The so-called “Panama Papers”—the documents leaked from the Mossack Fonseca law firm by an anonymous whistleblower—have highlighted how certain corporate service providers (CSPs) are able to set up, in offshore international financial centers (IFCs), shell companies for their clients, with bank accounts and other assets then owned by the shell company, so that the identity of the ultimate beneficial owner is hidden. That secrecy enables corruption, tax evasion, money laundering, and other nefarious activity.
While the Panama Papers revelations may have done some good in calling more attention to abuses of the legal and financial system – abuses that can and should be fought – much of the prevailing discussion in the wake of the Panama Papers revelations – much of it driven by moral outrage and salacious headlines about dubious deals – has produced two significant analytical errors, one concerning the diagnosis of the problem, and the other concerning the appropriate prescription.
First, with respect to the diagnosis of the problem, the media quickly branded all the IFCs mentioned in the Panama Papers collectively as “tax havens,” despite the fact that these jurisdictions vary substantially in the quality of their regulatory regimes. All jurisdictions have a role to play in tackling financial crime, but some IFCs are way ahead of others in their standards of compliance and regulation. For example, the jurisdiction I know best – Jersey – though sometimes lumped together with other offshore IFCs, in fact already has a robust regime. Jersey has long taken a firm stance against shell companies, and has had a central beneficial ownership registry, with information on every company registered on the island, since 1989. In addition, all law firms, accountancy practices, trust and company administrators, and other CSPs are regulated and legally required to verify the identity of their clients before undertaking any business. It is a condition of their license that they must know who the ultimate owners of the company are and how those individuals generate their wealth. Indeed, as the 2014 book Global Shell Games reported, contrary to popular perception, CSPs in IFCs were less likely to engage with criminals than those working in OECD member states. In Jersey, not a single breach was recorded. It is a system that meets, and even exceeds, international standards in combating financial crime.
Indeed, the “Jersey Model” – combining a central registry with licensing and regulation of CSPs – may be a more effective model than that used in many OECD countries. In 2015, my organization, Jersey Finance, commissioned Professor Jason Sharman, one of the co-authors of Global Shall Games, to conduct an independent review of Jersey’s regulatory structure , and to compare it with other countries. Professor Sharman concluded that central registries often had a passive, archival role in receiving and filing documents, rather than an investigative or enforcement function. Licensed CSPs could effectively act as gatekeepers for a central registry, but Professor Sharman emphasized that CSPs had to be licensed (not currently the case in countries like the United States and Australia) and that authorities had to be vigilant in auditing CSPs to make sure that they were verifying identity documents appropriately. Professor Sharman concluded that neither a centralized registry nor a regulated CSP model was infallible on its own, and that the most effective way of combating financial crime was to have both – as Jersey does. Jersey’s Companies Registry actively verifies beneficial owners’ identities at the time of first registration, with the registry coordinating with licensed and regulated CSPs who ensure that beneficial ownership information is kept up to date.
Thus, the tendency, especially after the Panama Papers, to equate “offshore financial centers” with “lax regulation” is inaccurate, and obscures the extent to which at least some of these “offshore” jurisdictions are in fact leaders rather than laggards when it comes to combating the abuse of the financial system to facilitate crime.
Second, with respect to prescription, the Panama Papers revelations have intensified calls from many civil society activists and some governments to require every IFC not only to collect beneficial ownership information in a central registry, but also to make the information in this registry public. While a central beneficial ownership registry is indeed desirable, the idea that the information in that registry should be generally available to the public is misguided. What is wrong with making a central registry accessible to everyone? A few things:
- First, implementing a public register of beneficial ownership based on the premise of self-reporting is likely to be ineffective. Anyone involved in illegal activity cannot be expected to provide the authorities with accurate information, particularly if the central registry is not verifying that information.
- Second, the introduction of public registries could increase the risk of crimes such as identity theft and cyber-crime. There are also legitimate concerns that the availability of personal information would heighten the risk of kidnap for ransom.
- Third, public registries could be an unnecessary and disproportionate intrusion of an individual’s right to privacy, in tension with legal guarantees such as Article 8 of the UK’s Human Rights Act.
- Finally, with global moves towards automatic exchange of information, through US FATCA and the OECD’s Common Reporting Standard (CRS), it is not clear what added value could be obtained from a public register.
The speed with which the Panama Papers has moved from sensational and salacious headlines to proposals for international policy and legislative change, without proper analysis, has been extraordinary. It is important in this complex world that such change is supported by facts. It is a pity that, in reporting the Panama Papers, the media sought to portray the issue so simply. A pity but perhaps not surprising.