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Berezansky Vladimir March 2017 inCOMPLIANCE Panama Papers



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As we approach the one-year anniversary of the release of the Panama Papers, I have assessed the impact of this scandal in the March 2017 number of inCOMPLIANCE, the official journal of the International Compliance Association (ICA).

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Berezansky Vladimir March 2017 inCOMPLIANCE Panama Papers

  1. 1. THE PANAMA PAPERS inCOMPLIANCE® 20 “ Offshore tax haven”… what a supremely evocative designation! It conjures up scenes from 1950s-era films of pre-revolutionary Cuba... delightfully rakish raconteurs flaunting opaquely-generated wealth, which they’ve stashed away in SPVs bearing innocuous names... hot jazz (“bah-bah loo!”) and chilled cocktails laced with rum and Angostura bitters... “Taxes? What taxes? All my taxes are away on holiday – ha, ha, ha!” Recent leaks – typified by the Panama Papers of last year – have largely dispelled this romanticised view of offshore tax havens as being “intriguingly dodgy yet exclusive”. Instead, the popular attitude towards the “offshore-osphere” is currently better described as “righteously indignant and offended”. In the words of Juan Carlos Varela, President of Panama: “It is clear that the affair shined a light into the dark corners of global finance and sparked a worldwide reform agenda. Despite the unfortunate name, the Panama Papers has been good for Panama as well as for the world.”1 Precedents The Panama Papers was by no means an unprecedented event. Quite the contrary; it was only the most recent in a series of similar instances in which pilfered – hacked or otherwise illicitly- removed – proprietary information with compromising and/or sensational implications was divulged to the general public and/or to interested governmental (primarily tax) authorities (see Figure 1). In this respect, if the definition articulated by Nassim Nicholas Taleb in “The Black Swan” (2007)2 is to be applied, the Panama Papers scandal was by no means a “black swan” event. Rather, this was an enormous grey or perhaps even white swan. Previous similar events include: • “Cablegate” (2010) – In late November 2010, WikiLeaks began releasing classified cables that had been sent to the US State Department by 274 of its consulates, embassies, and diplomatic missions from around the world. Dating from December 1966 to February 2010, these cables contained diplomatic analyses from world leaders, and assessments by American diplomats of their host countries and officials.3 • Offshore Leaks (2013) – This disclosure could be described as a full dress rehearsal for the Panama Papers. In April 2013, an International Consortium of Investigative Journalists (ICIJ) report was released, disclosing details of 130,000 offshore accounts. It detailed the results of an ICIJ investigation based on a cache of 2.5m secret records obtained by ICIJ Director, Gerard Ryle. In producing this document, the ICIJ collaborated with journalists from around the world to produce a series of reports published in connection with the ICIJ’s “The Global Muckraker.”4 • Luxembourg Leaks or “LuxLeaks” (2014) – In November 2014, the ICIJ brought to light a financial scandal based on its investigations into confidential information on tax rulings in Luxembourg, which were organised by PricewaterhouseCoopers from 2002 to 2010 to benefit the firm’s clients. This investigation resulted in the disclosure of tax rulings for over three hundred multinational companies based in Luxembourg. The scandal attracted international attention to tax avoidance schemes in Luxembourg and elsewhere, and contributed to the implementation of measures to regulate tax avoidance schemes beneficial to multinational companies.5 • Swiss Leaks (2015) – In February 2015, the ICIJ website released “Swiss Leaks: Murky Cash Sheltered by Bank Secrecy”, detailing the results of an investigation conducted by over 130 journalists in Paris, Washington, Geneva, and in 46 other countries. The report alleged that, between November 2006 and March 2007, €180.6bn passed through HSBC accounts held in Geneva by over 100,000 clients and 20,000 offshore companies. The data for this period came from files surreptitiously removed from HSBC Private Bank in late 2008 by Hervé Falciani, a former employee, which he subsequently handed over to French authorities. The ICIJ’s “Swiss Leaks” report concluded that the bank profited from its clients’ tax evasion practices.6 Two equally vital questions A favourite didactic question of lawyers and financial forensics professionals in explaining their methodologies is: cui bono? (i.e. to whose benefit?). But when judging the overall utility of offshore tax havens to the global economy, a second Coming to the surface One year on from their release, Vladimir Berezansky considers the impact of the Panama Papers
  2. 2. THE PANAMA PAPERS inCOMPLIANCE® 21 (sadly often ignored) question must also be considered: cui detrimento? (i.e. to whose detriment?). Neither of these questions is rhetorical, and they are equally vital to an adequate assessment of the broader significance of offshore tax havens. One reason why offshore tax havens are ignored and/or discreetly accessed by so many “upstanding” citizens of so many Western democracies is a collective failure of logic regarding their tangible and measurable detriment to the global economy. Indeed, invoking a concept as arguably insubstantial as “detriment to the global economy” – beyond the ranks of those professionally sensitised – can be a tough slog even today, much less a decade or two ago when the problems engendered by offshore tax havens first began to fester and multiply. A major inhibiting factor in assessing the relative benefits and detriments of offshore tax havens to the global economy is the continuing absence of reliable statistics regarding the total amount of funds and/or in-kind assets that correspond to this category. Putatively sound estimates range between $21tn and $32tn7 , but the implied margin of error in such estimates renders them essentially useless for any purpose other than shock value. To be clear, offshore tax havens have entirely legitimate and beneficial business purposes. But these circumstances are often forgotten, usually as a result of collective emotional whiplash caused by careening from the “intriguingly dodgy yet exclusive” perceptions (as parodied above) to the “righteously indignant and offended” mindset that takes hold after yet another scandal or exposé – especially on the scale of the Panama Papers – erupts via the world’s media outlets. Low- or no-tax havens and relative national advantage To revert briefly to basic principles: every sovereign nation has essentially complete discretion over its domestic revenue-generating infrastructure (i.e. articulating the type and rates of taxes, customs duties, administrative fees, etc that shall apply within its territorial borders and to its citizens). One of the many legitimate policy goals of a nation’s revenue- generating infrastructure is enhanced competitiveness designed to attract foreign investment. Not surprisingly, national governments tend to shape their revenue-generating infrastructures to encourage foreign investment that is most consistent with the contours of their domestic economies. Territorially large nations with big populations tend to use their tax codes to encourage so-called foreign direct investment (FDI) in large-scale infrastructure projects, often on a jointly-managed basis in which issues such as project cost allocations, technology transfers (if relevant), and profit sharing arrangements are carefully detailed. A geographically smaller, more remote and/or less populated country usually needs to compete for foreign investment (often as a major supplement to its domestic revenue base) in “niche” sectors of the global economy, i.e. by emphasising its specific history, culture and geography as a tourist destination and by heavily promoting natural resources and products that might be either unique or of high value-added net worth (such as rare gems, cutting edge electronics, Swiss watches, etc). From Watergate to 9/11 During the three decades beginning approximately with the Watergate Scandal and ending quite abruptly with 9/11, Western governmental investigators, law enforcement authorities and regulators – primarily those focused on enforcing tax, banking and securities markets regulations – became increasingly aware of the trend towards “anonymising” the seed funds and the proceeds of criminal activity within the legitimate funds flows of entirely legal business and commercial activity. During this period, the realisation that profits generated from longstanding and well-known international criminal structures – those engaged primarily in narcotrafficking, the “white slave” trade (as it was then known) and other illicit commercial activity such as smuggling – were viewed largely as a nuisance that required appropriately aggressive intervention by law enforcement and the prosecutorial power of all affected nations. The policy construct that drove Western and other national governments to take measures deemed necessary at this time could be described as not dissimilar to a
  3. 3. inCOMPLIANCE® 22 farmer’s approach to weed control or a homeowner’s struggle with rodents and insects. Compliance to the rescue! With 9/11 and related terrorist-instigated tragedies such as the 07/07 bombings in London, Western governments rapidly recalibrated their national security and law enforcement strategies. The ease with which international terrorist groups such as al-Qaeda were able to “anonymise” their funds was suddenly identified as a global security threat, and sweeping measures were demanded for addressing this threat immediately and definitively. Hence, the innocuous- sounding Watergate-era mantra “Follow the money” morphed into the increasingly invasive and sweeping (i.e. extraterritorial) policy imperatives now known as Anti-Money Laundering (AML), Know Your Client (KYC) and, most especially, Countering (or Combating) the Financing of Terrorism (CFT). On so many different levels 9/11 was a watershed moment in world history. This includes, of course, the virtual conscription and militarisation of the middle and back offices of licensed and regulated financial institutions, and the emergence of compliance as a conceptually-distinct function and area of expertise. Indeed, it would not be a distortion to assert that compliance, in macroeconomic terms, was a demand-driven function for which there was initially no supply. Specifically, the unprecedented and fundamentally innovative regulatory obligations created by the post-9/11 esprit de guerre and imposed on major global banks – eventually, on the entire financial services sector – created (or perhaps identified) a vacuum that needed to be filled; and it was filled by the compliance function. Following the 9/11 call to arms, another decade was needed to achieve full articulation and deployment of financial regulatory compliance as a comprehensive array of robust internal policies and procedures designed to mitigate assessed degrees of exposure to specifically identified regulatory (and, over time, reputational and other) risks. By the time of the 2008-2009 global financial crisis, most banks, investment firms, insurance companies and other licensed financial institutions at least understood what “global best practices” required of them in their respective markets, even if meeting such exacting standards was not a fully achieved goal in specific instances. Concentric circles of influence Led primarily by the US and UK investigative and financial regulatory authorities, North American, Western European and mature Asian global banks, securities exchanges and capital markets undertook and fulfilled a comprehensive programme aimed at ensuring the continuity and interconnectedness of domestic financial regulatory regimes for individual nations. Back when fundamental principles and metrics for robust compliance enforcement mechanisms were being promulgated by national legislative initiatives, international efforts such as the Wolfsberg Group, the Financial Action Task Force (FATF / GAFI) and the Basel Accords were fostering cross-border consensus on relevant financial regulatory standards to facilitate maximum uniformity and efficiency of multinational banking and securities market activities. It is important to understand that this process began first between and among financial services regulators and licensed financial institutions in the US, the UK, Western Europe and several mature Asian markets. The first concentric circle beyond this “inner core” consisted of the mainly contiguous large emerging market players in Latin America, Eastern Europe / Eurasia, the Middle East and Asia. Only after the gradual integration of this second concentric circle was well underway did the influence of global best practices finally reach the more far- flung jurisdictions, including many – but not all – of the offshore tax havens. Progress towards harmonising most of the world’s major, second-tier and outlying banking and financial services markets was anything but linear or uniformly successful. To the present day, for example, FATF / GAFI continues to identify (“name and shame”) so-called “high risk and non- cooperative jurisdictions”8 and builds consensus towards full implementation of global best practices within a tolerable bandwidth of local diversity. Not surprisingly, offshore tax havens have been among the most reluctant – even recalcitrant, at times – jurisdictions to import and implement robust financial regulatory compliance. Over time, the “pincers” of bottom- THE PANAMA PAPERS Figure 1: Volume of data compared to previous leaks ©Süddeutsche Zeitung, SZ.de, April 2016, reproduced with permission
  4. 4. inCOMPLIANCE® 23 up momentum – most especially, the aggressive extraterritoriality of certain national players (primarily the US and the UK) – in combination with top-down pressures exerted by a growing array of international and continental / regional organisations – including, quite recently, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters9 and its implementing mechanism, the Common Reporting Standard (CRS) – have borne tangible results throughout much of the offshore world of tax havens. The foregoing notwithstanding, one cannot afford the luxuries of naïveté or rudimentary linear thinking. The processes of multilateral (institutional) and cross-border (bilateral national) brow-beating of a steadily diminishing number of recalcitrant offshore jurisdictions into compliance with a gradually increasing minimum threshold for qualifying as having adopted global best practices are meeting with increasingly stiff resistance. This should surprise no one. As discussed previously, there are no truly reliable – much less proven – estimates of the amount of offshore wealth that exists. Certainly this “dark matter” of our global financial universe includes enough funds to coerce key persons and institutions to forbear from cutting off the Hydra’s last head. Eruption and aftermath The timing of the Panama Papers scandal was quite fortuitous and possibly instrumental in focussing global public attention on the heretofore little-noticed world of offshore tax havens. Given the interplay of disparate forces eventually coalescing on the “offshore-osphere” as an object of collective concern, the overall impact of the Panama Papers might have been blunted had this scandal erupted any earlier. As considered previously, there was nothing conceptually novel or distinctive about the Panama Papers (except for the volume of data divulged). Approaching the one-year mark of this scandal’s spectacular explosion, it seemed at first as though most of the immediate fallout would be surprisingly meagre. After the initial eruption of the offshore island’s dreaded “righteously indignant and offended” volcano, the native population, fearing the worst, took to their boats and relocated for an indefinite period to several neighbouring inhabited islands of the “intriguingly dodgy yet exclusive” archipelago... and waited. A few of the braver souls among the displaced population undertook occasional exploratory forays to their home island, where they found clear evidence of the volcano’s damage. Government investigators and an evidently large contingent of law firms and auditors had left unmistakeable traces of their ravages: the Prime Minister of Iceland had abruptly resigned from office; and the Presidents of Argentina and Russia as well as the Prime Ministers of Pakistan and (at the time) the UK all felt themselves compelled to issue blanket denials of illegal relationships with the devastated offshore island. In the aggregate, a ponderous amount of structural damage had occurred, to be sure; but with each succeeding visit, the recon teams were bringing gradually more encouraging reports back to the displaced population. But just a day or two before their offshore island was to be declared once again safe to inhabit, the natives were horror-struck to learn that an even more powerful earthquake on the Brazilian mainland had wrought far more devastation than the volcano which had originally forced them from their homes. At the time of writing, Panamanian prosecutors have arrested the founding partners of Mossack Fonseca, the firm at the centre of the Panama Papers leak. According to Kenia Porcell, Panama’s Attorney General, the decision to arrest Ramón Fonseca Mora and Jürgen Mossack was related to the Panamanian bank regulator’s seizure of FPB Bank in connection with its alleged involvement in Latin America’s largest ever corruption investigation, Lava Jato, or “Operation Car Wash”. Lava Jato is a Brazilian bribery probe involving prosecutors in numerous jurisdictions who are investigating allegations of systematic bribery of public officials by Petrobras (Petróleo Brasileiro SA), Brazil’s state-run oil company, and Odebrecht, a Brazilian- listed engineering company (the largest of its kind in Latin America). Regardless of where these investigations may ultimately lead, there seems little room for doubt that the Golden Age of the “offshore-osphere” has waned, and those who continue to make use of their “tax optimisation” features now have the burden of proving that their decisions are at least legal, if not perhaps entirely ethical. Vladimir Berezansky was one of the first foreign professionals to bring Western (US, UK, EU) regulatory compliance leadership to the Russian/CIS/ CEE financial services market. He has experience in Russia/CIS and Eastern Europe, as well as Cyprus, Switzerland and in London’s financial markets. Among his specialisations, he is a recognised expert in structured offshore Russian wealth. THE PANAMA PAPERS 1. The Miami Herald, 2 January 2017 2. See inCOMPLIANCE issue 27, p.19 3. https://en.wikipedia.org/wiki/United_States_diplomatic_cables_leak 4. https://en.wikipedia.org/wiki/Offshore_Leaks 5. https://en.wikipedia.org/wiki/Luxembourg_Leaks 6. https://en.wikipedia.org/wiki/Swiss_Leaks 7. See, e.g., https://trofire.com/2015/07/31/the-worlds-wealthy-are-hiding- up-to-32-trillion-in-offshore-accounts- 3/ 8. http://www.fatf-gafi.org/publications/high-riskandnon- cooperativejurisdictions/?hf=10&b=0&s=desc(fatf_releasedate) 9. http://www.oecd.org/tax/automatic-exchange/international-framework- for-the-crs/ 10. http://www.bbc.com/news/world-latin-america-38947440 and http:// www.comp-matters.com/article.php?id=173252#.WKdDO4VOK7U