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The leaky story so far
By D P Sengupta
Dec 27, 2017

Journalists, particularly in the West, are playing a very important part in the unmasking of the role of tax havens, tax consultants and accountancy firms in the global tax evasion and tax avoidance industry. In a way, the investigative reports in some important papers like the Guardian, New York Times, Bloomberg, and The Times are also responsible for the undertaking of the now 5 yearlong BEPS project by simplifying the arcane world of international tax and bringing the same to the notice of the lay public.

The International Consortium of Investigative Journalists (ICIJ) is also regularly releasing a trove of documents that show shining light on the working of the Law Firms and other agents of the avoidance industry. The latest is the Paradise Papers, this was preceded by Bahama Papers in 2016 and Panama Papers in 2015.

ICIJ is a remarkable organization. As explained by Gerard Ryle, Director, ICIJ, normally journalists are protective of their sources and would like to keep the news to themselves. But, in the presence of massive data leaks involving jurisdictions around the world, this is no longer a viable model and hence ICIJ decided to do the exact opposite, i.e. share the data with others. According to its website, ICIJ was formed in the year 1997 by American journalist Chuck Lewis. In 2017, it became an independent news organisation. It focusses on cross-border crime, corruption and accountability of power and is a global network of more than 200 journalists who collaborate on investigative stories in 70 countries. The journalists carry on their own investigations before releasing the materials that some whistle-blowers might have leaked to one or the other of the members of the consortium.

Both the Panama Papers and Paradise papers were initially accessed by the German Newspaper Süd- Deutsche Zeitung, which then shared the contents with ICIJ that in turn shared the data with other news organisations around the world.

Although Paradise Papers (2017) and Panama Papers (2015) are the most well-known leaks, in between in the year 2016, ICIJ had also released the Bahama Papers. Here the investigations were done by the ICIJ journalists themselves after a computer hard drive with corporate data and personal information and e-mails arrived in their mail. Incidentally, the ICIJ website has a tab – leak to us.

Besides, in 2015, ICIJ had also released the information initially obtained by the French Newspaper Le Monde containing a tax authority data of more than 100000 individuals and legal entities from more than 200 countries. These were called the Swiss leaks and contain information about individuals and corporates having accounts in HSBC, Geneva. The Indian Express that was part of the process then released a list of top 100 Indian names. []. This was the information that the French authorities had passed on to the Indian authorities earlier and there was a lot of speculation about the names.

The Bahama Papers are also unique in that the entire corporate registry of the Bahamas was made available to the public thereby giving a free online searchable database of offshore companies. Hopefully investigators and researchers in India will make use of the same.

The work of these real investigative journalists that explore the world of offshore finance is often risky. It has always been believed that offshore jurisdictions are used not only by corporates and HNIs but also by crime lords and there is intermingling amongst these. One Maltese Journalist, Ms Daphne Caruana Galizia whose blogs were more popular than the mainstream newspapers in Malta was conducting an investigation involving the current Maltese Prime Minister and two of his aides following the Panama Papers leaks. Apparently there were allegations of payments for sale of Passports and payoffs from the government of Azerbaijan.

Just a few minutes after posting her final blog, on the 19th of November 2017, her car was blown up to smithereens near her home. The last line of her final blog was: "There are crooks everywhere you look now. The situation is desperate." Her son Mathew Caruana Galizia is also a journalist and programmer with the ICIJ. This of course is the ultimate sacrifice that one can think of in the search of truth. But other journalists associated with ICIJ have also faced harassments, law suits not only in dictatorial countries but also in countries that otherwise have good human rights record.

Coming to the source of the leaks of the Panama Papers, two journalists of the German newspaper- Süd- Deutsche Zeitung- Bastian Obermayer and Frederik Obermaier initially accessed the same. They have since published a book- The Panama Papers - ( Breaking the story of how the rich & Powerful Hide their Money ). It is a fascinating account of how they accessed and developed the information and collaborated with ICIJ. Bastain Obermayer describes how he first got the lead. He writes that one night at around 10 PM he got a message:

"[John doe]: Hello.

This is John doe.

Interested in data? I am happy to share."

This was the trigger for the entire episode. The condition laid down by the informant was that they will chat only on encrypted channels and there will be no meetings ever. At one point, Obermayer asks him why he was doing this and he answered: "I want you to report on the material and to make these crimes public. This story could rival the Snowden documents but you're publishing in German. You need to partner with the New York Times or a similar calibre English paper." Thus began the collaboration with ICIJ and the resulting story is a fascinating read for any investigative journalist. As explained by Obermayer, the informant was not interested in money and his newspaper does not pay for news. He just wanted to expose the scale of injustice that the documents would reveal.

The leak related to the internal documents of the law firm Mossack Fonseka (MF). Any one ranging from criminals to investors, bribe givers or takers, who wants to hide his identity would contact the law firm via an intermediary- a bank, a lawyer or an asset manager. The product is an of the shelf offshore company. Mossack Fonseka used to offer firms in about twenty jurisdictions, mainly in BVI and Panama but also in the Bahamas, Bermuda, Samoa, Uruguay, Hong Kong, Nevada, Wyoming, Delaware, Florida , the Netherlands and of late Ras Al-Khaimah of the UAE (p-12, Panama Papers book).

As Gerard Ryle says, the source had somehow managed to copy 40 years of data containing e-mails, data base, pdf, images, text and others. The leaks showed how the law firm that had many clients all over the world facilitated formation of shell companies, provided directors to those willing to pay a price. Reputed law and accountancy firms used to approach MF on behalf of their clients and MF in turn did the necessary paperwork to establish companies, trusts etc. with the intention of masking the real ownership of these fake entities. All of us knew the modus operandi but this was the first time that one got to see how actually instructions flow from customers and the trail involved.

As per the ICIJ website the Panama Paper essentials were as follows:

- These are a set of more than 11.5 million confidential documents relating to the Panamian law firm MF

- The leak exposes the offshore holdings of 12 current and former world leaders

- Also provide details of the hidden financial dealings of 128 other around the world politicians and public officials.

The Panama Papers expose offshore companies controlled by the prime ministers of Iceland and Pakistan, the king of Saudi Arabia and the children of the president of Azerbaijan.

- The law firm's internal files contain information on 214,000 offshore companies connected to people in 200 countries and territories. 

It transpires that major banks are big drivers behind the creation of hard-to-trace companies in the British Virgin Islands, Panama and other offshore havens. The files list more than 15,600 paper companies that banks set up for clients who wanted to keep their finances under wraps, including hundreds created by international giants UBS and HSBC.

Thus, Mossak Fonseka's real business was thus selling shell companies. Its operations were not very different from the business of our very own entry operators . The only difference is that it was located offshore in fancy buildings and perhaps created a veneer of respectability by being prohibitive in appearance. Some time back in the context of the Limitation of Benefits provisions in the India-Mauritius and India-Singapore tax treaty, I had written about the ease of formation of companies in these jurisdictions without any question asked. []

In fact if any one searches for offshore companies, one comes across various advertisements even to this date. One such advertisement I had accessed read as follows:

"The beneficial owner would retain complete control of the company through Power of Attorney that we supply. This ensures that the true owner of the company is empowered to run the business, manage the company's activities, and open and operate the company's bank accounts. The Nominee Director will sign an undated letter of resignation that can be submitted on their behalf at any time you wish."

In such circumstances, one really is surprised by the tremendous respect shown by the Indian judiciary for the separate corporate identity- but that is a different story.

The Paradise Papers released in November 2017 is again massive in scale. It contains the internal records of the very respectable law firm Appleby with offices in Bermuda and elsewhere. The documents also include files from a boutique trust company,  Asiaciti, and from company registries in  19 secrecy jurisdictions such as Antigua & Barbuda, that do not publicly list names of company shareholders or directors. This is the largest of the leaks and contains 13.4 million such files.

Here again, the documents were initially leaked to the German newspaper that subsequently roped in ICIJ.

As per the ICIJ website, the essential features of the Paradise Papers are as follows:

- Reveals offshore interests and activities of more than 120 politicians and world leaders, including Queen Elizabeth II, and 13 advisers, major donors and members of U.S. President's administration.

- Exposes the tax engineering of more than 100 multinational corporations, including Apple, Nike and Botox-maker Allergan.

- Reveals tax haven shopping sprees by multinational companies in Africa and Asia that use shell companies in Mauritius and Singapore to reduce taxes.

- Shines a light on secretive deals and hidden companies connected to Glencore, the world's largest commodity trader, and provides detailed accounts of the company's negotiations in the Democratic Republic of the Congo for valuable mineral resources.

- Provides details of how owners of jets and yachts, including royalty and sports stars, used Isle of Man tax-avoidance structures.

Due to the ICIJ efforts, it is now possible to actually see the correspondences. For me, the most interesting aspect was the communication involving Apple, one of the most valuable companies in the world. As is fairly well known thanks to the investigations by the US Senate Sub-Committee on investigations, Apple pays very little tax in the jurisdictions where it sells the products thanks to the lacunae in the laws of the United States and Ireland, principally relating to corporate residency, whereby its subsidiaries claimed to be resident nowhere giving rise to the term nowhere taxation. Under pressure from the EU members, Ireland has agreed to change the rules although effective from 2021. In such circumstances, Apple went shopping for a particular jurisdiction that will tax such profits lightly. In that connection, its law firm sent a questionnaire to Appleby.


Some of the questions posed and the answer given by Appleby are very interesting indeed from governance perspective and are worth reproducing:

"Question 1.5- Is it possible to obtain an official assurance of tax exemption, and if so what is involved in obtaining it, including costs? How long does the assurance last?

Answer: No official assurance would be necessary. A standard tax resident company pays no tax (unless income is received from (a) banking business; (b) land and property in the Isle of Man; or (c) retail business in the Isle of Man (to Isle of Man customers) with taxable profits greater than £500,000) other than potentially VAT and there is no cost attached to maintaining that status. Although the Isle of Man is not part of the EU, it is part of the EU VAT area, unlike the other Crown Dependencies Jersey and Guernsey, or indeed the Overseas Territories; this means that a company operating in the Isle of Man can register for VAT, charge and recover VAT.

Question 1.6- Are there any developments suggesting that the law may change in an unfavourable way in the foreseeable future?

Answer- No.

Question 1.7- Is there a credible opposition party or movement that may replace the current government?

Answer- No. Most Isle of Man politicians stand for election independently instead of as representatives of political parties; there is no viable party politics. Political parties do exist but their influence is nominal, currently members of a representative house of 2 (House of Keys). Governments are formed immediately after an election by nominations made by the Chief Minister who is himself elected by the members of the House of Keys."

It may be noted that Apple's deal with Ireland had faced EU investigations and the EU Commission has held that the deal amounted to State Aid and has asked Apple to back taxes of 13 billion euros .

But has the Panama Papers had any effect at all? The answer is yes. Very near our home we find that the Prime Minister of Pakistan has been forced to resign after being indicted by their National Accountability Bureau. It was reported that three of Mr. Nawaz Sharif's children were owners or had the right to authorize transactions for several companies, including two that owned "a UK property each for use by the family" of the companies' owners. Sharif's daughter Mariam Safdar was the owner of the two British Virgin Islands-based firms. Mr. Sharif , of course, denied the charges.

The Icelandic Prime Minister who had not disclosed his dealings in such a company was the first victim and had to resign. There are other leaders that are undergoing investigations.

But the most proactive and meaningful steps so far have been taken by the EU. In the EU there was a PANA Committee constituted by the European Parliament on June 8, 2016 that has given its report on October 18, 2017. The Committee consisted of 65 members of different political associations as follows: (Centre right) European People's Party- 20, Socialists and Democrats-17, European conservatives and Reformists-6, Alliance of Liberals and Democrats for Europe-6, European united left- GUE/NGL-4, Greens/ European Free Alliance-4, Europe of freedom and direct democracy-3, Europe of Nations and Freedom-4, NA-1. The group went on study visits, interacted extensively with officials, scholars, representatives of advocacy groups of various jurisdictions and came up with a final report available at:

Some of the observations of the Committee are indeed instructive for any tax administration. According to the Committee, the Panama Papers documented and made public the systematic use of illegal practices such as backdating documents, and revealed a blatant disregard of basic due diligence, including in the case of outsourcing, on the part of the lawyers, wealth managers and other intermediaries concerned, as documented by, for example, maintaining business relations with companies whose nominee directors represented up to 1000 letterbox companies or had been dead for several years ;

The EU Member States have launched a total of at least 1300 inquiries, audits and investigations into the Panama Papers revelations; whereas Member States have identified more than 3000 EU-based taxpayers and companies linked to the Panama Papers; whereas over the past twelve months this has led to national authorities having already recovered tens of millions of dollars or euros in taxes on previously undeclared funds.

The committee noted that auditors and tax advisors have acted as globally integrated firms though presenting themselves as numerous separate legal entities that are not under common ownership, but which are bound by contractual arrangements to operate common standards under a common name, in order to dilute responsibility, reduce their regulatory cost and risk, ring-fence their legal risk, and protect their clients from regulatory enquiries.

The Committee was concerned at the promiscuity and conflicts of interest affecting auditors and consultants, lawyers and law firms who often serve as government advisers to draft tax legislation, conceive AML tools and even investigate and audit for regulators, while also serving or having served the regulated entities .

According to the Committee, the Papers also reveal a glaring failure on the part of governments, parliaments and national and European authorities to legislate for and to enforce anti- money laundering and tax controls, thereby facilitating financial crime.

The Committee submitted a draft recommendation on 30.11.2017 that lists 210 items available at:

The European Parliament voted on the draft recommendations on 13 December, 2017. The final recommendation was adopted by 492-50 with 136 abstentions. The final recommendations are indeed very political and perhaps betrays an impatience with the OECD's approach, particularly in the context of tax avoidance and evasion. The recommendations are relevant for developing countries as well. Some of these are as follows:

-Stresses the urgent need for a common international definition of what constitutes an offshore financial centre (OFC), a tax haven , a secrecy jurisdiction, a non-cooperative tax jurisdiction and a high-risk country in terms of money laundering; calls for these definitions to be internationally agreed without prejudice to the immediate publication of the EU common blacklist; stresses that these definitions presuppose the establishment of clear and objective criteria

-Reminds Member States of the importance of the GAAR principle in tax policy, and encourages tax authorities to use this principle consistently in order to avoid structures being created for tax fraud and tax evasion

-Considers that the EU should make it illegal to maintain commercial relations with legal structures established in tax havens if the ultimate beneficiary cannot be identified

- Calls for sanctions also to be applied to companies, banks, accountancy and law firms, and tax advisers proven to have been involved in illegal, harmful or wrongful activities with non-cooperative jurisdictions or proven to have facilitated illegal, harmful or wrongful corporate tax arrangements involving legal vehicles in those jurisdictions

-Calls on the Commission to come forward with a legislative proposal on the separation of accounting firms and financial or tax service providers as well as on all advisory services, including a Union incompatibility regime for tax advisers, in order to prevent them from advising both public revenue authorities and taxpayers and to prevent other conflicts of interest

-Notes that, according to the most recent Organisation for Economic Cooperation and Development (OECD) data on foreign direct investment, Luxembourg and the Netherlands combined have more inward investment than the US , the vast majority of which is in special-purpose entities with no substantial economic activity, and Ireland has more inward investment than either Germany or France; points out that, according to its National Statistics Office, foreign investment in Malta amounts to 1 474 % of the size of its economy ; notes that, according to research carried out by the University of Amsterdam, 23% of all corporate investments that ended up in tax havens passed through the Netherlands; believes that these data are a clear indication that some Member States are facilitating excessive profit-shifting activities at the expense of other Member States.

These are only some of the recommendations, the full list being a virtual treasure trove for anyone interested in tax policy matters.

And, what about India? In India, apparently an intergovernmental agency is looking into the material and as per a recent release by the CBDT about 147 actionable cases have been identified out of 426 persons named in the Panama Papers. Investigations apparently led to the detection of undisclosed credit of INR 792 crore. Some searches have taken place and in 5 cases prosecution complaints have been filed and in 7 cases notices have been issued under the Black Money Act of 2015.One has to however see how many of these cases ultimately result in actual conviction.

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