For decades, business people have used offshore companies to gain tax advantages, bank secrecy and a host of other “benefits” that are not available in their home countries. These practices have recently come under attack by governments and tax authorities who are keen to end the abuse of offshore companies to facilitate tax evasion and money laundering.
The world of taxes and banking is rapidly changing. Legislation targeting tax avoidance and money laundering is proliferating, while governments are adopting measures aimed at improving corporate transparency. What might have been a generally accepted practice a couple of years is no longer so.
Below, we outline the risks that ultimate beneficial owners (UBOs) and offshore-company promoters face. In the context of money laundering, “UBO” refers to the individual who ultimately controls an entity or is entitled to its funds; this may not be the same as the person in whose name a bank account is opened or who officially owns shares and interests in a company. The term “promoter” refers to all kinds of service providers in the offshore industry: corporate service providers (who also furnish nominee directors for offshore firms), registration agents, attorneys, bank account managers, compliance officers, consultants or private bankers.
Not all of the risks outlined below may affect all UBOs due to variations in different countries’ tax and legal systems, as well as vast cultural differences between jurisdictions. The points below should be considered worst-case scenarios that apply only to non-compliant offshore structures. Real-life experience shows that these scenarios are not simply theoretical. We recommend considering whether they apply to you – and if so, whether immediate action is warranted.
1. If you are a UBO or a promoter: The “Final Countdown” section shows how the CRS is accelerating the arrival of the Offshore Apocalypse. Even before the CRS came into force, hundreds of thousands of UBOs were prosecuted along with numerous offshore-registration agents. But this was not the result of effective law enforcement; rather, it is down to the work of “whistleblowers” as well as a tiny group of intrepid journalists.
Numerous teams of journalists around the world devote their careers to uncovering economic and tax-related abuses. A relatively small group known as the Organized Crime and Corruption Reporting Project (OCCRP) seeks to expose how organized crime and corruption works in regions such as Eastern Europe. The OCCRP conducts investigations in which the journalists camouflage themselves as business people and surreptitiously make video or voice recordings of their conversations with suspected offenders. The offshore industry proved to be a consistent participant in these dodgy affairs.
The OCCRP’s first project exposed corruption among energy traders. They then moved on to tobacco smugglers. Later, they set their sights on offshore company-registration industry. As in all their previous projects, they discovered innumerable examples of offshore companies through which UBOs evaded taxes and laundered money – naturally, with help of registration agents, consultants, attorneys and (private) bankers.
Thus the OCCRP’s journalists posed as clients, scheduled a meeting with Romania’s biggest offshore-registration consultant, and discovered how “elegant” and “simple” it was to commit tax evasion through offshore companies. The journalists surreptitiously recorded the discussion. A month later, the consultant was behind bars.
The entire operation soon collapsed like a house of cards. Romanian authorities went after the consultant’s clients. They also arrested six managers of Romania’s biggest oil company in connection with shady financial maneuvers – for example, fake consultancy agreements with offshore companies based in Delaware. The charges included document fraud, tax evasion and money laundering committed as part of a criminal organization. The consultant was sentenced to six years and four months in prison while other participants received jail terms ranging from six to nine years. Since then, the OCCRP has worked on similar stories in several other countries.
The world’s biggest investigative-reporting group is the Washington, D.C.-based International Consortium of Investigative Journalists (ICIJ). The ICIJ recently conducted an 18-month probe into Singapore-based Portcullis Trustnet, one of Asia’s biggest wealth-advisory companies. In this case alone, reporters plowed through some 2.5 million files detailing the operations of more than 120,000 offshore companies. More investigations followed. Most recently, ICIJ turned a spotlight on a database of 175,000 companies registered in The Bahamas.
Perhaps the best-known journalistic strike against the offshore industry is the “Panama Papers” affair, in which data from Panama’s leading offshore-registration agency was leaked to the public. The leak heaped embarrassment upon several famous and powerful people, from the British prime minister to the Spanish minister for industry to the prime minister of Iceland, from Spanish film director Pedro Almodovar to Argentine footballer Lionel Messi to the new secretary-general of the International Federation of Association Football (FIFA). All of them believed that nobody would ever find out about their links to offshore companies… For more on this “belief,” please see the first line of Offshore Apocalypse’s preface, as well as the table of contents and the detailed index.
2. If you are a UBO or a promoter: Authorities may seize files, records and e-mails stored on hard drives belonging to registration agents, consultants, attorneys or other promoters who are suspected of facilitating large-scale tax evasion. This is what happened in the case of the France’s top company-registration agent.
Following a tipoff from a bank, French authorities began monitoring the company-registration agent’s activities. They collected data proving that the agency had committed tax evasion and money laundering as part of a criminal organization. The owner and seven colleagues were charged and arrested.
Even laymen know that offshore companies are the primary tools for money laundering around the world. Hence confiscating offshorers’ data is simply a question of political will. The book continuously warns readers of the serious criminal consequences associated with offshore “tax planning.”
In days gone by, it would have been unimaginable that offshore company-registration agents would become the subjects of criminal probes. They were the ones who helped the power elite invest in “appropriate” companies. Perhaps it is no coincidence that undercover investigators were not usually the ones who secretly recorded conversations with offshore promoters, even though the state had every right to do so. Indeed, states have the obligation to prevent crime, but when it comes to offshore tax abuses, this obligation often goes unfulfilled.
It was even less imaginable that leaders of offshore-registration agencies in Panama would get arrested in their own country: Panama’s entire legal system had protected and served the offshore industry for decades. That era has come to a close. Nowadays, anyone with an Internet connection can freely access the three biggest “offshore leaks” databases.
3. If you are a UBO, your competitors, former business partners, enemies, journalists or even your ex-spouse may send information about your offshore investments/accounts to authorities in your home jurisdiction.
4. If you are a UBO who has traded with third parties through an offshore company you control, you inevitably run the following risk: Let’s assume one of your trading partners gets hit by a tax audit in his home country. The tax inspector challenges your partner’s offshore transactions, claiming the offshore entity is simply a re-invoicing center used for purposes of tax evasion. The inspector then accuses your counterpart of being the UBO of the offshore vehicle. At this point, your partner will likely declare his innocence and point the finger at you. The inspector may then cross check this information with tax authorities in your home jurisdiction, who may, in turn, launch a tax review against you.
5. If you are a UBO who is lucky enough not to fall prey to any of the unfortunate circumstances listed above, and you think you can surely avoid the risks, think again. Thanks to a number of global transparency initiatives, tax authorities in your home jurisdiction can still identify you as the UBO of an offshore account retroactively, depending on the applicable statute-of-limitation period. Under the automatic information-exchange system, which is to become the global standard starting in 2016/2017, your home tax authority will automatically receive details of your offshore bank accounts. As you know, anti-money laundering rules require banks to identify you (as UBO) during their client-acceptance procedures. Hence they already have your data in their files, ready to be exchanged.
6. If you are a UBO or a promoter, you need to be aware of the European Union’s other recent transparency initiative, the Fourth Anti Money-Laundering Directive. Under this legislation, UBOs’ data will become publicly available in company registers starting in 2017/2018. The EU is expected to expand this Directive’s purview to trusts and foundations as well. (It is worth noting that many of these entities are currently not subject to registration at all.) In order to avoid losing business with traditional tax havens, EU countries with significant offshore industries (e.g. the Netherlands, Luxembourg, Denmark, Cyprus and Malta) will likely work through other forums, such as the G20 or the OECD, to extend this concept as far and wide as possible.
7. If you are a UBO or a promoter, you must understand that the era of cheap, off-the-shelf offshore arrangements has come to an end. Offshore firms are no longer a commodity. Operating letterbox companies through nominee directors will no longer deliver the desired results. Tax administrators around the globe are increasingly likely to challenge offshore arrangements. The only way forward is by operating offshore structures that have real economic substance. That is not cheap. In cases where a company’s revenue is adequate to cover the high cost of “economic substance,” compliant offshore structures may still represent a sensible and legitimate option. Otherwise, the best option for avoiding unnecessary exposure is to close these offshore structures down, the sooner the better. Depending on your home country’s statute-of-limitation rules, you might have wanted to act yesterday.
8. If you are a UBO or a promoter, you must understand that the local management of offshore companies must have the power to make day-to-day decisions – powers that nominee directors rarely possess. The legal framework needs to be tested against actual practice, as these may not be in tune with one another. The offshore entity must have a commercial rationale, a so-called “business case,” which cannot be “tax benefits” alone. This rationale needs to be well-justified and documented, ready for review by tax inspectors or even a tax court. An offshore arrangement that has no purpose save “tax benefits” will be considered an abuse of law. Thanks to the transparency initiatives described above, authorities will have extensive information about offshore schemes will likely challenge them.
9. If you are a UBO who pays no heed to the above facts, you may soon expect serious conflicts with your promoter. Your identity as the offshore entity’s UBO, currently obscured by nominee directors, will be exposed thanks to the CRS. Your offshore arrangement or bank accounts may then become subject to scrutiny by tax authorities in your home country. In order to avoid tax charges or prosecution, your defense strategy will likely involve blaming your promoter, claiming that he was the one who advised you to use an offshore scheme and did not inform you about the potential pitfalls. You may argue that you acted in good faith based upon information in the promoters’ marketing materials; it has yet to be seen whether these arguments will prevail in court. At this point, your promoter may interpret his role differently than you do. It is not unheard of for promoters and clients to begin pointing fingers at one another, exposing all the details of each other’s roles in the offshore structure in order to reduce the extent of their responsibility.
10. If you are a promoter and you have been actively marketing offshore schemes (registering companies, furnishing nominee directors, providing maintenance services) you may be found liable for soliciting, facilitating, or assisting tax evasion, or even charged as a co-perpetrator of tax crimes. Once your clients run into legal trouble, you can assume they will tell authorities that you played an active and recurring role throughout the entire process – from preliminary advice to establishing, maintaining and operating the offshore schemes, regardless of your actual deeds or misdeeds. Even if there is no direct evidence against you, your clients’ testimony may be enough to substantiate charges against you: European and American offshorers who have been convicted of tax evasion have been known to file claims against their promoters, accusing them of failing to act with due care and diligence.
11. If you are a UBO who is under investigation, you may expect that your promoter will disclose details about your involvement in the offshore scheme. He will claim that you fully understood the rules and risks of the game and consciously attempted to exploit the illegal advantages of the offshore arrangement. If you withdrew funds from offshore accounts using a corporate bank card, authorities will have a hard time believing that you were truly unaware of the illegal nature of the scheme.
12. If you are a UBO or a promoter, you may expect authorities to ferret out the details of your offshore schemes sooner or later. Be aware: Offshore arrangements that might have been perfectly acceptable when you set them up may not comply with the latest standards. It is time for all stakeholders, beneficial owners and service providers to reconsider their role in offshore schemes. If it makes economic sense, offshore structures can be modified in order to make them legally compliant; otherwise, they should be shut down forthwith. It is important to remember that even discontinued offshore arrangements can still be subject to review depending on the relevant statute-of-limitation rules.
13. If you are a UBO or a promoter, you may conclude that only a handful of offshorers will find it feasible to restructure and maintain offshore structures in accordance with the latest standards. These structures will need to comply with an exhaustive set of rules.
14. If you are a UBO or a promoter and you believe you are amongst those who can sensibly continue operating in the offshore scene, you may want to consider de-offshorization – getting out of the offshore game, or transforming of the offshore tax-dodge into a company that has real economic substance and local real/effective management…
