What happens offshore…winds up onshore

Fallout from the massive Panama Papers leaks has been predictably and justifiably widespread. It’s also emboldened regulators and cleared a path for new rules and a stepped-up war on tax evaders
By Ken Mark

Exposed: Celebrities outed through the Panama Papers, like British Prime Minister David Cameron, are helping give momentum to regulators

The recent Panama Papers data breach is to hiding ill-gotten gains in tax havens what last year’s Ashley Madison website leak is to arranging extramarital affairs close to home. If you were named in the latter, however, not much could happen since philandering is not a criminal offence. At most, it cost you your marriage—more likely just some public shaming and disgrace.

Not so for people outed in the Panama Papers. Criminal prosecutions are possible for anyone who crossed the line from tax avoidance to tax evasion—more so if the hidden deals are also linked to other illegal activity. Even those on the right side of the law face potential job loss and/or professional humiliation. Just ask Iceland’s former Prime Minister Sigmundur David Gunnlaugsson, or Spain’s former minister of industry, energy and tourism, José Manuel Soria, a couple of early high-profile political exits. Slightly better off—embarrassed but still in office—is British Prime Minister David Cameron. The leaked Mossack Fonseca law firm’s documents revealed that his late father had set up a Panamanian trust. Within days, Cameron was compelled to admit he’d owned shares in that trust until selling them in 2010, just before becoming prime minister. He also made public all his personal income tax returns for his years as a member of parliament, pledged to keep up the practice and suggested that all MPs follow his example.

Today, the story has moved beyond the early shock and galling headlines. But it hasn’t gone away. Instead, predictably, the fallout from the initial bombshell is spreading. Companies and individuals that had no part in Panamanian affairs will soon find themselves facing more scrutiny, more oversight, new regulations and potentially stiffer penalties as emboldened financial services regulators and tax authorities move to declare open season on tax evaders, tax havens and the facilitators who bring the two together.

Some of what’s coming was in the pipeline. Some will be new. And all of it supercharged due to the Panama Papers’ massive size and scale—11.5 million files taken, an estimated several trillion dollars in deals, up to US$200 billion in unpaid income taxes annually.

One of the first landmarks of the new era was a mid-April announcement that Europe’s five largest economies—Britain, France, Germany, Spain and Italy—had agreed on a new information-sharing initiative on company ownership. This show of solidarity, forged in a sideline meeting at the spring session of the International Monetary Fund in Washington, DC, is quite an achievement in itself since historically, these countries can rarely agree on anything whether it’s football, politics or interest rates.

At the announcement, British Chancellor of the Exchequer, George Osborne, called the agreement a “hammer blow against those who hide their illegal tax evasion in the dark corners of the financial system.”

They weren’t the only ones meeting on the fly. At the same time, over in Paris, tax investigators from the 28-member countries of the Joint International Tax Shelter Information and Collaboration (Jitsic) network, held a hastily called session to work on a global strategy to target and prosecute tax dodgers outed in the Panama Papers. Jitsic chairman Chris Jordan, of Australia, said the goal was a “global approach” to the exchange of tax collection information.

Borderless regimes aren’t brand new, of course. These latest efforts follow an earlier agreement on multilateral information sharing from the 210-member International Organization of Securities Commissions. Says Lawrence Ritchie, a partner at Osler, Hoskin & Harcourt LLP and former Ontario Securities Commission vice-chair, “Since the 2008 financial meltdown, all regulators have become more proactive about white-collar issues and focusing on greater transparency in business dealings.”

Simply put, they continue to arm themselves with new weapons to boost tax collections on money hidden in overseas accounts. Politicians can’t look away when there’s so much money to be reclaimed. First, because voters are demanding that tax cheats be punished. Second, by boosting tax receipts, they will not have to increase taxes.

HOW FAR WILL they go? Consider what happened when enterprising financial regulators and tax authorities in the German state of North Rhine-Westphalia paid millions to hackers and other sources for stolen data to extract huge sums—about $800 million to date—from tax cheaters and their agents, included a 2014 settlement with UBS AG (The Union Bank of Switzerland) valued around $400 million.

The revelations pressured Swiss banks to share more information about suspected German tax evaders. Today, that potentially questionable practice has gained legal standing within Germany. Recently the country’s Federal Constitutional Court found that if data had been “received” rather than actively solicited, then those who used it were not guilty of abetting the theft. Whether it was legal to buy stolen data was a question it referred to other courts.

It’s a practice Scott Hutchison, a former crown attorney and a partner with the Toronto law firm, Henein Hutchison LLP, hopes not to see here. “The danger with the state getting into the habit of buying such information is that it creates an implicit offer to buy future information,” he says. “It is a dangerous practice to encourage since it effectively converts all such reward-based whistleblowers into agents of the state. Information available through media reports doesn’t raise the same concern.”

Using more conventional practices, the Canada Revenue Agency (CRA) took the aftermath of the Panama Papers’ leak to announce it would actively beef up its own tax evasion and anti-money laundering policies and practices. The stated goal is to recover $2.6 billion over five years focusing on tax havens, large foreign transfers of money and illegal shelter facilitators. It also announced the hiring of 100 new auditors to get it there. Their work load will boost the agency’s audits of “high-risk” taxpayers to 3,000 a year from the current 600 and review the 200 tax-shelter intermediaries up from fewer than 20 a year now.

Putting more resources on the job is one thing. But shifting priorities to lay charges against so-called facilitators—banks, accounting firms, investment counselors and so on—will be an unsettling change for some.

In this, the CRA may be following the lead of the U.S. Department of Justice. In 2014, for example, its investigators forced Credit Suisse AG to plead to aiding wealthy U.S. citizens to set up accounts to hide money from the U.S. Internal Revenue Service. The fine totaled US$2.6 billion.

It’s not a new policy in the U.S., but even there regulators recently announced a major policy shift to storm the last bastion of hidden wealth—the true identities of beneficial owners, not just the designated managers, of numbered companies. This so-called customer due diligence (CDD) rule will add regulatory muscle to current know-your-customer (KYC) regulations. It will require all U.S. financial institutions, including those branch offices or subsidiaries of foreign firms, to know and understand who are the actual beneficial owners of their corporate clients. In addition to the usual fines and sanctions, regulators can deny non-complying firms the privilege of doing business in the U.S.

At a recent anti-money laundering conference, Jennifer Shasky Calvery, Director of the U.S. Treasury Department, Financial Crimes Enforcement Network told The New York Times: “I don’t think everyone recognizes the connection between the [Customer Due Diligence] rule and the Panama Papers.”

She went on to say that closing the loophole “would clarify and make absolutely clear to our financial institutions that they must know and understand the beneficial ownership of their customers. Who is actually calling the shots? Who stands to gain?”

It remains unclear how quickly, if at all, Canadian regulators or their global counterparts will follow suit. But Osler’s Ritchie has a good hunch: “Canadian authorities cannot ignore trends and reactions in other major markets, especially in the U.S.,” he says. “They inevitably follow suit, with their own ‘made-in-Canada’ variant, whenever they feel it necessary to align legal and regulatory expectations.

“Wise directors and managers should be vigilant in watching and understanding these types of trends and developments, seek advice from experts on how the trends could affect their businesses, and be prepared to adjust their business practices accordingly.”

Photography: Stefan Wermuth/Reuters

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