After explosive leaks from an offshore firm last year, others in the sector insisted it was a bad apple. Now that claim can be tested.
Most people do not understand the complexities of offshore tax. They have no need to – because they do not have enough money to consider the schemes and arrangements that are on offer in tax havens.
The “ordinary” world and the “offshore” world have coexisted for decades, separated by the secrecy that remains one of the important attractions of the sector.
This secrecy – and inconsistent scrutiny – has served it well.
OFFSHORE TAX HAVENS
Over the past 40 years, offshore tax regimes have grown exponentially; back in the 1970s, they were a way for individuals to hide their money from corrupt and predatory governments in unstable countries, or for banks to move cash around to avoid fluctuations in currency rates.
Then, the lack of transparency and advantageous tax regimes made them the investment place of choice for the rich and famous who wanted legitimate but tax-efficient investments for their wealth.
That cottage industry has developed into a sprawling kingdom for the rich, and there has been little political appetite to thoroughly review what has been going on in this new realm.
That began to change in April last year with the Panama Papers exposé. Millions of people in the UK who had been enduring a “we are all in it together” austerity since 2008, and countless others in countries around the world, saw in vivid detail that some people were hurting more than others.
The papers showed how some of the world’s wealthiest individuals and businesses had been able to shelter their money in companies that did not bear their name, buy luxury goods and homes at cheaper prices, or invest in “vehicles” that kept the tax they paid to a minimum.
The Panama Papers posed a fundamental ethical question: is this fair?
The insights were provided by more than 11 million documents leaked from one law firm, Mossack Fonseca. This was a Panamanian company making the most of the offshore options available to its clients, while simultaneously showing a disregard for its obligations, as set out by regulators who are supposed to ensure money launderers and corrupt politicians are not using offshore schemes to squirrel away their cash.
As a direct result of the publication of stories by The Guardian, and a consortium led by the German newspaper Süddeutsche Zeitung and the International Consortium of Investigative Journalists, politicians, academics and financiers began to debate more seriously the morality of offshore tax havens, and how they have been policed.
In one notable intervention, more than 300 economists, including the Nobel prize winner Sir Angus Deaton, signed a letter to world leaders that argued: “The existence of tax havens does not add to overall global wealth or wellbeing; they serve no useful economic purpose.”
CALLS FOR TRANSPARENCY
There were demands for greater transparency from across the political spectrum, but this eventually led to compromises over the disclosure of information and assurances from prominent figures in the offshore sector. They argued that Mossack Fonseca was the exception rather than the rule.
For instance, the International Financial Centres Forum (IFC), a body representing offshore law firms, insisted British overseas territories and crown dependencies had “the highest regulatory standards”.
It said more transparency would lead to more money laundering and would only be a boon for criminals, NGOs and investigative journalists. Changes to the sector would only do harm, the group insisted.
One prominent member of the IFC is Appleby. Last year, a partner in the company told a journalist that criticism of the sector was unfair. “It’s a bit like saying that because Harold Shipman murdered his patients, that all doctors should be thrown in jail,” they said.
We know this because the remark appears on a document that forms part of a second substantial leak. This new cache of documents will allow politicians and the public to test whether the “Dr Shipman” claim stands up to scrutiny.
Appleby certainly has a reputation as a respectable company. One of the “magic circle” of offshore law firms, with offices in 10 jurisdictions, it has a blue-chip clientele that includes some of the wealthiest companies and individuals in the world.
The service Appleby provides them has won it the title of “offshore firm of the year” on a number of occasions. This year, it was the official law firm to, and sponsor of, the America’s Cup yacht competition.
Appleby regards itself as a Rolls-Royce operation. Thanks to the leaked files, journalists from some of the world’s leading media organisations, including Süddeutsche Zeitung, The New York Times, the BBC and Le Monde, have had a chance to peek under its bonnet.
The insights the documents provide raise new questions about the offshore industry, those who regulate it and how much notice is taken of them.
The files also highlight myriad legitimate ways the company’s super-rich customers can minimise the tax they pay – extraordinary methods, bewilderingly complex in some instances, that run counter to the original philosophy of the offshore sector, have been condemned by bodies such as the European Commission and the OECD, and appear to have become increasingly unpalatable to ordinary people.
There is a political dimension too, which was not apparent in the Panama Papers. The files show the IFC speaking of its influential “penetration” of the UK government with lobbying of ministers and civil servants. It boasted that this behind-the-scenes activity may have prevented world leaders from agreeing more wide-ranging transparency measures at a G8 summit in 2013.
Appleby certainly did not want more transparency. Internally, it argued any changes would mean “eye-watering” costs for its business.
The lobbying effort is particularly significant because the files show that in 2013, Appleby’s Bermuda operation was under scrutiny from the Bermuda Monetary Authority.
The BMA did not like what it found. In a critical report, it red-flagged Appleby in nine areas, demanding “high priority” changes in, among other things, the company’s anti-money-laundering and anti-terrorist-financing risk assessments.
This was not the first time Appleby had been called out over its handling of such issues. The files show it being criticised for flawed compliance procedures in 12 confidential audits over a 10-year period in the Isle of Man, the Cayman Islands, Bermuda and the British Virgin Islands.
So, at the same time Appleby was pushing back against greater transparency in offshore tax havens, and arguing that such moves would be counterproductive and unnecessary, it was consistently failing to keep to standards that campaigners say are not tough enough anyway.
The company has insisted – in a preemptive public statement – that it has investigated all the allegations put to it by partners in this project and found it did nothing wrong.
But it declined to answer specific questions, for instance, about clients such as Glencore, and how it secured mining rights in the Democratic Republic of Congo, one of the most corrupt and impoverished nations on earth.
And what did Appleby really know about a network of companies it set up for associates of the president of Angola, who has been repeatedly accused of corruption and human rights abuses?
The documents reveal other worrying vignettes, including one involving a billionaire client designated as a PEP – politically exposed person. PEPs require extra scrutiny and due diligence.
This particular billionaire wanted to do some business through Appleby’s Bermuda office, but the BMA resisted. It wanted more checks conducted on him, because the businessman had very obviously provided misleading information about his background on an important application form.
But Appleby did not want to do this extra due diligence work; instead, it suggested rerouting the application through the BVI, where it “does not appear that the same issues arise”.
The documents show some partners in the firm were clearly unhappy. “This is strange stuff,” one said. “Perhaps leave me out of the group for now in case there’s something I’m not supposed to know.”
There was deep unease, too, around another PEP who had been a client of the company since 1984. In 2013, Appleby realised he was not the man they thought he was.
The client, staff discovered, had connections to a scientist accused of being one of the architects of Saddam Hussein’s nuclear weapons programme, and his company had, in the early 1990s, been accused of being a front for Saddam.
When Appleby was alerted to the link, managers flew into a panic. According to a document seen by The Guardian, a senior partner asked: “Is there any evidence we detected this before? How can we not have known this earlier?”
None of them could explain how the company had been oblivious to this for 28 years, or who had introduced the client in the first place.
For all of this, it is the variety and nature of the tax avoidance schemes revealed in the papers that may cause the most concern outside the elites that use them. From ways to avoid paying VAT on superyachts and private planes, to brain-achingly complex structures designed to help multinational companies – they are all in the files.
Thanks to the Paradise Papers leak, the world will get a chance to scrutinise and pass judgment on the tapestry of schemes and networks politicians say they find so unpalatable – and many ordinary people find offensive and unfair.
This is a slightly abridged version from The Guardian UK