Battison's Blog

If you’re a regular reader, you may know that I work in Luxembourg, and in tax. To many, those key words are enough to see dollar signs rolling in front of your eyes. So when the ‘LuxLeaks’ scandal broke out, it provided justification to many around the world: “those quasi-tax haven countries are unjust”; “they cheat”; “they’re becoming more and more powerful”; “they’re being utilised more and more by an increasingly wealthy elite to evade tax”. Do you think that’s true? Then did you also think the same about Panama?

A journalist organisation recently unleashed nearly 40 years of a Panamanian law firm’s records, which exemplifies how many prominent political figures and wealthy people have used offshore bank accounts to conceal assets. The Prime Minister of Iceland lost his job over the scandal. But it’s also tarnished the reputation of more than 140 other politicians and public officials from around the world – Ukraine, Argentina, Russia, China, Britain, and many others.

Some people ask so what? They quote Judge Learned Hand:

“Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

It’s a great quote, since it unveils the hypocrisy of many critics. Yes, people do make voluntary donations to the state. But they’re the minority. Most people use every available legal tool to lessen their tax burden, and if they had the wealth to invest somewhere with less tax, would do so in a heartbeat. What’s more, capitalism encourages people to do whatever is legally permissible in order to maximise their capital assets. Thus within the rules of the game, it is not only perfectly reasonable, but more than that positive, to see people increasing their wealth with tax. Is there someone to blame?

Let’s take the example of British Prime Minister David Cameron’s late father. As a multi-millionaire stockbroker, he registered his own investment fund in Panama, and personally managed it until his death. Through this fund, the elder Cameron was a client of Mossack Fonseca – the Panamanian law firm in question. And even the fund’s prospectus explicitly stated that the fund intended to remain resident outside of the UK for tax purposes. So did the elder Cameron do wrong by using taxes to maximise his capital within a system called capitalism? Or is that system at fault?

Richard Hay, a specialist legal counsel to various British offshore centres, summarises the question well:

“There’s no surprise that criminals carry on activities in financial centres, because that’s where the money is. The real question is whether it is systemic.”

One of the main reasons why this story in Panama has attracted such attention is the widespread assumption that such criminal, or at least borderline criminal, activity is widespread. Although Mossack Fonseca itself claims that it applied all KYC (Know Your Customer) and AML (Anti-Money Laundering) due diligence procedures, the ICIJ (International Consortium of Investigative Journalists) reported that many banks, law firms and third parties involved in the transactions referred to failed to adhere to legal requirements. In other words, they did not carry out sufficient due diligence to ensure that their clients weren’t involved in criminal enterprises, tax evasion (illegal), or political corruption. Some of the documents even show that intermediaries deliberately acted to conceal certain transactions.

As a FATCA and CRS specialist, it’s my job to put due diligence procedures in place, and ensure they’re implemented. So I have sufficient insight into this world to understand that it is not only possible, but indeed highly probable that sufficient due diligence was not carried out. Yet please don’t read any sort of conspiracy into what I say. It’s great that more focus is being given to the issues at hand in the press, and by politicians. But international cooperation on this matter is already getting better at a break-neck pace, and has has been for many years – especially following the 07/08 financial crisis. Indeed you need only take a random snippet from the FATF recommendations (international standards on combatting money laundering and the financing of terrorism and proliferation) to have a guess at how many institutions around the world will/will not be able to accord with such requirements in the next couple of years:

“Financial institutions should be required to maintain, for at least five years, all necessary records on transactions, both domestic and international, to enable them to comply swiftly with information requests from the competent authorities.”

Given the number and complexity of new laws and regulations that companies need to comply with, and the fact that none of the due diligence work is funded by governments, it’s no wonder that application varies from one institution to the next. And can individual countries even monitor all the data that’s currently being requested? Of course they can’t!!

Therefore, although responsible individuals always have to take blame, I have to say that the ultimate fault, or problem, lies with the system itself. Yes, the days when secrecy was one of the main selling points for ‘tax havens’ is fast becoming history. But nonetheless the lack of a truly global tax organisation – similar to the WTO, but for tax purposes – is a significant hindrance to any truly synchronised efforts at tackling tax evasion. Such a tax organisation (and no the OECD does not, and cannot fill this requirement) would bring FATCA, CRS, UK CDOT, BEPS, and perhaps even model tax conventions, and bilateral tax agreements under its umbrella. With such oversight it could easily replace many of the complicated requirements with a simpler, and at the same time more rigorous, set of compliance requirements. But more than that, it could work towards rebalancing the existing inequities of the international tax system, which presently give huge bias to certain countries (and not just tax havens).