Considering the recent announcement of the Dutch Central Bank that 1 in 5 certified trust offices do not meet the minimum legal requirements, it seems a good time to reflect on the impact of the Panama Papers leaks. The leaks have exposed how rich relatives of some of the world’s most powerful people have become.The daughters of Azerbaijan’s president appear to control gold mines, a nephew of South Africa’s president gained his wealth out of oil contracts in the Democratic Republic of Congo and Iceland’s prime minister had to resign, after his wife was revealed to have secret offshore investments with claims on the country’s failed banks. These names were among the hundreds of people that the papers tie to thousands of offshore shell companies.
The holding of money in an offshore company is generally not illegal by itself. There are many valid reasons for multinational corporations, joint ventures or wealthy individuals to set up and use such companies. However, it may also be done to hide criminality from prying eyes, for example, by facilitating tax evasion or money laundering. Even though it is not clear whether the papers document any law-breaking, the reputation of the trust industry has already been damaged as a result of the negative publicity around the leaks.
The leakage itself is not the biggest problem; it’s the substance that comes out. This is where financial institutions and professional advisors play an important role. Banks, trust companies, law firms and other offshore professional advisors are generally required to follow legal requirements making sure their clients are not involved in criminal enterprises, tax evasion or political corruption. It all boils down to being proactively engaged. Trust companies can reduce the risk of getting named in future leaks, by having an eye for upcoming trends and gearing up for anticipated developments. A few pinpoints are listed below (in no particular order).
The changed public perception in relation to tax aggressiveness is a good example where proactive engagement is required. The prime responsibility for cleaning up tax havens lies with national governments. However it will probably take years before some form of international agreement is reached. Trust companies, should not sit and wait for this to happen. Instead they must form their own opinion about tax aggressiveness, recognize tax risks as an integrity risk and identify and take appropriate measures for this purpose. What does a company see as “aggressive tax planning”, what type of structures does it not want to facilitate and what kind of risk mitigation measures does it require? With regard to this topic trust companies should refrain from only relying on legal opinions and advices of professional advisers. Lawyers, tax advisers and accounts will most likely “just” focus on the legality and the fiscal or accounting issues and not so much on topics such as tax aggressiveness.
Furthermore trust companies should actively screen their portfolio on sanctioned parties, products and regions and be alert to unusual transactions including transactions that could indicate circumvention of sanctions. Since the risks of such sanctions are high and usually complex structures are facilitated by the trust industry, it is important to strengthen the factual knowledge among staff and invest in training and compliance tooling to identify indications as mentioned above in an early stage.
Last but not least, many structures described in the Panama Papers involve shell companies that anonymize the party or parties behind it. That can occur in different ways, such as the appointment of a “nominee”. A scheme like this can have valid reasons. However, the proper identification of the party or parties underlying a structure and understanding the legitimacy of and the reason for anonymity and thorough screening of the intermediaries (a.o. “feeders”) are the most important conditions for being able to grant services to such structures.
In the end, proactive engagement is about leading the way so that others may follow.