The Panama Papers: a round-up

The biggest international tax story of recent years broke just as we went to press last month. Thanks to the efforts of hackers some 11.5m documents belonging to the Panamanian law firm Mossack Fonseca were obtained by the German newspaper Sueddeutsche Zeitung and shared with the International Consortium of Investigative Journalists (ICIJ). The ICIJ then worked with journalists from 107 media organisations in 76 countries, including UK newspaper the Guardian, to analyse the documents over a year. The documents show how Mossack Fonseca’s clients were able to launder money, avoid sanctions and evade tax.

Although the law firm’s main business is that of establishing offshore structures they offered other services that allowed beneficial owners of companies and beneficiaries/settlors of trusts to remain anonymous. Their clients were often well known international personalities including 12 current or former heads of state and government (including dictators accused of looting their own countries). More than 60 relatives and associates of heads of state and other politicians have also been implicated. The files reveal a suspected billion-dollar money-laundering ring involving close associates of Russia’s President, Vladimir Putin. Also mentioned are the brother-in-law of China’s President Xi Jinping; Ukraine President Petro Poroshenko; Argentina President Mauricio Macri; the late father of UK Prime Minister David Cameron and three of the four children of Pakistan’s Prime Minister Nawaz Sharif. The documents show that Iceland’s Prime Minister, Sigmundur Gunnlaugsson, had an undeclared interest linked to his wife’s wealth. He has now resigned.

There can be little doubt that in due course HMRC will receive full access to the 11.5m documents or, at a minimum, to those of interest to the UK tax authorities. A multi-agency task force has been announced and the Financial Conduct Authority has already contacted 20 firms with ties to Mossack Fonseca requiring them to carry out investigations and report back. There is now even greater pressure on politicians in Britain to be taking action to oppose offshore entities being used to avoid tax and launder money. This is embarrassing for the UK government. The fact is many of the world’s best known (and best regulated) offshore financial centres are British dependencies or overseas territories. The UK has long connived at or actively supported their activities as offshore financial centres, both to provide a source of revenue and to funnel business back to the City of London.

What information will HMRC end up receiving? Almost certainly the names and addresses of UK resident beneficial owners or part owners of offshore companies, UK resident settlors of foreign trusts and UK resident beneficiaries of foreign trusts and other offshore structures. Additionally it looks as if they may receive all sorts of subsidiary information such details of offshore assets and bank accounts.

What will HMRC do with the data it obtains will to a large extent depend on the taxpayer’s compliance history. Unfortunately, HMRC is likely to put the worst possible interpretation on any data it receives. In other words, even if there are innocent and legal explanations the existence of any sort of offshore structure may be considered suspicious regardless of its purpose or use.

The news is not all bad, however. At least all of information obtained by HMRC is in the public domain so that taxpayers know exactly what the authorities know. Moreover, it has to be remembered that in the past HMRC has not had that much success attempting to raise money and/or prosecute taxpayers with offshore connections. When the so-called Lagarde List, containing details of HSBC’s Swiss private bank clients, was obtained almost no prosecutions followed and a mere £135m of additional revenue was raised. Of almost 9,000 UK tax residents whose details were shared with HMRC in 2010, only one has been convicted of tax evasion. It is also questionable whether leaked information will stand up in court. Even where tax fraud is suspected, HMRC can only pursue taxpayers for unpaid tax going back up to 20 years.

From 2017, HMRC will start to be sent details of UK taxpayers’ assets, bank accounts, companies and trusts from more than 90 jurisdictions, including the likes of the Channel Islands, British Overseas Territories and Switzerland. In anticipation of this and the availability of disclosure facilities, amnesties and other opportunities to regularize tax affairs many of those mentioned in the Panama Papers may no longer have anything to fear. This said if you have previously had a COP9 enquiry and not disclosed a Panama interest you should expect a fraud investigation (civil or criminal). The same is true if you used voluntary disclosure facilities such as the Liechtenstein disclosure facility (LDF), but failed to disclose all offshore assets.

One small advantage tax payers have is that all of the information obtained by HMRC will be in the public domain. Taxpayers and their advisers will, at least, know what data the authorities have.

The man or woman who hacked into the Mossack Fonseca computer and downloaded the 11.5 million documents released a statement at the beginning of this month. Tellingly, a large part of the statement was to do not with the data he had stolen but with what happens to those who steal it:

I have watched as one after another, whistleblowers and activists in the United States and Europe have had their lives destroyed by the circumstances they find themselves in after shining a light on obvious wrongdoing. Edward Snowden is stranded in Moscow, exiled due to the Obama administration’s decision to prosecute him under the Espionage Act. For his revelations about the NSA, he deserves a hero’s welcome and a substantial prize, not banishment. Bradley Birkenfeld was awarded millions for his information concerning Swiss bank UBS-and was still given a prison sentence by the Justice Department. Antoine Deltour is presently on trial for providing journalists with information about how Luxembourg granted secret “sweetheart” tax deals to multi-national corporations, effectively stealing billions in tax revenues from its neighbour countries. And there are plenty more examples.

The 1800-word statement (entitled The Revolution Will Be Digitized gives justification for the leak, saying that ‘income inequality is one of the defining issues of our time’ and claims that government authorities need to do more to address it. It also hints at more revelations to come…