The leak of 11.5 million documents from the files of offshore ‘law firm’ Mossack Fonseca & Co is one of the largest data breaches ever. Since the publication of the first stories – unearthed by a consortium of journalists from around the world – the focus of the public, the media and politicians has been squarely on the way the world’s wealthy seek to minimise tax payments.
The leak has already caused the resignation of Icelandic prime minister Sigmundur Davíð Gunnlaugsson after it emerged his wife had used a British Virgin Islands (BVI) company to invest the proceeds of the sale of her father’s business. Gunnlaugsson had a stake in the company, but did not declare the interest.
Scores of other politicians, celebrities and their families and friends have been named in the leaks.
Mossack Fonseca’s head office in Panama has been raided by authorities since the leak, and it looks as though a number of other firms – both offshore and onshore – are likely to be named in the papers as further documents are released over the course of the next few months. So far a handful of well-known onshore firms have been linked to deals involving Mossack Fonseca, including Holman Fenwick Willan, Simmons & Simmons and Spanish firm Gómez-Acebo & Pombo.
The papers reveal the complex web of offshore structuring designed to minimise tax payments and, on occasion, keep secret the ultimate beneficial owner of a company. Much of what has been revealed is entirely legal, although questions have been raised about some of the structures unveiled in the data.
Who is Mossack Fonseca?
When news of the leak broke, Mossack Fonseca was described by several mainstream media publications as “the world’s fourth-largest offshore law firm”.
It is difficult to clarify the truth of this statement. According to Mossack Fonseca’s website, it has “more than 500 staff members worldwide”. But it does not list the number of lawyers at the firm and a request for more detail went unanswered. According to online legal directories, the firm has 15 legal fee-earners.
Mossack Fonseca does not appear in The Lawyer’s annual offshore top 30 survey, which focuses on firms headquartered in the British Crown Dependencies and overseas territories. Certainly by overall staff numbers including fiduciary businesses the assertion that the firm is the fourth-largest offshore player probably stands.
But it is likely that there are many firms operating in the Crown Dependencies
which are substantially bigger in terms of legal staff and which have a much greater focus on the practice of law, instead of administrative services.
Mossack Fonseca
Mossack Fonseca is not well-known among UK and northern hemisphere lawyers as a law firm, although its website does list legal services among its varied business units – which also include a company “created to respond to the growing demand that exists today for digital storage solutions and the electronic management of documents and images”.
Offshore lawyers say they do not tend to come across Mossack Fonseca as lawyers on the other side of a deal.
“We’ve dealt with them, but not as lawyers on the other side of transactions,” says one partner in a Caribbean firm, explaining that Mossack Fonseca tends to appear as the incorporator or administrator of companies involved in transactions his firm’s clients are doing.
“It is fairly well-known typically as a company incorporator,” agrees a partner in another major offshore firm.
This role is the one displayed in the majority of the documents that have been published online so far. The firm’s role is generally concerned with directorships or shareholder issues, rather than pure legal issues.
While headquartered in Panama, Mossack Fonseca has offices worldwide – including in several of the more well-known offshore jurisdictions such as Bermuda, the BVI, Gibraltar and Jersey. It is also present in several jurisdictions that are sometimes classed as offshore, and are recognised as international financial centres, such as Liechtenstein, Luxembourg, Malta and Singapore.
Notably, Mossack Fonseca has no presence in the Cayman Islands, which accordingly has largely escaped being caught up in the Panama Papers leak. The BVI is the jurisdiction which is the most “popular” among the companies using Mossack Fonseca, according to data released by the International Consortium of Investigative Journalists (ICIJ), far ahead of Panama and then the Bahamas.
The impact on offshore
Offshore firms in the British Crown Dependencies and overseas territories (CDOTs) – the Isle of Man, Guernsey, Jersey, Cayman, BVI, Bermuda, Anguilla, the Turks and Caicos Islands, Montserrat and Gibraltar – are not keen on discussing the impact of the Panama Papers leak. The Lawyer approached a number of the top multi-jurisdictional offshore firms for this feature. Only Harneys chairman Peter Tarn was prepared to speak on the record on a limited basis, and three other firms agreed to give interviews or statements on an off-the-record, unattributed basis. Most of the others declined the chance to defend their jurisdictions and the work they do.
“This whole debate has tended to shine a light on the islands,” admits one of those who did agree to speak. He argues that Panama and the type of business done there should not be linked to the type of work done in the CDOT jurisdictions.
“I’ve been a little surprised when I’ve worked with onshore firms that they haven’t applied the degree of rigour that we do offshore”
“It’s a bit of a chalk and cheese world. What does offshore mean in this day and age?” he asks.
“It is important to remember that Panama as a jurisdiction is far removed from many other (more traditional) offshore jurisdictions in terms of the implementation of internationally agreed standards in tax transparency and information exchange,” adds another firm in a statement.
“Jurisdictions such as Bermuda, BVI, Cayman and the Crown Dependencies play perfectly legitimate roles, without which much of the global trade and investment flow simply would not be possible.”
Chipping away at the secrecy model
But these jurisdictions have not always been as engaged with the international community, or as under much pressure to be transparent, as they are now.
“It’s not that far back, 1998, when the first discussions took place with the OECD [Organisation for Economic Co-operation and Development] about trying to get countries to voluntarily exchange information,” points out a partner in another large offshore firm. “Probably even up until 2013 the OECD and FATF [Financial Action Task Force] were very much focused on voluntary disclosure.”
In recent years this has changed to a focus on automatic tax information exchange agreements (TIEAs). In January this year 31 onshore countries signed the Multilateral Competent Authority Agreement, an OECD initiative whereby jurisdictions where a company operates will get annual information relating to the global allocation of income and taxes paid, together with other indicators of the location of economic activity within the group of signatories.
Meanwhile 80 countries to date have signed the Common Reporting Standard (CRS) Multilateral Competent Authority Agreement on automatic exchange of financial account information, with most agreeing to start exchanging information from September 2017 and 2018. That lists includes all the CDOTs and other countries such as the Seychelles and the Cook Islands which also offer offshore vehicles. It does not, yet, include Panama.
“There’s a bit of a sense of can the rest of the world play catch-up? The Channel Islands are doing what we think needs to be done; where’s everybody else in this?”
Offshore lawyers predict that this drive towards transparency will be accelerated by the leak.
“It seems to me there was already a huge regulatory drive or legal drive towards transparency going on anyway,” says Tarn. “People underestimate the scope of that in terms of access to beneficial ownership information, in terms of automatic tax exchange agreements and CRS. There’s a pathway towards transparency that exists.”
The likelihood is that the Panama Papers leak will merely make governments put an increased focus on enforcing exchange of information, particularly with jurisdictions put under the spotlight by the Mossack Fonseca data.
For example, Jersey has a central registry of beneficial ownership and following the leak the island’s chief minister Ian Gorst agreed to open access to the registry to the UK Government.
“There’s a bit of a sense for us of can the rest of the world play catch-up? We’re doing what we think needs to be done; where’s everybody else in this?” says a lawyer based in the Channel Islands, adding that he welcomes the “pressure that’s going to be brought to bear on that type of country to abandon the secrecy model and get with the programme”.
Hidden by complexity
Lawyers are quick to defend the legality of the work they do and point to the ways in which their governments are looking to meet international transparency standards. Nevertheless, the fact remains that the offshore world has thrived because jurisdictions offer ways for both companies and individuals to minimise their tax payments through often-complex, secretive structures.
Law firms, both onshore and offshore, have played a key role in the structuring of those entities and lawyers are quick to point out that there is nothing illegal in their use.
But there is a moral argument to be made against such structuring, especially in a world where public purses are squeezed ever-tighter.
“We’re part of a picture,” says one partner. “There’s an entire industry. The issue of tax morality is more than just us.”
“Courts have said it’s not their business to determine what the moral implications are,” adds another, saying that lawyers should focus on whether a structure is legally-sound and that clients have received the right advice.
“We need to demonstrate that we’re whiter than white and that we’ve adopted and followed the rules with vigour,” he continues.
The most robust response to the moral question comes from the firm which provided a written statement.
“There is a clear distinction between clients wishing to use legitimate offshore structures and those intent on criminal activity – this is clearly not moral,” says the firm. “No defence can be given if you have the choice to participate in assisting a person or an organisation who is acting in a criminal way.
“This is the crux of the debate: how can offshore financial centres and those operating within them fulfil their obligations to identify and prevent these criminals from deliberately using the jurisdiction to disguise the flight of money, evade their tax obligations, or launder the proceeds of crime?”
The Panama Papers suggest that not every adviser has successfully met those obligations, with some outlets alleging that individuals named in the leaks have been deliberately obfuscating the source of funds through offshore vehicles.
Offshore firms claim that they all have stringent procedures in place to identify such cases, for example by delving deeper when a beneficial owner is identified as a ‘politically-exposed person’ (PEP).
“I’ve been a little surprised myself when I’ve worked with onshore firms that they haven’t applied the degree of rigour that we have offshore for some years to PEPs,” claims one.
Mossack Fonseca’s statement
Recent media reports have portrayed an inaccurate view of the services that we provide and, despite our efforts to correct the record, misrepresented the nature of our work and its role in global financial markets.
These reports rely on supposition and stereotypes, and play on the public’s lack of familiarity with the work of firms like ours. The unfortunate irony is that the materials on which these reports are based actually show the high standards we operate under, specifically that:
l we conduct due diligence on clients at the outset of a potential engagement and on an ongoing basis
l we routinely deny services to individuals who are compromised or who fail to provide information we need in order to comply with “know your client” obligations or when we identify other red flags through our due diligence
lwe routinely resign from client engagements when ongoing due diligence and/or updates tosanctions lists reveals that a party to a company for which we provide services has been eitherconvicted or listed by a sanctioning body
lwe routinely comply with requests from authorities, investigating companies or individuals for whom we are providing services
lwe work with established intermediaries, such as investment banks, accountancies and law firms, as part of the regulated global financial system.”
Lawyers working offshore express consistent frustration with the way the debate has been run in the mainstream media and public eye, although one points out that trying to project the message many jurisdictions would like to see in the “maelstrom” of the Panama Papers leak would have been pointless.
“There wasn’t a great deal of point in us going ‘actually, this is what we do’. It’s unrealistic to expect that our message would have been listened to,” he admits.
“It’s a question of constant education,” adds another partner. He says that explaining the technical legal aspects of offshore structuring is “not a sexy story” – the financial dealings of politicians is more attention-grabbing.
“There is a real risk that the word ‘offshore’ is used indiscriminately to tarnish the whole sector with highly biased and unjustified connotations,” argues another source. “Lumping all offshore jurisdictions, and all professionals within each of those jurisdictions, together with this negative label is misguided, inaccurate, and grossly unfair. It’s a bit like saying that because Harold Shipman murdered his patients, all doctors should be thrown in jail.”
Harneys chairman Peter Tar
“There’s a huge regulatory drive towards transparency. People underestimate the scope of that in terms of access to beneficial ownership information, automatic tax exchange agreements and CRS”
The various financial centres and promotional bodies, such as the IFC Forum, the Alternative Investment Management Association, the Bermuda Business Development Agency and Jersey Finance, have all issued statements defending their work since the Panama leak.
Yet there remains a heavy possibility that public opinion will win out and force more significant changes to the way the industry works than have yet been pushed through by the likes of the OECD. That trend will be exacerbated if there are further leaks from other firms.
“You do absolutely everything you can, not by virtue of being an offshore firm but by virtue of being a law firm, to secure your data and your clients’ data,” says Tarn. But there is a good chance that more firms will suffer leaks, causing future scandals.
Both offshore and onshore firms are also nervously awaiting the next data release from the Panama Papers. Only 151 documents are currently released and the ICIJ has promised to produce a whole list of companies named in some of the unreleased files next month – a list which will undoubtedly include more onshore firms, and probably some offshore firms too.
If that happens, the offshore community may have to make significantly more noise in order for its protests of regulatory adherence, stringent anti-money laundering checking and other safeguards against misuse of offshore vehicles to be heard by an ever-angrier global audience.
