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From the Managing Director's desk

Offshore goes to Paradise?!


Váradi László

Just eighteen months ago when the Panama Papers were released, we published the LAVECO Newsletter with the following headline: Panama Papers, Bahamas Papers, UK Papers, Germany Papers, USA Papers, ...........? What I wanted to imply in the title was that there would be a follow-up to the Panama Papers, and true enough less that one and a half years later, the second “instalment” was released.

Not from the jurisdictions I had listed, but another prominent location. It was inevitable; there are many other law firms, much larger than Mossack Fonseca, who have arranged, and still arrange today, tax-friendly solutions for their customers around the world. The firm Appleby is precisely one of these, providing legal and consultancy services to customers from all over the world since 1898. They have done so, and continue to do so, because it is a perfectly legal activity. It is quite probably for exactly this reason that the international reaction to the Paradise Papers has been so different to the reaction to the Panama Papers. The Panama Papers made a "bang", making a huge impact on public opinion worldwide. It was discussed in the press for weeks, and all over the world people sat up and listened. The Paradise Papers were welcomed with cold indifference almost everywhere. Especially at grassroots level, by the man in the street.

They are already fed up with the rich dodging taxes, while the powers that be know all about it, yet have failed to put a stop to it for decades. So, what is the point in talking about it? The timing of the release was also rather strange. If you remember, the news emerged on a Sunday afternoon, at a time when everyone is busy doing something else. And, come Monday morning, and a number of newspapers had already replaced the story with other headlines on their front pages. The stories named far more famous people, politicians, celebrities and high-ranking executives than the Panama Papers, yet the scandal it caused was nowhere near as significant as the journalists who published it had been hoping for.

This, however, was a totally logical reaction The man in the street is no longer interested in these issues. Businesspeople, celebrities, politicians? Well, people have known all along what they are up to. Why would they be surprised? This time round the sensation lasted for less than 3 days. Something, though, did change. A sort of reversal of opinions. Suddenly, a different sort of comment started to appear: “Well, if the Queen of England is involved in the offshore world, then why shouldn’t I be?” Others went even further: “The really clever ones are the ones who got involved; if you don’t get involved, you’re missing out on something!” People began to see the offshore techniques employed by celebrities and successful business people not as illegal, but as ways of becoming more successful. It’s more like athletes who use legal performance enhancers.

Here is an interesting fact: the turnover in the financial world is estimated to be between 4000 and 5000 billion dollars, each and every day! That is a huge amount. This does, of course, also include transactions in financial derivatives and FOREX. What is not so well known, however, is that more than 50% of this turnover is carried out through offshore financial service providers and offshore companies. Clearly, the world financial system is still very closely connected to the offshore world. Naturally, if this was illegal, then it could not have developed to this extent, or, for that matter, survived as it has for decades. This would not have been possible without the acquiescence of the international organisations and governments of major countries. Or rather, while outwardly voicing their opposition, their actions were supporting the process. And why isn’t it mentioned in the economics textbooks used in universities? Well, it is not my job here to rate what is taught, and how, at the universities…

The release of the Paradise Papers was something which could safely be predicted almost as soon as the Panama Papers were leaked. There are many companies in this industry bigger than both Mossack Fonseca and Appleby.

In fact, the amount of information held by the banks exceeds that held by all of the service providers. For almost 20 years now, under pressure from the OECD, banks around the world have systematically been collecting data on the beneficiaries of corporate clients. In the modern banking world, it is not possible to open a bank account, if the bank has not first identified the beneficiary of the company. However, once the banks begin the exchange of information internationally, such stories will not provide the journalists with the sensationalist impact they need, which is why the information had to be released in such a rush.

Now let us see what happened as a result of the Panama Papers. The banks made their already difficult conditions even more difficult. The situation has now emerged where it is extremely difficult, if not impossible to open an account for a traditional offshore company. Following the Panama Papers, a number of banks even began closing the accounts of companies registered at addresses affected by the scandal. It is not unusual in these jurisdictions for 5 or 6 corporate service providers to have their offices in the same office building, meaning that thousands of companies may be registered at the same address, even though they are administered by different companies. This fact, however, was of little interest to the banks’ compliance departments, who are not sophisticated enough to cope with a detail of this nature, meaning that many companies were treated very unfairly.

This is a very unfortunate situation, and one which we are powerless to oppose, as the lawyers in the compliance departments are extremely blinkered. The more intelligent, customer-friendly banks, with one eye on the future, gave their customers time to resolve the matter or offered alternative solutions. For example, to change the registered address of the company. This solution, however, is merely delaying the inevitable, as tomorrow the problem will not just be the address of the office block, but the jurisdiction itself. They may just say, for example, that companies registered in, say, the British Virgin Islands can no longer hold accounts as they are considered to be a higher risk.

Which brings us to the point that although the man in the street may not be interested in the Paradise Papers, the legal departments of the banks will use it as another excuse to turn the screw and further tighten the rules. In my opinion, this will make certain jurisdictions completely impossible to operate in. And the most vulnerable ones in this case are the traditional offshore jurisdictions, such as the British Virgin Islands, the world's most famous offshore destination. Furthermore, as the BVI does not meet OECD requirements on transparency, it is categorised as high risk by the compliance departments of the banks.

Yes, but then something is not clear. In fact it is altogether incomprehensible. If this entire offshore story is not illegal, not forbidden, and even the English royal family is involved, then why are the banks so negative? Surely, it is a profitable business for them. Of course it is, or rather was. However, the management of the banks have handed the decision-making process to the lawyers in the compliance departments, who, fearing for their jobs, set out to minimise the risks involved. Ultimately, the way the process develops will be decided by the banks, based on the flexibility of the relationship between the compliance departments and the business divisions, and where they draw the line between strict administrative rules and the demands for profit.. 

For years, the experts at LAVECO Ltd. have consistently been saying that only the transparent jurisdictions will be able to survive this changing age, where a system which has developed over the past 40 to 50 years is being shaken up and changed, as a result of outside pressure. It is logical to ask whether what existed before will be able to exist at all. I am not going to give my own answer to that question, as my answer would be biased, because of my own interests. Instead, I would like to mention a conversation I recently had with one of the top executives of one of the world's largest auditing companies, who is responsible for auditing multinational companies. In his opinion, as long as there are people on earth and there are differences between tax rates, there will always be tax competition. The kind of tools which companies will be using is irrelevant. What is important is that the demand is there, and if there is demand, then, sooner or later, there will also be supply. Whether it is still called offshore is another question, but the game will never be over: offshore, in one way or another, is already in Paradise. :)