Martin Kenney is managing partner of Martin Kenney & Co., Solicitors of the British Virgin Islands, a specialist investigative and asset recovery practice focused on multi-jurisdictional fraud and grand corruption cases.
The Panama Papers leak has been described as the biggest dump of confidential offshore company ownership data ever: 2.6 terabytes of electronic data; 11.5 million documents; 200,000-plus offshore companies. That's 10 per cent of the world's population of two million active offshore companies.
The offshore industry is complex in nature. Most commentators struggle to understand and accurately describe its purpose. As a result, many observers latch onto the word "secrecy" and spin that to mean something suspicious and corrupt. This is not the case. Only a small proportion of offshore entities are vehicles used for money laundering, fraudulent asset concealment or tax evasion.
Yes, there will always be skulduggery. Criminals will seek to manipulate the system to gain advantage. And I understand those who express moral outrage against large corporations or wealthy individuals who use offshore companies to avoid tax. But tax avoidance is entirely legal.
Of course, there is an ethical consideration when a multinational company appears to have paid less tax than the average person on the street. But it's a public-policy issue, not a legal one, unless aggressive tax planning crosses the line from avoidance to evasion.
These so-called fat cats (as the media loves to call them) employ vast numbers of the working population. Without them, their countries' unemployment figures would be depressing and their economies would suffer. Mudslinging at successful entrepreneurs will only drive them away into the waiting arms of another country.
The tax systems of developed countries have their derivation in the 1970s. The issue now is that we now have a global economy and our tax laws need to reflect this scenario more accurately. This is why large coffee-shop chains, for example, have been able to avoid taxation – legally.
Still, the aforementioned skulduggery is manifest across the globe. It includes the rapidly growing offshore services provided by Scotland. Added to this list are jurisdictions that fraud investigators see as black holes – the U.S. states of Nevada and Delaware. No investigative material is collected regarding the ownership or control of Nevada or Delaware companies, unlike offshore jurisdictions, where regulations require this material to be collected and housed. It can very quickly be seen that dodgy dealing is a worldwide problem, not limited to, say, the British Overseas Territories.
Onshore public registries of companies are held up by government as a "public listing" of both registered shareholders and directors, but not their ultimate beneficial owners (UBOs). These public databases are only as good as the information put into them. Anyone can spend a few dollars for an off-the-shelf company and insert front men as directors and shareholders. In a matter of days, you have a trading company that is effectually a sham.
I am proud to own and operate my anti-fraud law firm out of the British Virgin Islands (BVI). For some reason, every time we see stories like the Panama Papers, the BVI gets mentioned as an example of the mysterious and murky world of offshore companies.
As a practising fraud recovery lawyer, however, I can tell you that Nevada and Delaware companies are infinitely more difficult to obtain information from. So why are jurisdictions like the BVI and other Caribbean islands singled out by reporters and commentators worldwide? I submit that this is because these small islands are easier targets than U.S. entities, which will round on their accusers. The result is effectively bullying – there is no other term that better describes the browbeating these islands suffer at the hands of bigger foes.
The offshore financial services industry is the plumbing infrastructure for globalization, helping to move capital from developed to developing countries efficiently. The problem lies in those who would abuse these offshore financial services for unlawful ends.
Bigger countries need to get their own houses in order before directing criticism at the jurisdictions least able to defend themselves. Anybody can manipulate these systems if they are so minded. No amount of regulation or due diligence can fully prevent this. Liars and cheats are in the minority, but they exist.
The BVI is one of the most regulated locations worldwide. In begrudging defence of Mossack Fonseca (with whom I have crossed swords previously in disclosure litigation), the high-volume, low-fee models that company formation agents operate cannot include enhanced due-diligence checks on every user of offshore services, when operating profits are a few hundred dollars per company. Basic economics dictate that these agencies would rapidly become unviable if this was forced upon them.
So what is the answer?
One suggestion could be to increase the fees that agents charge to incorporate enhanced levels of due diligence across the board. After all, most users of companies have the resources to pay higher fees. If all offshore company formation agents had to apply the same rules for all of their customers, then better understanding and knowledge of their clientele would result. But if the customer who orders up an offshore company is a man of straw, then although they may pass the due diligence process, they will still only be a man of straw.