Paradise Papers Show Need to Close Beneficial Owner Loopholes

Photo Credit: ICIJ

The Paradise Papers are the result of another impressive investigation of thousands of leaked documents from the Bahamian law firm, Appleby. The extent of offshore holdings is likely to bring about scrutiny on corporate excesses as well as additional pressure on governments to reign in tax haven jurisdictions and lax incorporation laws. Only a few days after the Paradise Papers were released, Transparency International put out a report, Hiding in Plain Sight which exposes hundreds of companies established in the U.K. for the purpose of helping launder corrupt and kleptocratic spoils. Interestingly, the United Kingdom and perhaps more surprisingly the Ukraine, have been applauded for their efforts to increase transparency around beneficial ownership. Transparency of corporate ownership structures is the common missing ingredient in understanding who ultimately holds the purse strings. This leak demonstrates that law firms rather than law enforcement, government or the public know quite a bit about illicit capital flows and at times abet these financial crimes that undermine public confidence in rule of law while exacerbating economic inequality.

Shruti Shah, a contributing editor to the FCPABlog and President of Programs and Operations at the Coalition for Integrity, wrote an excellent analysis on the Paradise Papers in regards to beneficial ownership and the pressure the U.K. and the United States and their many jurisdictions may likely soon be facing. It will be interesting to see whether such pressure reinvigorates the beneficial ownership bills in the United States House of Representatives (H.R. 4450) or the United States Senate (S. 1454). Regardless of new legislation, there will certainly be increasing pressure on entities around the globe when FinCEN’s regulation on beneficial ownership takes effect on March 11th 2018 – especially for financial institutions operating in the United States.

Here’s a repost of Shruti Shah’s blog from November 6th:

The massive leak of 13.4 million files, dubbed the “Paradise Papers,” highlights loopholes that exist in the global financial system. The documents also 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.

The documents were leaked from offshore law firm Appleby, from corporate services provider Asiaciti Trust, and from company registries in 19 secrecy jurisdictions.

The Paradise Papers were revealed on Sunday (November 5) by the International Consortium of Investigative Journalists (ICIJ).
While shell companies have legitimate uses, their opacity makes them a favorite tool for tax evaders, money launderers, corrupt public officials and other criminals. The leaks also shine a light on the role of offshore tax havens.

The United Kingdom has led the way by publishing the world’s first fully open register of beneficial ownership, but it needs to do more to tackle abuses by its Overseas Territories and Crown Dependencies, many of which are well known tax havens.

Unfortunately, it is not just Bermuda, Panama, and other known tax havens that provide vehicles for tax evaders and criminals to launder their illicit wealth. In every state in the United States, one can incorporate a legal entity without having to disclose who controls the entity or derives economic benefits from it.

It’s imperative that company service providers are required to conduct due diligence and screenings of their clients so that they are not unwittingly opening shell companies for tax evaders or corrupt public officials.

Claudia J. Dumas, the head of the Coalition for Integrity said, “The Paradise Papers leaks show how important it is for all jurisdictions, including the U.S., to collect beneficial ownership information upon company formation.”

Original blog post on the FCPA Blog

Intro written by Louisa Tomar, Program Officer for Global Programs at CIPE

Shruti Shah is Vice President of Programs and Operations at Coalition for Integrity and a contributing editor of the FCPA Blog