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Comment: Shifting the Overton window – Panama Papers will change the consensus on tax (and boost corporate law firms)

The leak of 11.5 million documents from Panama law firm Mossack Fonseca has reheated a debate about tax and transparency that in truth hasn’t much cooled since the banking crisis. And from a narrow legal industry perspective, it will pile additional pressure on the offshore community.Not because the biggest story in recent memory with a law firm at its heart is a legal story – it’s a policy story – but because the disclosures will have reverberations felt by many professionals in the global legal market.

The point is less about the substance of the leaks themselves as they have been reported so far. The scale of the data may dwarf Snowden, WikiLeaks and the Pentagon Papers but in comparison the substance of the disclosures are less dramatic.

Because of the now well-established direction of travel, that won’t make much difference. The Panama Papers reflect a shift in the tax environment that has been underwritten by the combination of fiscally challenged Western economies and the new realities of transparency and disclosure in the digital age. The ‘Overton window’, the notion of what policy is mainstream at any one time, has already shifted considerably to tax affairs since the banking crisis. This story will be another sizeable shove in that direction.

Discussing the fallout with City lawyers, funds specialists and tax advisers, it is already a common view that the disclosures will bring additional pressure on offshore centres and potentially even shift some clients towards big corporate law firms.

One of the City’s top funds lawyers told Legal Business that ‘the tide is turning against guys trying to hide money in offshore jurisdictions’ and that while the tax benefits of going offshore remain, new transparency commitments are making the jurisdictions not putting in information sharing ‘fewer and farer between and much more exotic!’

While Panama has committed to the Organisation for Economic Co-operation and Development’s Common Reporting Standard (CRA), which will force offshore jurisdictions to report on which individuals control shell companies, it is one of just four countries alongside Bahrain, Nauru and Vanuatu not to have committed to a timeline for implementation. Popular offshore jurisdictions such as Barbados, Bermuda, British Virgin Islands, Cayman Islands, Cyprus and Guernsey have all signed up to implement CRA rules by 2017.

Richard Ward (pictured), co-managing partner at Debevoise & Plimpton’s City arm, comments: ‘There’s been a huge amount of work done in connection with the OECD’s Base Erosion and Profit Shifting project internationally and on cooperation between tax authorities and transparency. Will the offshore market divide up between good guys and bad guys? The answer will probably be yes. There’s a train that has already left the station, which will make it less safe to avoid disclosure.’

And, of course, the Panama Papers are only the latest in a series of developments to put pressure on offshore jurisdictions. The US Foreign Account Tax Compliance Act has already shifted the Overton window on notions of banking secrecy, while the EU Alternative Investment Fund Managers Directive has toughened regulation of funds.

The International Consortium of Investigative Journalists released details in February 2015 of thousands of bank accounts held in Switzerland, information that was later used by UK tax authorities. In the UK, campaign groups have in the last five years had substantial success at highlighting easy terms global corporates were sometimes getting from the UK taxman, progressing a debate the UK government had largely avoided.

On top of that, the increasing odds that embarrassing disclosures will be leaked online or hacked (Mossack Fonseca claimed in an interview with Bloomberg that the leak came from an outside hack), have shifted the goalposts for companies and general counsel in judging reputational and commercial risk.

So what now for the offshore law firms as world leaders come under renewed pressure to get tough on tax evasion? At the extreme end, Wilmer Cutler Pickering Hale and Dorr counsel Christopher David says the UK government ‘could take back executive control of British dependencies, like the BVI and Cayman, as they did with the Turks & Caicos’ when in 2009 the UK suspended the ministerial government and assembly after allegations of corruption. David says the UK government could then ‘extend the laws around disclosure of beneficial ownership’. While advisers doubt the political will exists for such a dramatic outcome, David believes that offshore law firms face a new landscape given ‘there is genuine pressure [on world leaders] to show real leadership’.

Adds Ward: ‘This is not the first example of information leakage that has enabled tax authorities to get access to hidden money. It just happens to be 11 million documents this time.’

Also significant is cyber security, which is forcing law firms – claimed by many to be the soft underbelly of data security – to spend much more on protecting client files and technology perimeters. Only last month, a federal investigation was launched in the US amid claims that hackers targeted networks at 48 major firms, including Cravath Swaine & Moore, Weil, Gotshal & Manges and Freshfields Bruckhaus Deringer. Advisers with smaller tech budgets than Big Law rivals will struggle to keep up.

Brian Spector, chief executive of cryptography company MIRACL, comments: ‘As far as hackers are concerned, any legal firm represents a treasure trove of personal and financial data – but this latest attack is an absolute goldmine. Protecting your clients’ data is a fundamental part of being a lawyer, so it’s difficult to see how this firm can recover from a hack of this magnitude.’

For corporate law firms, the good news is that cyber security will become a scalable competitive edge against smaller rivals. The bad news is that they’ll be required to spend a lot of money buying that edge and it’s an investment they’ll have little choice but to make. It’s the new cost of doing business at the upper reaches of the legal market. There are, of course, terabytes of spin and hype on the topic from vendors, but just because it’s a sales pitch doesn’t mean it’s wrong.

The final issue for the legal profession, at least those that wish to market themselves on pragmatic commercial judgement, is that they’ll need to get better at advising on legal liability-meets-reputational risk, rather than sticking to the letter of the law. That’s going to be a stretch for some lawyers struggling to accept that we’ve passed an age in which the refrain, ‘But it is legal!’ ends the matter.

For more on the Panama Papers, click here or here