This article looks at the reverberations of the Panama Papers saga, which occurred when a journalists' consortium got its hands on a trove of account information from the Central American state.

The following article looks at the continuing effects on the offshore world of the Panama Papers "leak”, which saw the Washington DC-headquartered International Consortium of Investigative Journalists publish reams of data about public and private figures with accounts in the offshore tax jurisdiction. (See earlier commentary here.) The author of this article is Marie-Louise Murray, an associate at Russell-Cooke. The editors of this publication are grateful for this contribution to debate and invite reader responses, to tom.burroughes@wealthbriefing.com.

In November 2016, offshore law firm Mossack Fonseca was fined $440,000 by the British Virgin Islands’ Financial Services Commission, the highest penalty the FSC has ever issued. The firm, central to the unprecedented April 2016 Panama Papers data leak, was fined after a six-month site inspection revealed several contraventions of the Anti-Money Laundering and Terrorist Financing Code of Practice and the BVI Regulatory Code. It had been fined $31,500 for anti-money laundering and information security breaches earlier in 2016.

Some believed this would deepen cracks created by the Panama Papers scandal in the already fragile reputation of tax havens.

But is this penalty, described by campaigners as “embarrassingly inadequate”, simply a token gesture in response to recent media scrutiny, made by a cynical regulator biding its time until attention shifts to another scandal?  

Why all the fuss about offshore investment?
Offshore asset-holding structures are not illegal. They can offer reduced tax liability in often politically and economically stable countries, with privacy (sometimes strict confidentiality) for sensitive transactions. However, the Panama Papers shed light on seemingly legitimate offshore structures disguising criminal activity - including illegally circumventing tax (tax evasion not avoidance), money laundering and terrorism. 

Amid these revelations and a growing public focus on the perceived immorality of many permitted tax avoidance activities, regulators across the world have been forced to investigate.  

As of December 2016 there had been inquiries in 79 countries and circa 6,500 taxpayers and companies across the world were under investigation, as a result of the Panama Papers. Europol found 3,469 probable matches between their files and the Panama Papers, with 116 on an Islamic terrorism project. The European Parliament opened a 10-month inquiry into implementation failures of anti-tax avoidance and financial transparency rules. Germany introduced a “Panama Law”, requiring citizens to declare shell companies.

German MEP Michael Theurer raised concerns about “the influence of Great Britain on the former colonies and Crown dependencies and the role that [they] are playing”. Although Mossack Fonseca is Panama-based, over half the 214,000 structures uncovered in the leak are headquartered in UK overseas territory the British Virgin Islands. Anti-corruption expert Mark Pieth described the UK as a “big part of the problem” by not forcing its offshore centres to be more transparent.

The UK response
The UK government started targeting offshore structures before the leak. Facilities made available by HMRC until 2015 enabled voluntary disclosure of outstanding tax liabilities on offshore assets. HMRC calculates a £2 billion-plus recovery from offshore tax evaders since 2010 and expects a further £7.2 billion by 2021. This is thanks to new powers and investment, including the Common Reporting Standards (CRS), a UK-government led “transformation in global financial transparency which…will see HMRC automatically receive offshore account and trust data from more than 90 countries, including British Overseas Territories and Crown dependencies.”

The Finance Act 2016 includes new civil sanctions for offshore evasion enablers and increased civil sanctions for offshore evaders (building on new penalties in the Finance Act 2015 that take part of the evaded asset as the penalty). There are three new strict liability criminal offences for offshore evaders. HMRC ends permanent non-dom status from April 2017 and introduced measures to levy inheritance tax on all UK residential property, regardless of holding structure.  

Since June 2016, UK companies and LLPs must maintain and include in Companies House returns lists of ultimate beneficial owners. In June 2013 moves were announced to introduce public registers of offshore companies’ beneficial ownership.  

The day after the Panama Papers publication, HMRC said: “there are no safe havens for tax evaders...the days of hiding money offshore are gone.” Following that, few tangible results have actually been achieved by the UK government.  

A UK government Panama Papers taskforce did initiate over 30 tax fraud and financial crime investigations, and examinations into the links of 43 high net worth individuals with Panama. Over 60 financial services firms and banks have been asked by the Financial Conduct Authority to disclose details of any accounts handled by Mossack Fonseca and explain internal procedures to assess exposure. But prominent tax lawyers question HMRC’s capabilities and resources to manage investigations and prosecutions of that scale.  

The UK resisted EU Commission plans to blacklist zero-rate corporation tax havens (including several Crown dependencies and UK overseas territories) as “non-cooperative jurisdictions”, and argued for a later deadline for compliance with EU transparency rules. Anti-tax avoidance campaigners blame UK lobbying for the dropping of transparency amendments to the EU Anti-Money Laundering Directive.  

UK attempts to persuade overseas territories to introduce beneficial ownership company registers have stalled. They have agreed to on-demand information-sharing with law enforcement agencies. Although some tax havens have committed to CRS information exchange protocols, each signatory country can choose which accounts it considers “reportable”. Sceptics question the ability and willingness of these jurisdictions to properly police international information exchange rules.  

What next for offshore?
While transparency standards are not universally applied and policed, places exist for criminals to hide ill-gotten gains. Equally, while such devices remain legal, high net worth individuals and corporations will use offshore structures to avoid domestic tax and transparency rules.  

Critics remark that the UK government is already backsliding on promises to “sweep away” offshore tax evasion. Previous leaks (e.g. the Cayman Islands 2013 tax leak and the 2015 great HSBC leak) have not ended offshore schemes. The highest ever fine issued by the BVI financial regulator is a mere $440,000. Offshore investments have existed for nearly a century - they will not disappear overnight.  

However, the Panama Papers have resulted in prosecutions and contributed to an increasing focus on the morality versus legality of offshore structures. The first CRS information exchanges begin in 2017, signalling increased regulatory investigations, inspections and audits.  Investors should consult professional advisors regarding legal and regulatory obligations.

Lines between tax avoidance and tax evasion can be blurred. Investors should brace themselves for increased scrutiny and a greater expectation of transparency (including pre-emptive disclosure), not to mention the reputational hazard of unwanted association with those using offshore structures for criminal activity.