Pandora Papers leak highlights importance of third-party due diligence

The International Consortium of Investigative Journalists (ICIJ) released the documents – known as the ‘Pandora Papers’ – in early October. The ICIJ and its media partners have spent months trawling the documents for information linking politicians, major corporations, businesspeople and celebrities to the use of offshore structures to minimise tax payments or potentially obscure their wealth.

Companies and special purpose vehicles (SPVs) are often established in territories where company formation is straightforward, minimal know-your-client information is required, public records are not readily available, and the use of nominee directors or shareholders is commonplace.

In many of these jurisdictions, sometimes referred to as tax havens or secrecy jurisdictions, associated tax rates may also be low, or even nil.

Being mentioned in the Pandora Papers or earlier leaks such as the Panama Papers in 2016 and the Paradise Papers in 2017 is not, on its own, a sign that any misconduct or wrongdoing has taken place. Many of the practices will be legal and used for legitimate purposes, including privacy.

However, the level of due diligence required on individuals and companies mentioned in the Pandora Papers causes some authorities concern.

Enhanced due diligence to address potential risks

Consideration should be given to undertaking specialist customer and third-party due diligence to address the potential risks associated with dealing with individuals and businesses referred to in the Pandora Papers.

Sufficient comfort will need to be obtained to identify the beneficial owners behind any potential offshore structures, so that companies know who they are really doing business with. This will assist firms in demonstrating that any funds being transferred are legitimate and do not represent the proceeds of crime.

There could also be a higher politically exposed persons (PEP) risk, as many of the individuals mentioned in the Pandora Papers are likely to be high-net worth individuals (HNWIs) who are either in positions of political power or who are close associates or family members of PEPs.

PEPs are associated with higher levels of bribery and corruption risks and so identifying PEPs will trigger the need to conduct enhanced due diligence procedures, in accordance with PEP guidance issued by the Financial Action Task Force. The risks associated in dealing with PEPs will need to be carefully considered, assessed and mitigated if necessary.

The consequences of failing to undertake adequate due diligence procedures will be significant. The reputational and commercial impact on a company associated with conducting business with tax evaders or HNWIs connected to bribery and corruption could be damaging. Loss of business relationships, loss of customers and potential regulatory action are just a few potential repercussions.

Carrying out robust forensic intelligence and legal due diligence activities can play a significant role in mitigating these risks.

The UK approach to data leaks

The UK authorities have shown in the wake of the previous data leaks to the ICIJ that they are willing to take action to investigate potential wrongdoing, so they will not be responding to the Pandora Papers from a standing start.

In the wake of the Panama Papers expose, HM Revenue & Customs (HMRC), the Financial Conduct Authority, Serious Fraud Office and the National Crime Agency established a collaboration to process and take coordinated action where that was determined to be appropriate.

The analysis systems and information sharing gateways established in 2016 have since been subsumed into the National Economic Crime Centre which was created to “deliver a step change in the UK’s response to, and impact on, economic crime”.

HMRC also has dedicated resources devoted to ensuring wealthy individuals pay the right levels of tax in the UK. It established a high-risk wealthy programme in 2018 as an equivalent for individuals to its high-risk corporates programme for businesses, with the aim of accelerating tax disputes in the most complex cases.

It is clear that the UK’s tax and law enforcement administrations will be comparing Pandora revelations with other data sources such as those provided by the Common Reporting Standards to determine whether flags arise that point to irregular or inappropriate filings or connectivity that merits further investigation.