Paradise Papers or Panama Papers? Any change to the global financial system?


The so-called Paradise Papers is another in a long list of leaks that forces money laundering into the open: The Panama Papers, Wikileaks in 2010, Luxembourg tax files in 2014 and HSBC in 2015. The Paradise Papers are essentially version 2.0 of the Panama Papers, albeit smaller with 1.4 terabytes of data leaked compared with 2.6 terabytes in the 2016 Panama Papers leak. Dr. Henry Balani global head of strategic affairs at Accuity looks at the wider implications of the leak.

Interestingly, this time around there is a greater emphasis from the press that the creation of offshore companies (in itself) is not illegal and can have legitimate purposes. This suggests the public are now better educated on how offshore companies work. The ICIJ website that posts the data provides a notification of such.  However, the optics of the Paradise Paper leaks continue to be damaging to many high-level government officials, politically exposed people (PEPs) and even the Queen of England and Prince Charles caught in the scandal.  Secrecy continues to be a concern, leading to potentially unethical or even criminal behaviour.

The question that must now be asked is how many more secrets need to be exposed before we see a global improvement in financial transparency and tax evasion?  The public learns about how the truly wealthy use offshore companies to hide their sources of wealth and reduce their tax burden in their home domicile.  While there may be legitimate wealth creation, such as successful businesses, the lack of transparency leads to the suspicion that there is also ‘dirty money’ hidden for illegitimate reasons.  Revelations from the latest Paradise Papers leak only raise the public’s discontent and anger.

Governments are interested in these leaks as their role is to stop global tax evasion and money laundering activities that are often facilitated via offshore financial centres, while also ensuring the fair taxation of citizens and corporations. Criminals launder illicit funds through the global financial system, and if caught, can be subject to strict anti-money laundering regulations and penalties.  Banks are not spared from huge penalties [1].

These two points of pressure would compel politicians to increase the transparency of the global financial system.  It could be as simple as identifying the ultimate beneficial owner of offshore companies, yet progress has been slow. Despite the revelations from the Panama Papers bringing down the Prime Ministers of Iceland and Pakistan, the prosecution against Mossack Fonseca, the law firm in the middle of the Panama Papers scandal, still continues.

The difficulty is that offshore financial centres are sovereign nations, or dependent territories, that benefit from providing offshore company registration services.  Firms like Appleby themselves tend to be highly secretive and profitable, catering to select ultra-high net worth individuals [2].  These offshore financial centres typically assign blame for criminal wrongdoing against the home countries for not policing their citizens to declare sources of wealth for tax purposes.

Can we expect a change from the latest revelations?  It will depend on who else is exposed, and more importantly, if the leaks uncover additional hidden illegal sources of funds.  No doubt the Paradise Papers will be reviewed in detail with individuals and companies linked as part of the research to determine if in fact there are any ‘bad guys’ gaming the global financial system.

Screening tools can help identify the sometimes-complex relationships between politically exposed persons, ‘bad guys’ and offshore companies, however, it can be difficult to determine how illegal their activities actually are.  Additional leaks will provide greater clarity and opportunity for effective due diligence.  Perhaps then will we see an improvement in the global financial system.

Source: FTSE Global Markets