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GUEST ARTICLE: Creditor Opportunities From The Panama Papers Saga

Tim Prudhoe and Anna Gilbert

Kobre & Kim LLP

30 June 2016

The following article is by Tim Prudhoe and Anna Gilbert, offshore-based lawyers at Kobre & Kim. They write about the Panama Papers saga and the scope for identifying specific assets by creditors. The editors of this publication are pleased to share these views and invite readers to respond.

Amidst all that has already been written about the “Panama Papers” data theft of 2.6 terabytes of electronically held client information, it is important to keep in mind the unprecedented opportunity that it has generated for creditors. This opportunity extends far beyond Panama itself. Thinking of the situation in purely domestic terms would be to misunderstand a complex and evolving set of issues.

As a reminder, a terabyte is 1 million bytes of information. This translates to a staggering 11.5 million documents, including 4.4 million emails, according to the network of investigative journalists that disseminated the information.

Onshore service providers, including many well-known and long-established law firms, have already received regulatory requests for information detailing their potential involvement in asset concealment. If there was any doubt as to whether this event was anything other than highly planned and perpetrated over a protracted period, it is worth noting that downloading that amount of data at high speed broadband rates would take over 120 days running at 24 hours a day. Mind-boggling statistics aside, this data theft was not the first and it is simply unrealistic to believe that it will be the last. However, the perpetrators’ agenda, whether it was revenge, financial or moral gain, or publicity, is not relevant to its impact on the wealth industry.

The real story buried beneath the headlines of resigning politicians caught with previously undeclared funds is the resulting increased scope for identifying and targeting specific assets by creditors. These opportunities arise in an atmosphere increasingly hostile to statutory regimes designed to promote banking and other fiduciary confidentiality. With the boost that the Panama Papers provides in terms of initial structuring information, creditors and their professional advisors can expect judicial support in deploying aspects of this information cache.

Panama’s companies legislation, which is based on the companies legislation of the US state of Delaware from as long ago as 1927, throws up no greater informational roadblocks than several well-known Caribbean jurisdictions. Of the 213,136 companies themselves forming part of the data, only 22.7 per cent of them (48,360) are actually incorporated in Panama. The highest level from a single jurisdiction was 53.32 per cent (113,648) from the British Virgin Islands. The mere fact it occurred in (or at least in respect of – who knows the location of the IT servers of law firm Mossack Fonseca) Panama is irrelevant to the creditor opportunities that it now presents.

Having guided clients through voluntary disclosure programmes around the world, the wealth industry is already well aware of increase in interest from onshore tax authorities as a result of the Panama Papers. But the scope for practical “yield” out of targeted searches within the documents themselves goes well beyond this. Creditors (and those with creditors) - both pre- and post-judgment - now have a useful resource for leads and other information around asset recovery and enforcement.

Post-judgment, ownership links are likely a useful tool for corporate veil piercing, also referred to as the corporate disregard: where it can be demonstrated that the use of one or more companies has been for fraudulent purposes. It is not only creditors with crystalised status for whom the data is worth careful review. In the right hands, the raw data mined out of the Panama Papers is capable of supporting viable discovery (disclosure) applications. Specifically, the data could support pre-judgment discovery within one or more of the well-known Caribbean international financial centres, often referred to by the media as tax havens.

These jurisdictions, founded on the English common law system, have a system of court-ordered pre-action discovery which is based on a necessarily incomplete picture. This requires further information to determine whether an intended plaintiff has suffered an actionable wrong and at the hands of whom. In this context, even snippets extracted from the Panama Papers may well progress a carefully planned strategy towards judicially-mandated asset recovery.

In an industry steeped in nominee directors and shareholders as well as fiduciary structuring such as trusts or foundations, deciphering either the actual ability to deploy this windfall information or necessary “next steps” is not always easy. The general timing of the Panama Papers itself is also creditor-friendly as pressure continues to build for openness and transparency around the central issue of beneficial (i.e. real) ownership information.

This movement towards increased transparency on “real”, or underlying, ownership has continued to gain momentum as a result of the Panama Papers. In April, the G5 countries (UK, Germany, France, Italy and Spain) were followed by another 35 countries in the latest anti-corruption initiative based around the sharing of information on beneficial ownership of corporate entities. However, it is important to understand where specific information gathering and custodial responsibilities lie and how that information is accessed. Currently, corporate service providers owe duties in connection with the collection and maintenance of beneficial ownership information, for use in response to regulatory requests.

That maintenance of information via authorised providers outside jurisdictions such as the BVI is a doomed business model, not simply because of overseas pressure but also as a result of local legislation initiatives impacting the interplay between corporate services providers and introducers of work from outside of the BVI. This “brave new world” of BVI-based beneficial owner information has existed since January 2016 in respect of new client intake and has a transitional period of only 12 months in respect of existing clients. It is in this context that the potential creditor head start provided by the Panama Papers is likely to be so significant.