28 Jun 2018
With this being the second anniversary of the publication of the Panama Papers (the Papers), now is an appropriate juncture to consider how three major jurisdictions and the EU reacted to the scandal.
Of interest is the approach and achievements – if any – of some of Europe’s top regulators, such as the United Kingdom’s Financial Conduct Authority (FCA) and Germany’s BaFin. Also of strong interest is the Swiss Financial Market Supervisory Authority (Finma), the Swiss regulator.
It is possible that banks in these and other important European financial and offshore hubs were entangled in the dark world of corporate secrecy or financial crime presented in the Papers.
Preliminary reportage from the Papers showed that over 500 banks, including their subsidiaries, registered almost 15,600 shell companies with Mossack Fonseca, the Panama-based law firm which was central to the scandal but has now shut down.
Indeed, some of the main banks that requested the most offshore clients include top European banks. Hence, it is worth assessing what the relevant watchdogs did about the crisis.
The Papers scandal goes back to April 2016, when various newspapers around the world simultaneously published stories based on a leak of 11.5 million documents originating from Mossack Fonseca, a law firm (ranked fourth) in Panama, which covered the creation and ongoing administration of 214,000 offshore companies as well as details of the directors and shareholders of these companies.
Directly named in the documents were two heads of state, five former prime ministers and sixty one relatives and associates of presidents, kings and prime ministers.
Following publication, both the Prime Minister of Iceland, Sigmunder Davio Gunnlaugsson and his counterpart in Pakistan, Nawaz Sharif, resigned due to close relatives involvement in some of these offshore companies.
The latest estimate is that globally tax authorities have received in excess of $500 million due to the publication of the Papers.
With the UK claiming to be the capital of the world’s international financial services industry, the reaction of the UK authorities is worth examining, particularly as 1,924 UK intermediaries such as banks, lawyers and accountants were named in the Papers.
Within a week of publication of the Papers, the UK government established a task force comprising of HMRC, National Crime Agency (NCA) and the Financial Conduct Authority (FCA) staff.
In April 2016, the FCA wrote to over 60 financial firms asking them about any involvement with the Panama Papers.
What became of this? The FCA is yet to say.
To the best of my knowledge it took no action against any of the financial firms it wrote to.
Before publishing this article, KYC360 contacted the FCA, asking what became of its letter to the scores of firms, but it did not respond.
By November 2016, it was announced that twenty two individuals and eight companies were being actively investigated because of the Papers, whilst “hundreds more” were under detailed review.
Nine professional enablers of economic crime were identified.
Last month, it emerged the Solicitors Regulation Authority had decided to take action against a City-based lawyer, saying he failed to comply with anti-money laundering rules in a case linked to the Panama Papers and a wealthy politically-connected family.
Additionally, links to Panama of some high net worth individuals were being investigated and links to eight current investigations by the Serious Fraud Office were discovered.
HMRC have also announced that it expected to receive £100 million as a result of their Panama Papers investigations.
However, due to the strict policy of taxpayer confidentiality operated by HMRC, details of individual cases will not come into the public domain unless a taxpayer chooses to itigate against HMRC in a tax tribunal or in the High Court.
Since the publication of the Papers, the UK authorities have acquired greater powers to attack tax evasion, namely the new corporate offence of “failing to prevent the facilitation of tax evasion” which came into effect on 30 September 2017, although the original proposals for this offence predated the publication of the Papers.
As the new offence does not have retrospective application, UK professional enablers who were somehow mentioned in the Papers cannot be prosecuted under this new offence.
Nevertheless, some have predicted that the FCA may elect to subject their regulated firms to regulatory sanctions of failing to prevent the facilitation of tax evasion as the standard of proof required to establish a breach of FCA Rules is lower than the standard required to obtain a criminal conviction.
Readers will recall that the FSA took regulatory action against firms for failing to prevent bribery well in advance of the Parliamentary Bill that eventually became the 2010 Bribery Act.
It was estimated that some £170 billion worth of UK real estate is owned by offshore entities and that almost 10% of the 31,000 offshore companies that own UK land and buildings were linked to Mossack Fonseca.
Apart from making it more expensive for a non EU company to own UK property through the tax system compared to a EU company, the UK government recently announced that, as from 2021, the beneficial owners of all foreign entities that own or control UK property will have to be notified to the UK government, who, in turn, will publish these details.
The FCA did not respond to requests for a comment.
A spokesman for HMRC referred to a 2017 statement, outlining progress it had made, including that: “To date, the work of the Panama Papers Taskforce has led to civil and criminal investigations into 66 individuals for suspected tax evasion, including high net worth individuals. As part of this HMRC has made four arrests; and carried out six interviews under caution.”
The Swiss authorities soon launched their own investigation following publication of the Papers.
It was soon revealed that a Swiss unit of HSBC had links to 733 offshore foundations named in the Papers, whilst, similarly, a UBS unit had links to 579 entities.
The local regulator Finma announced earlier this year that it had concluded its investigations into 30 local banks.
Some were required to improve their AML systems and controls.
However, Gazprombank Switzerland would be the subject of further action.
The apparent lack of regulatory action against Swiss institutions may appear to many to be somewhat surprising given that 80 Swiss banks were subject to a non-prosecution agreement with the US Department of Justice for actively knowing and encouraging some US taxpayers to illegally hide accounts and assets from the Internal Revenue Service, in a sustained course of action that, in some cases, went back to the 1980s and beyond.
One may wonder whether these 80 Swiss banks had a different policy of “tax efficiency” for US taxpayer customers compared to those with named in the Papers.
It was largely because of this action by Swiss institutions that the US introduced FATCA which required financial institutions around the world to automatically report financial details of their customers who had US tax liabilities.
The OECD soon followed with their Common Reporting Standard proposals which broadly adopts the FATCA proposals on a more widespread basis around the world.
Asked to comment, a spokesman for Swiss regulator FINMA explained that while it does have the power to take enforcement action, this does not include issuing bank fines.
It also pointed to its Gazprombank media release, in particular, stating that: “The prevention of money laundering is a key priority for FINMA.
“Over recent years, FINMA has issued on average more than ten enforcement rulings a year imposing sanctions relating to money laundering and has taken a range of measures, including the dissolution of a bank and a licence withdrawal from a fiduciary company.”
Meanwhile, the Office of the Attorney General of Switzerland issued a statement regarding the Panama Papers, which said (translated from French): “The Public Ministry of the Confederation (MPC) has not been able to establish in practice in its field of competence suspicions of a potential behaviour contrary to criminal law.
“In the absence of such suspicions, the MPC has therefore not proceeded to any further opening of criminal proceedings directly related to the media case mentioned. In general, the MPC maintains a media watch and analyzes the documents and information provided to it.”
Over the border in Germany, Europe’s largest economy, the local financial regulator BaFin soon announced an investigation into the eleven German banks named when the Papers were published.
As with England, very little was said of banks being found to be guilty, fined or prosecuted.
Germany did speak about taking action regarding tackling money laundering and tax evasion, about being “active” on the Panama Papers issue, but seemed rather mum on specific prosecutions of banks.
In January this year, the Germans announced that they found no evidence of substantial breaches of anti-money laundering laws by any of the banks in question.
BaFin president Felix Hufeld pondered how such banks could allow themselves to be used for tax evasion, whilst noting the institutions had not acted illegally.
Such concerns may be heightened where a German bank, such as Commerzbank, had received a bailout from the Federal Government during the Financial Crisis.
There would be widespread public outrage should a German bank which received a bailout from the government, whilst assisting their customers illegally evade their German taxes.
He also wondered how these banks could monitor whether appropriate AML systems and controls were implemented by Mossack Fonseca.
Asked to respond on the German approach to the Panama Papers regarding banks, a BaFin spokesman pointed to the same comments made by BaFin president Hufeld.
Germany-based Markus Meinzer, who is Tax Justice Network’s Director, Financial Secrecy, said:
“As far as I am aware, there have been few and timid regulatory actions and responses by German banking supervisor Bafin. They outsourced checking of 11 internationally active German banks in response to Panama Papers but, according to Bafin president Felix Hufeld, could not find major faults. According to the Bafin, everything is fine.
“Furthermore, as of April 2018, there is not a single notice of any reportable penalties issued by BAFIN – the regulator appears not even to have created the webspace to publish those infringements, despite its obligation under the anti-money laundering law.
“A further major problem is that lawyers, notaries and real estate agents, among others, are not subject to any effective supervision despite them being obliged entities.
“Above all, we are lacking any objective and robust evaluation of the responses by various agencies to the Panama Papers, including by tax administrations, public prosecutors and courts, and regulators.”
BaFin and the German Finance Ministry responded to Meinzer’s remarks.
A BaFin spokesman stated: “Mr Hufeld said: “Sometimes a certain behavior may be legal according to the current legal situation, but illegitimate by common perception. Panama Papers may be a case of that. […] It appears that none of the eleven institutions that participated in such endeavors have been violating AML regulations to a considerable degree. […] Whether or not tax evasion has taken place was not at the center of BaFin’s investigation because the competence for such questions lies with other authorities. […]”
“BaFin never said anything along the lines of “everything is fine”.
“According to article 57 of the Money Laundering Act, incontestable fines must be published. Firstly, at this point there may or may not be fines that are not final yet. Secondly, fines are far from the only supervisory measures in BaFin’s repertoire. There may or may not have been other supervisory measures that are not subject to publication requirements.”
The German Ministry of Finance added: “Lawyers, notaries and real estate agents are not only obliged entities according to section 2 of the German Money Laundering Act. They are also subject to a supervision by the authorities listed in section 50 of the Act. Supervisory powers of the authorities are specified in section 51 of the Act.
“Questions regarding specific supervisory activities have to be addressed to the supervisory authorities listed in section 50 of the Act, be it self-regulatory bodies or authorities of the German Länder.
“German authorities have been very active in the Panama Papers affair. The federal government followed-up by a dedicated ten point action plan and corresponding legislative action. Authorities in charge of the investigation and prosecution of criminal offences continue their investigations in a number of cases.”
At EU level, the publication of the Papers had a significant effect.
The European Commission (the Commission) proposed in July 2016 a further strengthening of the EU Fourth Anti-Money Laundering Directive (4AMLD) which was scheduled for implementation in June 2017 across the EU.
In this measure, known as the Fifth EU Anti-Money Laundering Directive (5AMLD), the Commission proposed that beneficial ownership details of corporates must be made available to the public, whereas as general publication was optional under 4AMLD.
Beneficial ownership details of trusts and similar entities should be collated in a central register to be made available to national authorities, those institutions subject to AML regulations such as banks and lawyers and to those with a “legitimate interest” in obtaining such details.
4AMLD mandated beneficial ownership details should be collected by the trustees or trust administrator, but Member States were not required to establish central registers of such details.
Finally, the Commission proposed that where a regulated institution becomes aware of a discrepancy in the central beneficial ownership register, for example, where it has not been kept up to date, the institution must report the relevant details to the authorities.
Political agreement between the Commission, the Member States’ governments and the European Parliament was reached in December 2017.
It is expected that an agreed legislative text including these measures will be approved by the Summer of 2018 with an implementation date of January 2020.
In another measure, the Commission announced in December 2017 that 17 jurisdictions were included in a tax haven blacklist with another 47 territories, including the British Overseas Territories and Crown Dependencies, being placed on a watch list.
The Commission deemed that the countries on the list were not sufficiently committed to transfer tax information to Member States.
The Commission said it would deny the blacklisted countries access to EU funds, except for aid development, and called on Member States to individually impose dissuasive sanctions on those jurisdictions.
Following commitments to improve their tax transparency, eight countries were soon removed from the list.
However, it is likely that the European Parliament will call for decisive action via the creation of the TAXE 3 Committee, which will continue the work of the PANA Committee established shortly after the publication of the Papers and which investigated money laundering, tax evasion and tax avoidance.
As we now reflect on the investigations and statements from the regulators, there seems to be no credible evidence that any major British, Swiss or German financial institution was linked to significant tax evasion or money laundering.
Is that a fair assessment? Well, that is what the regulators seem to be saying.
However, public concern following the publication of the Papers is another manifestation of the key role of the media in highlighting tax issues and whether individuals and organisations have been paying their fair share of tax (whatever that may be!).
As a result, there continues to be political and legislative action to clamp down on tax evasion and to restrict aggressive tax planning.
About the author: Denis O’Connor is both a Fellow of the Institute of Chartered Accountants in England & Wales and the Chartered Institute of Securities and Investment. He was a member of the British Bankers’ Association Money Laundering Committee from 2003 -10; and a member of the JMLSG’s Board and Editorial Panel between 2010 and 2016.
He has been a frequent speaker at industry conferences on financial crime issues, both in the UK and abroad.
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