UK banks should carry out wider review of offshore financial ties following Panama leak, says expert

Out-Law Analysis | 13 Apr 2016 | 3:05 pm | 2 min. read

FOCUS: Banks should consider whether to review their ties with other law firms, banks and trust companies in Panama, as well as other high risk jurisdictions, so that they can be ahead of the game in case other leaks or issued about offshore activities emerge.

The Financial Conduct Authority (FCA) has written to some banks asking them to review their ties with Mossack Fonseca, the Panamanian law firm, after millions of documents relating to its client work were leaked last week. The banks, which the FCA has not named, have until Friday to comply. Regulatory authorities in other countries, such as France, have taken similar action.

According to the International Consortium of Investigative Journalists (ICIJ), the leaked documents show that more than 500 banks, their subsidiaries and branches registered nearly 15,600 shell companies offshore with Mossack Fonseca. There are concerns that some of these shell companies were used to hide beneficial ownership, to evade tax and to launder the proceeds of crime.

As we have seen in previous cases involving large scale leaks, investigative journalists tend to drip feed their discoveries into the public domain. Furthermore, the leaked documents will create links to other businesses or territories, causing a clamour for further action by the authorities. This happened during the 'Lux Leaks' episode, when details of companies with tax rulings in Luxembourg were leaked. Governments are also likely to want to be seen to be doing more to tackle perceived issues with the 'offshore' industry.

Banks would therefore be wise to consider investigating now whether they have links with other law firms, banks or trust companies in Panama. They should also explore whether they have connections to other high-risk jurisdictions. This will place the bank in a much better position to deal with the media and the authorities as the picture continues to emerge.

UK developments

The UK has already followed through on its commitment at the 2013 G8 summit to implement a public register of the beneficial ownership of UK companies. The 'persons of significant control' (PSC) legislation came into force on 6 April 2016, and annual returns of all PSCs have to be made from 30 June 2016. Investigative journalists and campaign groups are likely to devote resources to trawling through this information and matching it to leaked data.

The government is also under pressure to force the UK overseas dependencies, which have currently only committed to keeping a PSC register which is accessible to law enforcement agencies, to make the register available to the public as well.

Which jurisdictions are 'high risk'?

Over 90 jurisdictions have agreed that they will begin the automatic exchange of tax information about residents of other jurisdictions that hold financial accounts in their territory. Information exchanges are due to begin in either 2017 or 2018, depending on the jurisdiction.

Jurisdictions which have not committed to the common reporting standard (CRS), or which have withdrawn their commitment, include Panama, Bahrain, Nauru, Taiwan and Vanuatu. These are considered to be high risk because they are, to varying degrees, financial centres.

Jason Collins is a tax expert at Pinsent Masons, the law firm behind