It’s a familiar story: an immense leak of data that expose an intricate web of the elites’ hidden investments. Various celebrities, politicians, billionaires, and drug dealers were named recently in the Pandora Papers leak, as the rich and powerful poured money into a variety of assets from beachfront property, mansions to yachts, across various jurisdictions.
With nearly 12 million files, the Pandora Papers leak paints a picture of the various networks and strategies used by shell companies to skirt scrutiny, conjuring up memories of the Panama Papers before it. But after yet another mammoth leak, the question of whether this will lead to new regulatory mechanisms and internal practices remains somewhat up for debate.
Of the knock-on effects, Hinesh Shah, senior associate at Pinsent Masons, says there will continue to be “increasing scrutiny on the use of off-shore vehicles, particularly given tax evaders, fraudsters and money launderers have been identified across various leaks, and so law firms which engage in setting up these vehicles need to be prepared for this.”
Periodic data dumps are now commonplace, says Shah, noting that from 2013 onwards, there has been a regular flow of leaks. Bearing this in mind, Shah says we can expect a greater focus on global social initiatives – for example reducing international inequality gaps – to in turn increase scrutiny of tax havens.
There is the big question of whether due diligence processes need to be enhanced within law firms. “Not necessarily,” says Andrew Sackey of Pinsent Masons.
Sackey suggests a number of risks of using offshore vehicles including “obscuring who the ultimate beneficial owners are” and being used to facilitate tax avoidance, evasion schemes and money laundering, key among these.
But there are also legitimate reasons for using offshore vehicles, “such as privacy safeguards and moving assets out of volatile territories for example,” Sackey says. But firms need to ensure their KYC procedures are “robust, documented and supported with evidence.”
“Understanding who you do business with, where their money is coming from and the reasons for them establishing off-shore vehicles are simple questions that law firms need to make sure they have answers to,” he says.
There are a range of risks law firms open themselves up to by not carrying out thorough due diligence. Sackey notes that inadequate due diligence processes could lead to serious action being taken against firms by regulators and authorities.
“This could include sanctions, financial penalties and limits on business activities. The risks relate to the underpinning conduct. ‘Facilitation’ can be innocent, careless, negligent or, in rare cases, dishonest – criminal sanctions,” he says.
“Rightly so, the emphasis on doing business the right and understanding who you engage with has been underscored by the rise of the ESG agenda. There is of course a danger of reputational damage which could quickly lead to loss of customers, loss of business relationships – ie. suppliers, banks – and employees resigning,” Sackey says.
Shah says that a push for change is already underway.
“We’ve already seen calls for beneficial ownership registers to be maintained in off-shore jurisdiction and strengthened tax-sharing arrangements between countries (including between the USA, who adopt FATCA, and countries who have signed up to the OECD Common Reporting Standard). We can also expect to see greater anti-money laundering (AML) regulations in the accountancy, legal and real estate sectors,” he notes.
The question of whether we will see offshore firms making internal policy changes as a result of the leak is one lawyers are currently juggling.
“Potentially” this could happen, says Shah, “but this will only happen underpinned by appropriate inter-national regulation and legislative changes.”
“For example, if offshore companies are prevented from conducting transactions unless they can satisfy a clear and stringent criterion, if enforcement action is taken against them, or if enforcement activity becomes a more frequent and visible driver,” he adds.
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