The recent revelations arising out of the publication of the Paradise Papers have been gleefully seized upon by anti-corruption and tax justice campaigners.
Writing in the FCPA Blog, Shruti Shah of the Coalition For Integrity (formerly Transparency International USA) seems to have jumped onto the “anything offshore is evil” bandwagon.
She states: “The documents show how easy it is for tax evaders, money launderers, and senior public officials to utilize anonymous companies to hide their identities, their potential conflicts of interest, and their business deals.”
I have a great deal of respect for anti-corruption organizations such as Shah’s and Transparency International. They work tirelessly to draw attention to and exert pressure wherever they see wrongdoing. But they appear to suffer from tunnel vision, failing to make a balanced argument where the offshore world is concerned.
You cannot, and must not, confuse an ethical argument regarding tax policy and social responsibility (in a fair world, everyone would pay tax commensurate to their earnings) with “dodgy dealings” and criminal activity.
Tax evasion, corruption and money laundering are criminal acts and need to be prevented and punished. Tax avoidance and conducting business in a confidential environment are not.
Note that I use the adjective confidential and not secret’as the media likes to refer to it. The approach of some campaigners to these issues can be frustrating: they do not appreciate that what they propose as a “cure” will not only destroy the communities on the islands providing offshore financial services, but they are using a sledgehammer to crack a nut.
The word “loophole” particularly exasperates. Every anti-1% commentator uses it whenever an offshore tax issue is raised. There are no loopholes. Describing tax efficiency in the pejorative (“exploiting loopholes”) implies that the vast majority of those operating offshore entities are in some way corrupt. They are not. Purported loopholes exist because the onshore law makers have decided that they should. If these loopholes were so gaping and bad, onshore governments would have closed them immediately after the Panama Papers broke last year. They haven’t. Why is that?
The reason why is because it is in everybody’s interests to have offshore tax efficient systems available to Big Business. I have said previously on the FCPA Blog that anti-capitalist commentators will ultimately wreak serious damage to some economies. Big Business and the entrepreneurs that mastermind its profitability will simply uproot and move elsewhere. When this happens, jobs will go with them, leaving rising levels of unemployment behind.
It is in the interests of all governments concerned to enable Big Business to operate and retain more of its profits by being tax efficient. In turn these businesses invest their capital into further business ventures, thereby creating more jobs. No government will act unilaterally to change their tax laws to appease the Coalition for Integrity, Transparency International, or similar organizations. To do so would be economic suicide: Big Business would simply jump jurisdictions.
The UK is mentioned (as usual) in Ms. Shah’s short piece, being the overseer of British Overseas Territories that apparently need reigning in. It’s alleged that these so-called offshore tax havens conduct their business in secret — or that the tiny tropical Islands provide an impenetrable shield to those wishing to be tax efficient. This is simply not the case.
The British Virgin Islands (BVI) is the largest offshore company service provider in the world. I note that the BVI is not mentioned by Shruti Shah in her piece. This is highly unusual, as the BVI is according to most collectivist commentators something akin to a pirate’s cove.
Ms. Shah states that the UK “… needs to do more to tackle abuses by its Overseas Territories and Crown Dependencies, many of which are well known tax havens.”
What abuses are we talking about? The BVI has given the major tax authorities access to its records via Tax Exchange Agreements.
Ultimate beneficial ownership (UBO) identification information regarding BVI companies is readily available to 27 governments including Aruba, Curacao, the Czech Republic, Faroe Islands, Greenland, Guernsey, Australia, Canada, China, Denmark, Finland, France, Germany, Iceland, India, Ireland, Japan Netherland, Isle of Man, New Zealand, Poland, Portugal, St. Maarten, South Korea, Sweden and both the UK and the USA.
Additionally law enforcement agencies including the police can also access the information via established Letter of Request diplomatic channels.
A new 24-hour electronic request for UBO data disclosure system is expected soon following discussions with the UK.
Finally, in a civil dispute where a party has committed wrongdoing, lawyers can gain access to UBO identification information via a Court Disclosure Order.
So please can somebody explain to me what part of the information held by the BVI is secret?
It seems that anti-corruption campaigners will not be satisfied until offshore service providers and low-tax/zero tax locations have been phased out. So what about the ordinary folk who live in these locations that will see their livelihoods stripped from them? Do anti-corruption and tax justice campaigners see the deaths of these islands’ economies as acceptable collateral damage in the war against the offshore industry?
The naivety of those who think that public UBO registers will be the answer to all these problems is staggering. Crooks don’t tell the truth: that’s what makes them criminals. They are deceitful and will simply put forward men of straw to front their companies and schemes.
Public UBO registers will only serve to cloud what is already an almost insurmountable problem. This is the same for the UK and its much exalted open register: it is only as good and accurate as the information honest people submit. If Al Capone or Meyer Lansky were alive today, does anyone seriously expect that their front companies would accurately and truthfully disclose their status as UBOs on a public UBO register?
Today, UBO identification material is collected and held offshore by regulated company formation agents. It is invaluable to anti-corruption and anti-fraud investigations. By introducing public UBO registers to expose this sensitive material, the law of unintended consequences will hold that the truth will run and hide. And cross-border investigations into economic crime will be stymied wholly unnecessarily.
As I write, the latest ICIJ exposé in the Guardian sees Formula One champion Lewis Hamilton castigated for avoiding paying value added tax on his purchase of a private jet; while Nike, Apple and other companies are being damned for simply maximizing their profitability. However, all appear to have one thing in common . . . their actions appear to be perfectly legal.
Once the ICIJ starts exposing criminal activity, then we will all (myself included) sit up and take note, demanding that the perpetrators be punished. Until then, it is nothing more than titillation and a non-story, unless you are jealous of the immensely talented sports personalities who will no doubt suffer the same invasion of their privacy as Mr. Hamilton.
Let us be straight: how many tax justice or corruption campaigners would like to discuss their private banking in a room occupied by members of the public they don’t know? What have they got to hide? Could they be up to some form of skullduggery simply because they expect privacy when conducting their personal business?
American author David Brin said: “When it comes to privacy and accountability, people always demand the former for themselves and the latter for everyone else.”
So, could those in organizations such as Transparency International or the Coalition for Integrity be accused of being two-faced, for wanting one thing for themselves but expecting others to do something else simply because they are wealthy? The question is rhetorical, of course.
It is the personal attacks on individuals such as Lewis Hamilton that I have an issue with. If the Paradise Papers disclose criminality, then expose it and the culprits. But why draw attention to individuals and companies that have actually done nothing wrong?
As the source of the breach is a well-respected law firm, Appleby, it may open-up additional arguments concerning issues of Legal Professional Privilege.
Legal Professional Privilege is a bedrock of most common law systems. If the ICIJ’s journalists have identified criminal activity, then the correct procedure would be to refer that evidence to the authorities. This will enable a judge to decide on the privilege issue and consider the potential ramifications of how the evidence came into the possession of the prosecutors. Should it be admitted into evidence? Can the alleged offender receive a fair trial given that the story has already been spread across the media?
No doubt I will be taken to task by those who think the rich need to be hung from lampposts. But being tax efficient is not a crime and those who have the temerity and desire to conduct their business in privacy should not be punished for it.
Martin Kenney, pictured above, is Managing Partner of Martin Kenney & Co., Solicitors, a specialist investigative and asset recovery practice based in the BVI and focused on multi-jurisdictional fraud and grand corruption cases www.martinkenney.com |@MKSolicitors. He was selected as one of the Top 40 Thought Leaders of the Legal Profession in 2017 by Who’s Who Legal International and selected as the number one offshore lawyer for asset recovery.
Your comments regarding the UBO concept are so accurate, and yet seemingly ignored by the vast majority who see it as the panacea it is not! . As you say, people with nothing to hide will register themselves, and people with something to hide will register other people's names.
The negative for those who register is that it will be another source of information about people and their assets that can be preyed upon by fraud artists and others. Because real estate is publicly registered in Canada, we receive at least 3 phone calls from companies per week, asking if they can sell our property – companies that are not registered or licensed to act as real estate agents.
In addition, in Canada, every corporation must file tax returns and list all of the shareholders of the company. Thus, Canada Revenue Agency does have a list of all shareholders of all Canadian companies. Is that not sufficient? Do we really need a public registry so our privacy is compromised? I would think that other countries follow a similar system of requiring disclosure of shareholder lists to their taxation authorities.
We all tell ourselves stories to justify a world view, as explained by Kahneman in Thinking, Fast and Slow. In that vein, Mr. Kinney spins a view that lets him and others rationalize illegal actions. In short, the view is that eactions are legal unless explicitly said to be illegal, in a statute. However, that can never be done because of the infinite forms of fraud and thievery. However, as explained by a prominent economist and legal scholar (Judge Posner), law is to look to substance instead of form. Cook Inc. v. Boston Sci. Corp., 333 F.3d 737 (7th Cir. Ill. 2003) Under that standard, there should be jails full of .001%ers and their ancillary "advisors," regardless of theoretic niceties.
Wow! Mr. Kenney’s argument is interesting and fascinatingly ridiculous, Africa loses more than $50 billions every year because of IFFs channeled through places like the BVI. We now know how lobbyists “manufactured” tax laws in the US and other jurisdictions so their clients will continue to take advantage using offshores located anywhere in the world. The choices of Caribbean countries to pursue offshoring has never really helped their development because the money is there just on paper but the real funds are not there. I concur that competition may take many forms in capitalism. Financial engineering by corporations to avoid paying taxes is one aspect of this competition — under the rigors of market competition, evading responsibility is an innovation to be emulated. The magnitude of tax evasion on the part of multi-national corporations through one channel — the shifting of profits to countries and territories with low or nonexistent taxes — was quantified earlier this month by the U.S. Public Interest Research Group Education Fund and Citizens for Tax Justice. Their study, “Offshore Shell Games 2014,” reports that the 500 largest U.S.-based multi-national corporations have squirreled away almost US$2 trillion in profits that lie untouched.
It is estimated that $90 billion a year in federal income taxes are not paid through the creative use of subsidiaries set up in offshore tax havens with M. Kenney and the like and it has nothing to do with assets protection or privacy.
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