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Earlier this month, over 13 million confidential documents relating to offshore investments were released into the public domain by the International Consortium of Investigative Journalists (ICIJ).
The documentation leak, referred to as ‘The Paradise Papers’ contains documents in relation to the financial activities of hundreds of celebrities, high-net-worth individuals, politicians and even Royalty. The documents are from the Bermudan legal service provider Appleby.
This leak is the second largest of its kind, following last year’s ‘Panama Papers’ – which also involved the ICIJ collaborating with more than 380 journalists across the globe to investigate the documentation. Although this leak is not as big as The Panama Papers, it contains information about the upper elite on a scale which is unprecedented.
Tax evasion vs Tax avoidance
Financial crime compliance professionals often regard offshore financial centres as presenting an increased risk of financial crime due to the ease of creation of investment and corporate vehicles and relatively limited transparency as to their beneficial ownership. Tax evasion – the act of illegally cheating tax authorities – has long been a criminal offence, but, crucially, tax avoidance is legal. However, while this practice is legal, some commentators have queried the morality of avoiding tax. The tax liabilities avoided, could have been used by governments to help build schools, hospitals or reinvest into the economy. The lost public sector investment opportunities lead to a degree of social outrage at organisations and individuals who use tax avoidance techniques.
There are key questions for financial institutions: do they really know who the true owner of the assets is? Do they really understand the true purpose of certain structures and transactions? Following the Panama Papers, the FCA contacted a number of financial institutions to establish if the firms had links to the individuals named. The Paradise Papers leak is unlikely to diminish regulatory interest in the steps firms are taking to understand and manage their risk exposure.
What should you be doing about it?
As of 30 September, the Criminal Finances Act corporate offences related to the facilitation of domestic and overseas tax came into force. Firms must have appropriate procedures in place to prevent their staff or third parties from facilitating tax evasion. Firms must also undertake risk assessments such that senior managers can identify the exposure to the risk of their firm facilitating tax evasion and implement appropriate controls.
Firms should ensure they have considered all indicators of tax evasion risk relevant to their business, such as the placement of funds into offshore centres, the use of less transparent structures, and customers with tax residency different from their address. Firms should know which parts of their business and products or services are most susceptible to facilitating tax evasion. Firms might consider undertaking additional due diligence on transactions which carry increased tax evasion risk. Furthermore, it would be prudent to embed this into your risk assessments, policies and procedures and ensure that staff have been trained to recognise and manage the risk.
Even where a firm has satisfied itself that the risk of facilitating tax evasion is manageable in a particular situation, a firm might still choose to support particular tax avoidance schemes in order to protect their reputations. Firms should consider financial crime risk holistically as schemes which support tax avoidance can also be attractive to criminals and terrorist financiers as they seek to re-integrate illicit funds or fund terrorism.
How we can help
• Training – We can work with your firm to design a comprehensive training and assessment programme; training individuals and specialist teams to ensure a thorough understanding of the financial crime risks and controls within your firm.
• Policies and procedures – We can assess your policies and procedures are fit for purpose, and, if necessary work with you to develop your documentation based on current practice in line with regulatory expectation, and tailored to your business.
• Enterprise wide risk assessment – We can review your risk assessment and ensure that tax evasion risk is fully taken into account, if necessary we can help develop a risk assessment to ensure connections with offshore jurisdictions are adequately captured.
If you wish to discuss the content of the article further or if you have any questions, then please get in touch.
