A tide of financial transparency is sweeping across the world. Swimming against it is folly; it will have severe reputational and financial consequences
The revelations from the recent Panama Papers leaks continue to make headlines around the world. The leaks have laid bare the private affairs of high-profile politicians, celebrities, and sports personalities from around the world.
The media have been careful (no doubt for reasons of legal liability) to point out that offshore entities are often used for legitimate purposes. This will be of little consolation for the tens of thousands of lower-profile Mossack Fonseca clients who will have their personal data released into the public domain in early May, as the International Consortium of Investigative Journalists has promised to do.
The large majority of Mossack Fonseca clients would not have suspected their offshore registration agent was also being used by dictators, oligarchs and politically exposed persons. These clients now face reputational, financial and emotional harm by association, even if their structures were established for legitimate purposes.
The fallout from the Panama Papers gives rise to important considerations for UK-based practitioners who advise wealthy international clients. UK practitioners may be at risk of criticism if they refer clients to offshore service providers whose business practises are later revealed to fall short of accepted industry standards. Already, several UK banks and law firms are being investigated by their respective regulatory bodies over their historic links to Mossack Fonseca.
First and foremost, practitioners and clients should be undertaking thorough due diligence on current or prospective offshore service providers. Practitioners and clients should seek out well-regulated trustees with a clear track record of compliance with tax and anti-money laundering laws. Any previous adverse attention from regulatory bodies should raise clear red flags.
The size of the offshore service provider should be considered. Larger operators may (at least in theory) have superior data security, but their size may also mean they are a bigger target for data theft. Larger and more high-profile firms may also be at increased risk of having undesirable individuals within their client base. Clearly, legitimate clients may risk being tarred with the same brush in the event of adverse publicity. As a result, it is possible that the Panama Papers revelations could lead to increased business for discerning boutiques at the expense of larger offshore service providers.
The choice of jurisdiction for offshore structuring should also be carefully considered. Jurisdictions such as the BVI, Cayman Islands and, of course, Panama have (rightly or wrongly) suffered heavy reputational damage in recent years.
With some of these jurisdictions at risk of "blacklisting" in the wake of the Panama Papers scandal, it is possible clients will increasingly look to "mid-shore" and even onshore jurisdictions in future. Hong Kong, Singapore, and New Zealand all offer potential wealth and business structuring solutions for international clients without the same stigma attached to traditional offshore centres.
For UK or European-centric clients, jurisdictions such as Malta, Madeira, Cyprus and Luxembourg offer low tax rates as well as the benefits of EU membership. The UK itself is becoming increasingly attractive as a place to incorporate with the Corporation Tax rate falling to 17 per cent in stages over the next 4 years.
The public discourse regarding tax planning by large corporations and wealthy individuals is rapidly changing. Practitioners and clients now need to consider how tax planning may be perceived by the wider public in addition to simply considering the application of the letter of the law.
Above all, practitioners and clients need to be aware that the world is moving towards an age of complete transparency. The Common Reporting Standard looms on the horizon from 2017 and the UK continues to push forwards with transparency reforms such as the recent beneficial ownership sharing announcements with the Crown Dependencies and Overseas Territories. In this environment, practitioners and clients need to seek out sustainable solutions from reputable service providers or risk severe consequences.
Mark Davies is managing director of Mark Davies and Associates