Most people accept (some more reluctantly than others) that those with a “need to know” include tax authorities, such as HMRC in the UK. Even in this respect, however, privacy is a key concern. Historically, different schedules of a man’s income (independent taxation for women not being introduced until 1988) were sent to different tax offices such that no one office would have a full picture of a man’s financial position. Today, taxpayers’ rights to privacy in respect of information provided to HMRC are enshrined in legislation (Commissioners for Revenue and Customs Act 2005, s.18 – a duty HMRC do not always fully understand, see R (oao Ingenious Media Holdings plc) v. HMRC  UKSC 54).
Yet against this backdrop of concern for one’s own privacy and reluctance to make direct enquiries as to others’ financial affairs there is a burning desire to know “what’s really going on?”. What is it that they don’t want me to know?
It is in that context that the “Panama Paper” leaks (deluge would be a more fitting description) occurred in 2015. 11.5 million documents from Panamanian law firm Mossack Fonseca were provided to the International Consortium of Investigative Journalists, and onwards to one hundred or so media outlets.
The essence of what those papers revealed is that numerous high profile names were linked in one way or another to offshore companies (Panamanian, BVI). Furthermore, the law firm would provide nominee directors and shareholders, thereby allowing the true beneficial owner’s identity to remain hidden.
On its own, there’s nothing wrong with such a structure, but it does invite the question: why do you need it? For some, perhaps many, it was an innocent desire for complete privacy - the same desire that you or I may feel. But whereas there is minimal interest in my financial affairs (besides one persistent Nigerian prince), the same is not true of the rich and the famous. In those circumstances such offshore structures may seem a logical, if extreme, measure.
Privacy, however, is a double edged sword. It can be used for both legitimate and illegitimate purposes, with shades of grey in between. Within days of their release, the Panama Papers ensnared the Prime Ministers of Iceland (resigned after failing to disclose millions of dollars of bonds in collapsed banks owned through an offshore company) and Pakistan (failing to disclose that his children owned offshore companies that owned homes in London). At the more egregious end of the spectrum, it appears that Mossack Fonseca companies were used to pay bribes, evade tax and launder the proceeds of crime. Indeed, the eponymous owners of Mossack Fonseca are currently under arrest on suspicion of facilitating payment of bribes to politicians and officials in Brazil (Mr Mossack and Mr Fonseca deny any wrongdoing).
Once the excitement of the discovery fades, there are broadly three approaches one could take. First, one could decide that privacy is paramount and nothing needs to change. In this system, one would rely on the unpredictable and uncontrollable activities of leakers to uncover what lies beneath. Few appear to support this approach.
Second, at the other end, one could go for absolute transparency. Each country would maintain and make accessible to the public full registers of beneficial ownership of all legal persons. Whilst this would satisfy many people’s curiosity and no doubt produce a regular stream of news articles, it does raise the question “why do I need to know that?”. You don’t need to know your neighbours bank balance, so why do you need to know if he/she owns a company with a particular balance sheet? Why would the answer change if he/she happened to be rich or famous?
The middle ground, and third option, therefore, is absolute transparency between national crime and tax authorities. They, after all, are the ones who really need to know.
This, in fact, is the current state of play in many respects. The G20 reaffirmed its commitment to the full implementation of the Financial Action Task Force standards on transparency and beneficial ownership of legal persons and legal arrangements in April 2016. Recommendation 24 requires countries to ensure that “there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities”.
A practical consequence of the push towards greater transparency has been the agreements relating to the automatic exchange of information for tax purposes. 101 jurisdictions have presently committed themselves to automatic information exchange with each other, including may “offshore” centres such as BVI, Cayman Islands and Panama either presently or in the next year.
In terms specifically of beneficial ownership, France, Germany, Italy, Spain and the UK have all committed to greater international exchange of beneficial ownership information. The UK, for its part, is in the process of implementing a register of beneficial trust interests (SI 2017/692), has abolished bearer shares in companies and has made Companies House records accessible to all.
The pressure created by leaks such as the Panama Papers is pushing other jurisdictions in the same direction. It would be unfair, however, to group all “offshore” jurisdictions in a single category. Jersey, for instance, has had a register of beneficial ownership since 1989.
Useful as all this no doubt is or will be, the people with their fingers closest to the pulse of what is really going on are usually the professional advisers. All manner of financial crimes can go undetected with the complicity or indifference of lawyers, accountants and tax advisers. A strong professional ethics code backed up by effective sanctions on those who fail to comply with their money laundering obligations is an essential corollary.
The perpetrator/hero (as fits your sensibilities) of the leak remains anonymous, fearing for his safety. He released an explanation for his actions entitled “The Revolution Will Be Digitized” justifying it on the basis of “income inequality”. The €5m Euros apparently paid by the German authorities for the Panama Papers will, perhaps, mean that one small slice of income inequality has been addressed.
Michael Firth is a barrister at Gray’s Inn Tax Chambers