Paradise Papers and Financial Transparency Regulations

On November 5, 2017, some of the global elite woke up to horrifying news; some of their supposedly secret offshore transactions were exposed in the so-called “Paradise Papers.” The Paradise Papers is a leak of 13.4 million financial documents from an offshore law firm, as well as corporate service providers and business registries. The disclosures named over 120,000 companies and individuals.

The International Consortium of Investigative Journalists (ICIJ) is working on the investigations and, while the scope isn’t quite as large as the as the Panama Papers, the subject matter is comparable. The Panama Papers was an investigation led by the ICIJ that revealed money laundering of 214,000 offshore companies through a complex weave of shell and holding companies, legal entities, offshore accounts and other tangled financial structures through a Panama-based legal firm.

NOTE: It’s not illegal in itself to form an offshore entity and there are some legitimate reasons to do so.

Naming Names

While it’s not too surprising that politicians, multinational corporations, celebrities, and high-net-worth individuals use complex structures to protect their cash from higher taxes, some of the names on the list raised a few eyebrows. Companies like Disney, Nike, and McDonalds — all multi-billion dollar companies — were mentioned, along with many others that might surprise you. Individuals such as US Secretary of Commerce Wilbur Ross, US Secretary of State Rex Tillerson, Madonna, Paul Allen, George Soros, Bono, three former Canadian Prime Ministers and the Queen were some of the names revealed.

As the document release was so recent, the fall-out is just starting. In the US, Senate Democrats want to launch a probe into the dealings of Secretary Ross. One potential troubling connection is his holdings to a Russian shipping firm with connections to Putin.

In Canada, current Prime Minister Justin Trudeau’s top fundraiser and close friend, Stephen Bronfman, was mentioned as having many millions in off-shore accounts.

Both Ross and Bronfman (and many others mentioned) have stated that their actions are legal. However, in politics many times it’s not about the letter of the law, but rather about appearances and the optics of the situation is not good.

As Dr. Henry Balani, global head of strategic affairs at risk and compliance firm Accuity, states: “However, the optics of the Paradise Paper leaks continue to be damaging with many high-level government officials, politically exposed people (PEPs) and even the Queen of England and Prince Charles caught in the scandal.  Secrecy continues to be a concern, leading to potentially unethical or even criminal behavior.”

Even if all the investigations by the various tax and other agencies come up with no smoking gun, will Joe and Jane Taxpayer care? As a letter to the editor to the Toronto Sun observes, “I imagine most Canadians could care less whether Bronfman’s $60-million, tax-free snowball is being managed from home or from offshore. The real issue is, why is it legal in the first place?”

Effects of the Panama Papers

Consider the regulatory changes spurred on by the Panama Papers. In Europe, 4AMLD regulations were explicitly changed to strengthen transparency rules to tackle terrorism financing, tax avoidance and money laundering, as a result of findings from the Panama Papers.

In the US, while updates for Customer Due Diligence rules have been in process for a while, the release of Panama Papers seemed to spur the passing of the FinCEN Customer Due Diligence Final Rule. According to an article in The New York Times, “the rule is meant to close a major loophole in the American banking system that enables the sorts of secretive financial maneuvers that were thrust into the spotlight this week with the leak of millions of documents from a law firm in Panama.”

In the attempt to create more financial transparency, some of the new rules require business entities to disclose beneficial ownership information. For example in the US, the Final Rule “outlines explicit customer due diligence requirements and imposes a new requirement for these financial institutions to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions.”

What regulations then, might the Paradise Papers bring forth? While the initial shock can’t compare to the Panama Papers — we’ve seen the story before — it’s another reminder of the vast wealth that is being hidden.

Calls for Offshore Controls

Former UK Prime Minister Gordon Brown states (speaking of the UK), “first of all they have got to outlaw these tax havens, they have got to threaten to sanction them, they have got to punish them with, potentially, arrest warrants in some cases where people are breaking the law.”

Thirty Members of European Parliament sent the UK government an open letter, criticizing their lack of progress on curbing the offshore tax industry:

“The Paradise Papers must act as a wake-up call to deal with industrial-scale tax dodging, once and for all… We also call for stronger regulation of intermediaries, including penalties for those proven to be involved in tax evasion, aggressive tax avoidance or money laundering.”

In an article on the Financial Transparency Coalition website, Neeti Biyani, Programme Consultant at the Centre for Budget and Governance Accountability, states, “Transparency is key to establishing a fair global financial system that works for everyone. Governments across the world therefore must implement public country-by-country reporting and establish centralized registries of beneficial owners of all legal entities in their jurisdiction, which should be publicly accessible.”

The article goes on “this is a global systemic issue that cannot be addressed at the national level alone. It’s time for governments to agree on a global agreement under the United Nations that ensures all countries are democratically represented and that reforms are guided by the overarching aim of fulfillment of human rights, sustainable development and gender equality.”

Will the Paradise Papers be the straw that breaks the back of offshore systems’? As, an estimated $800 billion to $2 trillion is laundered every year, there’s still a massive issue of funds being squirreled away, distorting the financial and taxation systems. Unfortunately, that amount of money represents a lot of incentive and influence to thwart any real reforms. Time will tell if the calls for transparency and financial fairness will shine through; we’ll have to wait and see what the investigations uncover and how regulators react around the world.