The publication of the Panama Papers last week made my blood boil. Why? Because it perpetuates the myth that offshore financial centres are the piggy banks for crooks and tax dodgers.
In April 2009 the G20 heads of state resolved to ‘take action’ against non-co-operative jurisdictions which did not comply with anti-money laundering initiatives. These initiatives were introduced 9 years prior to that.
Since 2009, the Organisation for Economic Co-operation and Development (OECD) and the Financial Action Task Force on Money Laundering (FATF) have been tightening up regulation and implementation. The primary focus has been on the Offshore Financial Centres – why – because they are small and weak against such powerful organisations? As a result these offshore financial centres have had no option, but to comply. Jersey is now rated the most compliant of jurisdictions internationally, complying with 44 of the ’40 + 9’ recommendations.
In 2010 the US passed The Foreign Account Compliance Act (FATCA) which requires financial institutions abroad to report details of their American clients’ accounts or face punishing withholding taxes on American-sourced payments.
FATCA then spawned the Common Reporting Standard a transparency initiative overseen by the OECD club of 34 countries. This is to be the standard reporting for the exchange of data for tax purposes. So far 96 countries, including Switzerland, have signed up and will soon start swapping information.
All British offshore financial centres, including Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Guernsey, Jersey and the Isle of Man were early adopters of the new standard.
Now that the offshore financial centres are fully compliant – where do the tax dodgers go to hide their money from tax authorities? The US!
America has steadfastly refused to sign the CRS saying that it has a large network of bi lateral agreements under FATCA and therefore does not need any additional obligations. However, FATCA does not look beyond the account to the beneficial owner if held by a company or nominee.
It is therefore easy to avoid detection of wealth ownership; simply set up a company in Delaware or Nevada. The incorporation of companies in the US is a State not federal matter and in many states the incorporation agents do not have to collect ownership information and therefore are unable to exchange such details even if asked to.
Already money is flowing into the US from the Bahamas and Bermuda because they have signed up to CRS and the US has not. America is therefore the best place to hide legally earned wealth from tax authorities. It does not treat the banking of undeclared money as money-laundering. However, the US is not a good place to put the monies of ill-gotten gains for fear of facing the full force of the US legal system.
But why were there so many high profile people using one firm in Panama?
Part of the anti-money laundering initiatives requires the private client industry to conduct more rigorous checks on politically exposed persons – (PEPs) and report them if they suspect their wealth has been illegally – such as bribes. Most banks, law firms and other professionals as a matter of policy therefore do not act for such people for fear that their power has been used to secure a financial advantage.
I once acted for a PEP – a man who I had known for many years (with the explicit consent of the senior partner). Although he had done nothing wrong he could not open a bank account in London – he was therefore forced to open an account offshore.
These rules drive such people to obscure places and to firms known to accept them – presumably without asking too many questions. However, not all offshore structures are dodgy. It is well known that business people in countries such as Russia and Ukraine put their assets offshore to defend them from ‘raids’ by criminals.
Mossack Fonseca has grown big on the back of acting for PEPs. It is (or was) the fourth largest offshore law firm in the world with a global network of 600, operating in 42 countries. However, I have never had dealings with it or with Panama and have been in the offshore structuring business for over 25 years.
The Panama Papers is good journalism in that it sells papers and attracts viewers, but distorts the true picture. There are lots of good reasons why UHNW families including PEPs put their wealth in offshore financial centres, but it is simply not true that offshore financial centres are sunny places for shady people. This myth hides the real truth that rich and powerful countries like the US demonise offshore financial centres while attracting huge wealth into their own country for the evasion of tax.
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