The high-profile Panama Papers leak is expected to put pressure on financial institutions as they will be increasingly required to ask pertinent questions particularly in ascertaining ultimate beneficial ownership when clients set up offshore vehicles. This may mean more onerous requirements on client onboarding and customer due diligence processes in the future, lawyers said.
The papers contain information about more than 214,000 offshore companies listed by Panama-based corporate service provider Mossack Fonseca, and have revealed how wealthy individuals and public officials have hidden their assets from public scrutiny through offshore vehicles.
Wider Implications of the Leak
The wider implications of the leak, however, have revolved around issues such as tax evasion, bribery, corruption, money laundering and terrorist financing. The challenge for law enforcers and regulators lies in how to stamp out such crimes when they are "buried beneath layers of secrecy", according to the International Consortium of Investigative Journalists ("ICIJ"), which received the leaked documents from German newspaper Süddeutsche Zeitung, to which the Panama documents were made available.
Hard to Trace Real Shareholders
The use of offshore vehicles has become a controversial topic in recent years particularly in light of how individuals and companies have used such structures to hide their wealth or evade taxes. Such offshore vehicles are either in the form of an offshore company or through a trust structure, which according to Yap Wai Ming, partner at Morgan Lewis Stamford in Singapore, makes the tracing of the real shareholders very difficult.
Yap said it is not illegal to set up offshore entities in jurisdictions with low or no tax regime, often considered as tax haven jurisdictions. It becomes tricky, however, when some of the offshore companies act as nominees for the real shareholders.
"Very often you don't know who the real beneficiary shareholders are and the trustees have no obligations to tell you who they hold the shares for. Companies perform such services on the hallmark of confidentiality just like banks. Such confidentiality is not unique to offshore companies," Yap said.
Asking Pertinent Questions about Beneficial Ownership
Nizam Ismail, partner at RHTLaw Taylor Wessing in Singapore, said financial institutions should be encouraged to ask some very pertinent questions about beneficial ownership and controls even if the use offshore vehicle is not illegal. Speaking in the context of Singapore, he said the Monetary Authority of Singapore ("MAS") has already prescribed such requirements, which are set out in the AML/CFT regulations following amendments made in April 2015. Singapore's AML/CFT regulations have put a strong focus on areas such as identifying beneficial owners or persons controlling legal entities, conducting due diligence on trustees, beneficiaries, settlors and protectors of a trust.
"I think that the Panama Papers case will put the spotlight on financial institutions which have clients using offshore vehicles, to see if they have demonstrated compliance with MAS AML/CFT regulations," he said.
Not Just a Tax Issue
Yap said using offshore vehicles is not just about tax evasion; it becomes an issue when the beneficial owners involved politicians and wealthy individuals who used such legitimate structures to avoid detection.
"Some politicians may have abused the structure and use it to hold ill-gotten gains. Unexplained wealth are held via these offshore vehicles which provide a veil of secrecy and are hidden away from prying eyes of the tax investigators," he said.
Ismail said if offshore vehicles were used deliberately to introduce opacity so as to cloak the proceeds of crime, hide beneficial ownership, or to further a criminal intent, financial institutions could be liable if they fail to conduct appropriate customer due diligence.
"Given the high visibility and profile of the Panama Papers leaks, financial institutions will probably do another round of screenings around the names of entities and individuals on the list. It is not surprising if they are already being requested by regulators to do so," he said.
No Opportunity for Arbitrage
Keith Pogson, senior partner, Asia-Pacific financial services at EY in Hong Kong, said that while regulators around the world have increasingly tightened KYC and beneficial ownership requirements, banks have also been consistent in putting in place controls to ensure compliance with AML and KYC requirements.
"A lot of banks have been reviewing their portfolios in the last couple of years as they want to be seen as being in the forefront of complying with AML and KYC requirements," he said.
Pogson said most of the large international banks have a set of common standards for client onboarding and client acceptance, and as such there is no arbitrage opportunity because they have to follow the highest standards in all the countries in which they operate.
Panama Papers Leak will not Lead to Tighter Regulations
Ismail did not think that the Panama Papers leak would necessarily trigger tighter regulations because regulators had already implemented their requirements as part of regulatory reviews.
"But it will put in focus the implementation of AML/CFT regulations by financial institutions," he said.
Pogson said tax and banking regulators have carried out a considerable amount of work to clamp down on activities related to money laundering, terrorist financing and tax evasion.
"The [Organisation for Economic Cooperation and Development] and other bodies have done [an] enormous amount of work to deal with the issues since the last financial crisis. We now have [the US] Foreign Account Tax Compliance Act, the Common Reporting Standards, AML/CFT KYC, and sanctions regimes. The environment [makes it] very difficult for people to avoid tax offshore," he said.
MAS: Offshore Vehicles not Illegal
In Singapore, the Ministry of Finance and MAS have since made known their stance about the use of offshore vehicles following the Panama Papers leak. The Ministry of Finance and MAS said although offshore vehicles were not illegal per se, they would not hesitate to take firm action if evidence of wrongdoing by any individual or entity were to come to light.
"Businesses and individuals may set up offshore vehicles for a variety of legitimate commercial or other reasons. However, it is important that offshore vehicles are not used for illicit purposes," the MOF and MAS said jointly in response to media queries in early April.
The authorities in Singapore are now reviewing information being reported in connection with the Panama papers and carrying out the necessary checks, according to the MOF and MAS.