of Counsel in the Fraud and Investigations team at Eversheds, notes that: “Litigants chasing down assets in respect of their civil claims will be clamouring at the gates of the organisations who are purportedly in possession of the leaked documents. The Panama Papers appear to contain sensitive and detailed information about offshore companies that was never contained in public records and was never meant to see the light of day. Our litigators will have some late nights in the coming weeks.”

Viv Jones, Senior Associate in the Fraud & Investigations team at Eversheds, observes that: anti-bribery and anti-money laundering rules usually require knowing who really owns your business partners. The Panama Papers may lead to more transparency in the future, but in the meantime legitimate businesses should be very cautious in dealing with companies incorporated in high secrecy jurisdictions”.

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