So what has Mossack got under its Panama Hat?

So what has Mossack got under its Panama Hat?

Mossack is a Panama-based law firm whose services include incorporating companies in offshore jurisdictions such as the British Virgin Islands. It administers offshore firms for a yearly fee. Other services include wealth management.

The OECD Supplementary Report on Panama reported:

“The 2014 Supplementary Report concluded that six of the ten essential elements were in place. Two of the essential elements were determined to be “not in place”. These were the availability of ownership and identity information (Element A.1); and the availability of accounting records (Element A.2).”

“One essential element related to Panama’s network of information exchange mechanisms with all relevant partners (Element C.2) was determined to be “in place but certain aspects of the legal implementation of the element needed improvement”.

“Another essential element concerning Panama’s ability to provide information in a timely manner (Element C.5) involves practical issues that will be assessed at a later stage.”

And it notes that:

“Panama has enacted new legislation to strengthen its anti-money laundering (AML) framework. Under the new AML legislation, resident agents are required to hold detailed records of their clients, including those of final beneficiaries. These measures help to ensure the availability of identity and ownership information on companies and private foundations. However, it appears that resident agents are not required to hold information on all shareholders and beneficiaries, but just on the natural persons that have the final control on the legal entities for whom they are acting as resident agents.”

“With respect to companies, a regulation to the new AML legislation clarified that resident agents are required to identify and verify the identity of final beneficiaries holding 25% or more of the shares of the legal entity. In any event, the new obligation imposed by the amended Commercial Code on all legal entities to keep updated share registers for nominal shares, subject to penalties for non-compliance, is sufficient to ensure the availability of ownership information with respect to shareholders where nominal shares are concerned”

But there are problems where trusts and foundations are concerned:

“Accounting requirements are not in place in Panama for entities other than companies and partnerships that carry on business in Panama. In addition, the Panamanian law does not specify the type of records and minimum retention period related to accounting documents pertaining to trusts and foundations”

It also noted that the Trust Law and Foundations Law were silent on the type of records required to be kept and their retention period, and recommended that these requirements be clarified to ensure that reliable accounting records are maintained for a five year period. This has been improved since but the report did note that:

“Foundation incorporation documents that do not contain the founder’s identity information cannot be notarised, and this is an essential requirement in order for the foundation to formally and legally exist. However, identity information about the beneficiaries is not included in the Public Registry.”

With regard to companies, there are two forms of companies in Panama: Sociedades Anónimas

(SAs or corporations) and Sociedades de Responsabilidad Limitada (SRLs).

Both SAs and SRLs are required to have a resident agent. The names and addresses of the owners of an SRL must be published in the Public Registry But SAs are the most commonly used anamanian companies by both resident and foreign investor

SAs are created by public deed which must be registered in the Public Registry. They must have a resident agent at all times who must be a lawyer admitted to practice in Panama

Panama has anti-money laundering legislation, and this has been tightened since the OECD made their initial review. These require look through on legal persons. A natural person is a human being, but holdings can be held by a trust, foundation or another company. The law states that: “in the event that the final beneficiary is a legal person, due diligence will prolong until getting to know the natural person that is the owner or controller.”

But what is not clear is how close the Panamanian regulator monitors how well this is done. In Jersey, the Financial Services Commission can seem very heavy handed, but by contrast, the Panamanian authority seems more lax.

The JFSC conducts continual and detailed reviews of compliance with the law, going into firms, examining records in detail, and making recommendations for any weakness in process or data, and will continue to ensure it is satisfied that any rectification of weakness in a regulated company are fixed. There are large sanction lists of individuals which must be checked against final beneficial owners, and any trading with these would lead to prosecution. It is not clear that the Panamanian regulator does this.

The leaked records comprise more than 11 million documents - emails, bank accounts and client records – which represent the inner workings of Mossack Fonseca for nearly forty years, from 1977 to December 2015 . They reveal the offshore holdings of individuals and companies from more than 200 countries and territories. And they suggest that the Panamanian oversight is not robust enough in its monitoring and investigation of companies like Mossack,.

As the Irish Times reported:

“They recount example after example of ethical and legal wrongdoing by some clients and provide evidence of a firm happy to act as a gatekeeper to the secrets of its clients, even those who turn out to be crooks, members of the Mafia, drug dealers, corrupt politicians and tax evaders.”

And it is interesting to note how increased regulation led to changes in the inner workings of the company Back in 1987, Mossack Fonseca made its first big move to establish a branch in the British Virgin Islands, which a few years before had passed a law that made it easy to set up offshore companies without public disclosure of owners and directors. Bearer shares in BVI companies were also a good way of keeping anonymity and have featured heavily in the reports.

When shares are bought and sold, a registered shareholder name is included on share certificate details. Bearer shares bypass this by not including the name of the holder on a physical share certificate. Incidentally, the issue of bearer shares is not permitted in Jersey companies.

But when the British Virgin Islands cracked down on bearer shares in 2005 , as the Irish Times notes, Mossack Fonseca moved that particular business to Panama. In other words, as centres of operations like BVI became better regulated, and required more compliance, Mossack seems to have shifted to jurisdictions that were less fussy.

As the Guardian reports, “over a decade, more than 600 official law enforcement requests from the BVI Financial Investigation Agency (FIA) shows that in multiple cases Mossack Fonseca had no idea for whom it was acting. Performance improved in 2015. A name was given in response to all but one of about 90 request”

The Guardian sees the BVI as been licensing the firm even though it knew it was not fulfilling its legal obligations, but it could be seen from the increased compliance with requests that the BVI was strengthening its control.

There are different narratives here, the Irish Times taking the view that a more robust compliance regime lead to Mossack leaving BVI, the Guardian seeing BVI as still being involved, despite itself reporting the rather contradictory fact that performance with requests had improved.

What we don’t know, which is standard in cases like this, is what kind of rectification programme was put in place to correct past deficiencies, and what timetable was set out to do so. Until that information is forthcoming, it is difficult to know how good the BVI regulation has been.

But there are loopholes in legislation. Mossack Fonseca often appears not to have stored information on beneficial owners. Instead it used a loophole in the legislation that allows company agents to rely on an “introducer” to carry out due diligence.

Yet it must have been having some impact, because if all jurisdictions were regulated alike, Mossack would not have started moving business away from BVI as the pressure on requests became more insistent. The Irish Times notes that Mossack began moving from BVI to Panama and Anguilla and Samoa as a result of increasingly stringent BVI regulation.

The Sydney Morning Herald reports this “As you are aware, we have been deliberately stalling the proposals from OECD countries to enter into Tax Information Exchange Agreements (TIEA)," the chief executive of the Samoa International Finance Authority, Erna Vaai, wrote to the Panama firm in June 2007.

And it noted that “While Samoa eventually signed the TIEA with Australia in 2009, in practice Australian information requests to Samoa can take more than three years to process.”

Of course we saw something similar with the French blacklisting of Jersey for delays over TIEAs which was only rectified when legislation was amended to ensure that there would not be extensive delays in the process.

The Irish Times also notes that the fall-out could be extensive:

“Although many of the operations could be deemed legal, which has been admitted by the ICIJ itself, the potential tax-evasion dealings are bound to have serious political ramifications across continents.”