The Impact of the Panama Papers

The worldwide publication of the so-called Panama Papers which leaked a massive volume of information about the beneficial ownership of companies set up by the Panamanian-headquartered law firm of Mossack Fonseca initially prompted an attack on the low standards of regulation of companies established in Panama.

However as this information was digested it became immediately evident that the concerns were not limited either to Panama or to Panamanian companies. Mossack Fonseca's operations extended to many other jurisdictions and there is now a significant focus on the British Virgin Islands (BVI) where Mossack Fonseca had set up around 113000 companies. The sheer scale of that BVI operation has inevitably resulted in a much wider reaction to the leak and has put the UK under considerable pressure to force the British Crown Dependencies and Overseas Territories to become much more transparent with regard to access to beneficial ownership records.

Unfortunately the personal and family offshore affairs of UK Prime Minister David Cameron have only served to add fuel to the flames especially in light of Mr. Cameron's own ironic crusade for beneficial ownership registers to be made public, although the media has highlighted Mr. Cameron's successful attempt to exclude any register of trusts from the beneficial ownership initiative.

On 11th April, Mr. Cameron announced that the Crown Dependencies and Overseas Territories had committed to provide beneficial ownership details of companies to the UK tax and law enforcement agencies upon request either within 24 hours for a non-urgent request or within as little as 30 minutes for an urgent request. (Mr. Cameron actually stated that Guernsey and Anguilla had yet to fully commit but in Guernsey's case its Chief Minister had made the commitment in writing to Mr. Cameron on 4th April but the States of Guernsey were not yet able to formally ratify it due to the States having come to the end of its term ahead of the local general election on 27th April). Crucially this commitment was given on the basis that the central beneficial ownership registers will not be accessible to the public.

The Sunday Times on 10th April had carried an article which claimed that the National Crime Agency (Britain's FBI) had demanded that such information must be supplied within an hour. Whether or not satisfying the National Crime Agency's requirement will be sufficient going forward remains to be seen because the situation is developing almost by the day. The UK's own beneficial ownership register will be available to the public while it is understood that several G7 and G20 countries are currently resistant to making their central registers public. However, Germany and France are already now proposing a blacklist of jurisdictions which breach global transparency standards and so the situation is clearly far from being settled.

The battle now for the Crown Dependencies and Overseas Territories is therefore to maintain the right to privacy of central beneficial ownership records whilst at the same time balancing their transparency obligations to tax and law enforcement agencies in the knowledge that the UK is so wedded to public disclosure.

There can be little doubt that with several G7 and G20 countries so strongly objecting to their registers being open to the public there will be many offshore jurisdictions and international finance centres around the world which will refuse to make their own central beneficial ownership registers public. The obvious danger therefore is that that if the Crown Dependencies and Overseas Territories give in to UK demands to make the registers public beneficial owners with companies in those jurisdictions may opt to relocate their companies to other jurisdictions where they will be able to take advantage of privacy.

Some media commentators have suggested that beneficial owners who have nothing to hide should not be concerned at all by a public beneficial register. Such a view is naivety in the extreme. Fully-compliant beneficial owners with a choice between public disclosure and remaining private will surely opt for the latter if it continues to be available elsewhere. Furthermore after witnessing the political and media hounding of David Cameron and his family for undertaking very bland non-aggressive tax planning there will be no incentive for those undertaking similar everyday tax planning to have their financial affairs publicised unnecessarily.

At the time of writing it is very difficult to predict the outcome but if some crystal ball-gazing is appropriate I would personally conclude that:

• Those offshore jurisdictions and international finance centres which already have high standards of regulation and are fully signed up to the Common Reporting Standard are in a far better position than those whose standards lag far behind. Put simply verified beneficial ownership information must already be held in order for that information to be exchanged.
• The sheer scale of the exposure of hidden assets in offshore jurisdictions and international finance centres is inevitably going to result in an increased attack on any jurisdictions the viability of which is dependent on secrecy.
• Privacy arbitrage is likely to become crucial with the risk of competitive disadvantage the lack of a level playing field and re-domiciliation of existing companies all becoming major factors. There is of course a very real risk that business may migrate to less regulated jurisdictions which would seem counter-productive to any attempts to take better control of what activity takes place offshore.
• There are likely to be ongoing hard negotiations between the UK and the Crown Dependencies and Overseas Territories about how to deal with the exchange of beneficial ownership information without creating an unlevel playing field compared to non-British connected competitor jurisdictions given the clear disparity between the UK's own commitment to a publicly-accessible beneficial ownership register and the strong determination from the Crown Dependencies and Overseas Territories to keep their beneficial ownership registers private . It is surely in the interests of all parties to reach agreement on a system which enables those territories to become kitemarks for the way in which responsible offshore jurisdictions should operate going forward resulting potentially in these territories benefitting from high quality business.
• Other jurisdictions not connected to the UK in any way will inevitably be pressurised to up their game in order to be allowed to continue to operate. Rogue jurisdictions are very unlikely to be tolerated going forwards although those jurisdictions may potentially benefit from privacy arbitrage in the short term.
• A combination of the Common Reporting Standard plus increased beneficial ownership information will see a continual evolution of the offshore world and potentially a growth in the number of wealthy individuals looking to physically relocate to tax-friendly jurisdictions in order to optimise the structuring of their wealth.

The PraxisIFM Group is fully committed to maintaining very high standards of compliance and have a very firm belief that there will be a flight to quality both in terms of choice of jurisdiction and choice of provider. Through our wide network of offices we offer a wide range of structuring solutions with all offices operating to the Group's very high standards.

FOR MORE INFORMATION CONTACT:

David Piesing

Email: david.piesing@praxisifm.com

Tel: +44 (0) 1481 737601