Do You Know About Secrecy Jurisdictions and Beneficial Ownership?

The Panama Papers is a collection of over 11.5 million documents that exposed the use of Panamanian secrecy laws to hide ownership, wealth and even criminal activity.  

A Book Review

I enjoy reading books and these days listening to books. I heard about this book on a podcast and it sounded interesting so I bought it and listened to the entire book in a short span of time. I was already familiar with the concepts of secrecy jurisdictions, tax havens and offshore companies and I had read some of the news accounts of the leak. But there was much more to learn which is why I highly recommend this book, even thought it has been seven years since publication.

The Panama Papers – Breaking the Story of How the Rich & Powerful Hide Their Money, written by Bastian Obermayer and Frederik Obermaier

Obermaier and Obermayer (no relation to each other) are investigative journalists at the Suddeutsche Zeitung, a large daily newspaper in Munich. In 2014 they were contacted by an anonymous source eager to provide information regarding the use of Panamanian entities to hide wealth and in some circumstances, criminal activity including bribery and corruption. The source transferred over 11.5 million documents from the files of a Panamanian law firm, Mossack Fonaseca to the journalists.  These documents revealed the establishment or activities of more than 214,000 offshore entities in the tax haven of Panama.

At the time Panamanian law permitted a high level of secrecy including concealing the identity of the ultimate or beneficial owners of Panamanian entities and Mossack Fonaseca, specialized in this work. They provided advice, structured offshore transactions and handled the establishment and maintenance of offshore entities (companies, trusts, foundations). The law firm’s clients included professionals acting on behalf of their own wealthy clients, such as private banks, investment advisors and attorneys as well as individuals seeking to establish offshore companies, trusts or foundations.  

When the records were leaked the identities of the beneficial owners and the professionals that facilitated the establishment of these entities were exposed.  In addition, in certain cases the journalists were able to discern the use or source of assets owned by a particular Panamanian entity even though it was not directly disclosed.

It turned out that the beneficial owners included:

• government leaders and employees
• family, friends and associates of government officials
• sports figures
• royalty
• criminal figures, including organized crime figures
• companies and other entities identified with corruption and bribery scandals

Relevance

Depending upon the country, the use of an offshore entity in a tax haven or secrecy jurisdiction is not inherently illegal but from a diligence point of view, if you come across this structure you need to do more investigation.

This book is a detailed and useful source of information for understanding the subjects of tax havens, secrecy jurisdictions, beneficial ownership. It is also a good primer on how these structures work to hide legitimate and illegitimate wealth both of which are important diligence topics.

The Panama Papers leak was instrumental in drawing attention to these topics and kickstarting global initiatives to better understand and track ownership of entities and promote transparency. The United State has now enacted the Corporate Transparency Act and other countries have, or in the process of, establishing beneficial ownership laws and registries.

Finally, notwithstanding the lessons of the Panama Papers, the Pandora Papers an even larger source of information was leaked in 2021. This demonstrates that notwithstanding the risk of exposure there is a continued appetite for these types of entities and the secrecy that surrounds establishment and maintenance. The tactics, techniques and ways of thinking that were revealed in the Panama Paper leak are ongoing.

The topics in this book continues to be relevant to diligent professionals.

Diligence Lessons

By the time that I listened to the book I was already familiar with the concepts of secrecy jurisdictions, tax havens and offshore companies and I had read some of the news accounts of the leak. But there was much more to learn including:

• The scope and global coverage of the issues surrounding tax havens, off shore jurisdictions and secrecy. These are issues that have direct and indirect implications on about every country and territory in the world. 

• A detailed look at the actual steps and processes used to structure and establish these offshore entities, including the classes of professionals that act as “enablers”.

• An overview of the techniques used by the reporters to guard the privacy of the source, the secrecy of the data and the investigation and the work of the global network of the journalists. Ironically, also get a view of what was not done by the law firm to protect and insure the secrecy of the data.  

• The challenges that were presented by the sheer volume of data and how they were overcome by both technology and enlisting human reviewers.

• The work of The International Consortium of Investigative Journalists (ICIJ) which was active in this area before the Panama Papers and continues to be active in subsequent investigations.

I found this book to be a wealth of diligence learning and materials that are still relevant today, so I started thinking about – how would I use this book in a diligence program, especially if I were a compliance officer and had to be on the watch for red flags or if I were required to meet regulatory standards of “know your client” types of diligence.

Using the Book To Improve Your Diligence

Here are my suggestions:  

1. Establish a diligence book club in which you read and discuss useful books or reports. This is a long book, so do it over time and perhaps chapter by chapter. You can have different people or groups take primary responsibility for extracting information and learning from the different chapters.
2. Use the book to increase your own knowledge. Beneficial ownership, tax havens, secrecy jurisdictions, the global movement of money and the use of third party enablers are all relevant topics.
3. Learn diligence techniques from the journalists involved in the story. They performed their own diligence, some of these procedures may be useful for your programs.
4. Take the book as a starting point to further explore the resources and data sets (including past and more current investigations) that are made publicly available by the ICIJ.

Learn More

If you want to learn more – here are some places to start:

The Panama Papers – Breaking the Story of How the Rich & Powerful Hide Their Money, written by Bastian Obermayer and Frederik Obermaier

The International Consortium of Investigative Journalists (ICIJ)

Offshore Leaks Database – Information from the Panama Papers