The immense public service performed by the consortia of journalists who exposed the inner-workings of the Panamanian law firm Mossack Fonseca is plain to all. The thousands of stories in multiple languages revealing how M/F works with law firms and banks around the globe to help individuals hide their wealth has provided law enforcement a cornucopia of leads — as the investigations launched in France, Switzerland, South Africa, Pakistan, the United Kingdom, El Salvador, Argentina, and India attest to. Far more important than nailing a few tax cheats or crooked politicians, though, are the revelations showing how easily firms like M/F can dodge laws that supposedly bar them from helping individuals keep their wealth a secret and what changes are needed to end this legal dodge ball.
But there is a risk that, because the revelations have been dubbed the “Panama Papers,” reformers will be thrown off the scent. Panama is a small part of the story at best. The real problem lies in jurisdictions like the British Virgin Islands where, as an April 4 Guardian story shows, an obscure provision in its antimoney laundering law allows M/F and other firms like it to establish a BVI corporation without having to verify who the true, or beneficial, owner of the corporation will be. This creates an opportunity to introduce a layer of secrecy between the owner and his or her money and law enforcement authorities. A name better calculated to lead reformers in the right direction would have been the “BVI Papers” since most of the corporations M/F establishes for clients are created under the law of BVI.
An even better name still might be the “EI Papers” as it is the “EI” provision of BVI law that allows M/F to duck verifying the identity of the beneficial owners of the corporations it creates. “EI” stands for “eligible introducer,” and the best way to see how the EI provision in BVI law makes hiding money so easy is through an example. Suppose, just for the sake of illustration, Russian President Vladimir Putin was about to come into a large amount of rubles that he would rather Russian citizens and his critics abroad not know about. How would the EI provision in BVI law help him keep his wealth secret?
Putin might start the wealth-hiding process by asking someone he trusts, say a childhood friend who is now a renowned cellist, to act as his front man. The friend, for convenience call him Sergei Roldugin, would then approach a Russian bank or law firm friendly to Mr. Putin for help. That law firm or bank would then retain Mossack Fonseca to establish a corporation in Roldugin’s name in the BVI that Putin would actually own.
Roldugin could contact M/F directly, but if he did, Mossack Fonseca, which is licensed to create corporations in the BVI, would be required to ask Roldugin a series of probing questions to meet its obligations under BVI’s antimoney laundering laws: Who is he? What’s his reason for creating a BVI corporation? Where will the money he puts through the corporation come from? M/F would also have to trawl the internet for information about him and that search would almost certainly turn up his relationship with Putin. Under BVI law that would trigger further, more searching inquiries. What is his relationship with Putin? Is he planning to invest any of Putin’s money in the BVI corporation? Unless Roldugin could provide satisfactory answers to the firm’s questions, M/F would have to refuse to establish a corporation for him, or if it did, it would have to alert BVI authorities.
But BVI law allows M/F to avoid asking such pesky questions by deeming the Russian law firm or bank asking it to create Roldugin’s corporation an “eligible introducer.” If M/F decides the Russian intermediary qualifies as an eligible introducer, then BVI law allows it to assume the intermediary has asked the questions it would have to ask had Rodulgin approached it directly and that the intermediary has received satisfactory replies. For M/F to treat a law firm or bank as an eligible introducer, three conditions must be met.
First, the firm or bank must be based in a country BVI recognizes as having an effective antimoney laundering regime of its own. In the case of Russia in 2010 BVI amended its law to put it in this category. The amendment apparently was in response to a 2008 evaluation of Russia’s antimoney laundering regime by the 13 nation Eurasian Group on Combating Money Laundering (whose members, besides Russia, include Belarus, Kazakhstan, Tajikistan, Turkmenistan, and Uzbekistan). That evaluation gave Russia high marks for the vigorous enforcement of its antimoney laundering laws.
But BVI law is not wholly naïve, and before M/F can treat a Russian intermediary as an eligible introducer, it must be satisfied that the introducer is in fact obeying Russia’s antimoney laundering laws. While BVI law is vague on what M/F must do to satisfy itself, a series of tough questions posed to the introducer followed by a visit to its offices seems to be sufficient. The third condition before M/F can treat an intermediary as an eligible introducer is that it have a written agreement requiring the intermediary to tell M/F who is the beneficial owner of any corporation it asked M/F to establish.
M/F suggests, in a statement issued when the Panama Papers were released, that the vast bulk of its work is done for eligible introducers: “90% of our clientele is comprised of professional clients, such as international financial institutions as well as prominent law and accounting firms, who act as intermediaries. . . .” Hence, it is critical that when law enforcement or tax authorities ask M/F who the beneficial owner of one of its corporations is, its eligible introducers comply with their obligation to provide M/F with the information. Yet most agreements appear to be honored in the breach. The Guardian reports that in less than ten percent of the cases where law enforcement has asked M/F to name a beneficial owner has it been able to do so. Presumably this is because M/F’s eligible introducers are ignoring its requests for the information.
BVI’s Premier touts a 2015 reform to its antimoney laundering laws that he claims will plug this gap in the law. From January 1, 2016, M/F and other incorporation agents can no longer rely on introducers for beneficial ownership data. They must now keep a record themselves of the name, date of birth, residential address and nationality of beneficial owner or owners of companies they incorporate at the request of eligible introducers. But there is a hitch. As BVI’s corporate service providers have been quick to reassure clients (here and here for examples), the new law does not require incorporation agents to verify that the information eligible introducers provide them is true. Thus, in the (again hypothetical) case of the Roldugin corporation, M/F would be free to accept the representations of the Russian law firm or bank that it is Roldugin, rather than Putin, who is in fact the beneficial owner. That the law was not meant to interfere with BVI’s lucrative offshore business is suggested by the fact that incorporators are not required to review, let alone have, a copy of the beneficial owner’s passport or other identity documents. Hence in the (again purely hypothetical) case involving Putin, the Russian firm, instead of saying the beneficial owner was Roldugin, could say it is Daffy Duck so long as it provides an address (presumably Disneyland) and the duck’s date of birth and nationality (U.S.?).
It should be clear by now how eligible introducer laws like the one in the BVI make it so easy for tax cheats, corrupt politicians, drug lords, and other unsavory characters to hide their money and why it is so important they be changed. BVI and other offshore jurisdictions need to urgently reform these laws to prevent firms like M/F from passing the buck when asked for beneficial ownership data and other information about their corporate creations. They must be made responsible for verifying and holding beneficial ownership and punished severely if they do not. Otherwise, the shell games EI laws enable the worlds’ crooks to play at the expense of the common good will continue.