LexisNexis

Panama Papers leak lifts the lid on offshore finance and provides further impetus for reform

JONATHAN WATSON

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The Panama Papers, a leak of 11.5m files from the database of law firm Mossack Fonseca, has provided considerable ammunition for critics of the legal profession. The leak highlights the creation of layers of secrecy that allow individuals and companies to hide assets from the authorities.

The activities revealed in the Panama Papers, said the anonymous source behind the leak in a statement issued in May, show that ‘the legal profession has failed’. The source argued that ‘lawyers have become so deeply corrupt that it is imperative for major changes in the profession to take place, far beyond the meek proposals already on the table’.

Many administrations are attempting to respond. On 12 May, the UK government hosted an anti-corruption summit in London at which six countries – Afghanistan, France, the Netherlands, Nigeria, Kenya and the UK – agreed to publish registers of who really owns companies in their territories (registers of beneficial ownership). Six more, including Australia, agreed to consider doing the same.

At the summit, IBA president David Rivkin noted that lawyers play a vital role in investigating, prosecuting and bringing to justice those who are engaged in corruption. ‘They are an essential part of the battle against corruption,’ he said. The IBA has undertaken considerable work in the areas of anti-corruption, combatting money laundering and, last year, launched a Judicial Integrity Initiative, aimed at eliminating judicial corruption.

‘‘All of the structures that seem to have emerged from Panama are, in all likelihood, entirely legal – the question is: what do the principals behind those structures do with them?

Robert Wyld, Co-Chair, IBA Anti-Corruption Committee

The Panama Papers have crystallised public opinion around two specific policies: public registers of the beneficial owners of companies, trusts and foundations and the automatic exchange of tax information, says Alex Cobham, research director at the Tax Justice Network. ‘After this leak, the public now understand that the key problem is the anonymity of ownership,’ he says. ‘It’s no longer enough for governments to say “we’re going to crack down” and then move on.’

Britain’s overseas territories and Crown dependencies – such as the British Virgin Islands and Jersey – did not pledge to create a public register. These territories feature heavily in the Panama Papers. Of the companies that appear in the leaked documents, half – more than 113,000 – were incorporated in the British Virgin Islands.

In the US, where several states act as tax havens for people from all over the world, the Treasury has pledged to send legislation to Congress requiring companies set up in the country to report their real owners to the agency’s Financial Crimes Enforcement Network.

‘A lot of it’s legal, but that’s exactly the problem,’ said US President Barack Obama in his initial reaction to the Panama Papers. ‘It’s not that they’re breaking the laws, it’s that the laws are so poorly designed that they allow people with enough lawyers and accountants to wriggle out of responsibilities that ordinary citizens are having to abide by.’

The Panama leaks have opened a genuine opportunity for reform, says Thomas Pogge, director of the Global Justice Program at Yale and chair of the IBA Task Force on Illicit Financial Flows, Poverty and Human Rights. ‘We must recall that states agreed in 2016 that one of the Sustainable Development Goals is to reduce illicit financial flows by 2030,’ he says. ‘Yet, if we entrust it to the elites, this opportunity will be lost. We must understand the promising reform proposals and mobilize in their support.’

Robert Wyld

Robert Wyld

Robert Wyld, partner at Australian law firm Johnson Winter & Slattery and Co-Chair of the IBA Anti-Corruption Committee, says the Panama Papers have exposed the hypocrisy that exists when it comes to international taxation regulation and enforcement. ‘On the one hand, governments across the world have created laws that permit legal structures to be created for generally quite legitimate purposes,’ he says. ‘All of the structures that seem to have emerged from Panama are, in all likelihood, entirely legal – the question is: what do the principals behind those structures do with them?’

This is the question that company formation agents will now have to answer, says Edward H Davis Jr, founding shareholder at Astigarraga Davis and North America Regional Officer for the IBA Anti-Corruption Committee. ‘They claim they can’t be held responsible for what happens after they form an offshore corporation,’ he says. ‘However, if you have designed a strategy of anonymity, sought out clients and customers to use it and don’t adequately “know your customer” then you are likely aiding and abetting illegal conduct and you can’t stick your head in the ground and pretend that it isn’t so. Formation agents, and others who are involved such as banks, brokerage houses, lawyers and accountants can and should be equally held accountable.’

Leopoldo Pagotto is Secretary of the IBA Anti-Corruption Committee and Of Counsel at Trench, Rossi e Watanabe in Brazil. ‘This raises a question about lawyers’ behaviour when approached for legal advice,’ he says. ‘Some appear to consider professional privilege as completely inviolable, but it seems quite clear that the lawyer should say no if asked to assist in illegal behaviour. Lawyers should advise very strongly against this.’

Mossack Fonseca says that media reports about the firm ‘rely on supposition and stereotypes, and play on the public’s lack of familiarity with the work of firms like ours’. The firm adds that it has never been accused or charged in connection with criminal wrongdoing, noting that it is ‘legally and practically limited in our ability to regulate the use of companies we incorporate or to which we provide other services.’

The papers have helped the international community to focus not just on the automatic exchange of information, but on the quality of that information – beneficial ownership in particular. ‘Public registries will be very useful, but what is more important for us is the quality of the information they contain,’ Bonucci says. ‘What we are really pushing for is very accurate and frequently updated information on who is the real beneficial owner for these structures.’

The Panama leak offers an important opportunity for reform. It will also spur law firms to take proactive steps to prevent leaks such as the one from Mossack Fonseca. ‘I don’t think it’s necessarily going to lead to people seeing the light or to the end of these practices,’ says Jan Lawrence Handzlik, a US-based investigations and trial lawyer and Co-Chair of the IBA Business Crime Committee. ‘I would assume that the problem is much larger than what we can see in this one scandal.’