After the Panama papers
Mossack Fonseca and its homeland are not alone in facing closer scrutiny
THE travails of Mossack Fonseca, the Panamanian law firm from which a trove of documents about offshore firms it had helped create was recently leaked, intensified on April 12th, when prosecutors raided its head office. But as the firm defends itself, campaigners for financial transparency are already looking for other Mossacks and other Panamas.
Mossack was an outlier, rivals claim. “Everyone knew that if you wanted that bit more secrecy, you’d go to them,” says a lawyer who investigates offshore fraud. “We were lucky to get beneficial-ownership data from them 30% of the time.” Nevertheless, other incorporation mills face more scrutiny too, among them Panama’s other big law firms, such as Morgan & Morgan, and OIL, part of Hong-Kong-based Vistra, which caters primarily to Chinese customers. Like Mossack, these are wholesalers. They sell shell companies in blocks to law firms and banks, which sell them on to the end client, sometimes via other retailers. Mossack has dealt with 14,000 such intermediaries.
In many of the cases highlighted in the Panama papers, there was a clear breakdown of due diligence along this chain. Retailers who were supposed to check clients’ identities and store the information were not doing so. Mossack was doing little—and may not have been obliged to—to know its customers’ customers.
Other jurisdictions are also coming under scrutiny, although Panama is genuinely different. Among sizeable offshore financial centres, it alone has firmly resisted the move to greater tax transparency—a stance which it may now abandon. Apart from Panama itself, the most heat is on Britain and its offshore territories—particularly the British Virgin Islands (BVI), home to roughly half of the 214,000 companies mentioned in the Panama papers.
A dozen of the world’s 50-60 active offshore financial centres are current or former British possessions. Perennially derided as dens of financial iniquity, these islands have in fact cleaned up a lot since the first sustained attacks on them in the 1990s. They now do as well as many bigger places in reviews by the OECD (see chart) and the Financial Action Task Force (FATF), which set tax-transparency and anti-money-laundering standards.
But David Cameron, Britain’s prime minister, is under pressure to extract another pound of flesh from them. He is likely to renew a push for them to adopt public registers of company ownership, as Britain has. Those territories that have no central registers readily available to the taxman and law enforcers, as Bermuda and Jersey already do, have agreed to set them up. This will put them ahead of FATF standards, which do not require centralised data collection. This week they pledged to speed up response times to requests from British authorities, from weeks or months to a day or less—though they will still resist the idea of making their registers public.
The BVI, which is home to 450,000 companies in all, hopes to deflect criticism with its new requirements on corporate agents. One of these, which kicks in this year, will force them to collect and verify beneficial-ownership information on clients. Until now this has often been left to “introducers” in the client’s home country, who often fail to do it.
Some worry that if the British outposts are squeezed too hard, business will flow to less tightly regulated places with shell-company-friendly laws, such as the Seychelles and Samoa. Hong Kong, already a giant peddler of offshore firms, could also benefit, as could the numerous American states with lax regulation of registration agents and ironclad corporate anonymity, like Delaware and Nevada (see box).
And then there is Britain itself. Oversight of its company-formation industry is poor. Many embarrassing links have been established between British shell companies and criminals, such as those behind a $1 billion swindle in Moldova involving Scottish limited partnerships.
Fraudsters use Britain and America because they are “cheap, anonymous and good names”, says Martin Kenney, an offshore investigator. “Since compliance departments don’t count them as high-risk, they are often subjected to less due diligence.” That gives the transparency-loving Mr Cameron lots to ponder as he prepares to host a global anti-corruption summit, set for May 12th.