Tom Moore argues profession must deal with changing attitudes on tax and reputation
The offshore market is being redrawn following the leak on 3 April of 11 million documents from Panama law firm Mossack Fonseca & Co, which led to a public outcry about tax evasion. The leak revealed some 12 world leaders, including close associates of Russian president Vladimir Putin and 143 politicians, used the firm to avoid tax in developed countries.
While Mossack Fonseca has claimed the documents are the result of a hack rather than a leak and has hired a private investigator with a view to bringing legal action, the damage has already been done. The firm – which denies any wrongdoing – had its headquarters raided by police last month, with the local attorney general’s office saying the aim was ‘to obtain documentation linked to the information published in news articles that establish the use of the firm in illicit activities’.
Governments, regulators and tax authorities have been scrambling to present themselves as tough on legal tax avoidance and outright tax evasion. In the UK, the Solicitors Regulation Authority and Financial Conduct Authority have told law firms and banks to check for business done with Mossack Fonseca.
The EU’s five largest economies – the UK, Germany, France, Italy and Spain – have already announced plans to share information on the beneficial ownership of companies and trusts held in their countries. UK chancellor George Osborne said on 14 April that a new initiative to automatically share information on the owners of companies, trusts, foundations and shell companies would remove ‘the veil of secrecy under which criminals operate’. It comes as part of a global move towards linking country registries to provide international real-time access on company ownership to tax and law enforcement agencies.
RPC head of tax disputes Adam Craggs said the change will ‘likely lead to an increase in both civil and criminal investigations carried out by HMRC’ as the move is ‘a real breakthrough in its ongoing campaign to crack down on tax avoidance’.
The wider episode has reheated a debate about tax and transparency that has not cooled much since the banking crisis. From a legal industry perspective, it will pile additional pressure on the offshore community.
The debate reflects 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. The Panama Papers aided another sizeable shove in that direction.
It is already a common view among City lawyers, funds specialists and tax advisers that the disclosures will bring additional pressure on offshore centres and potentially even shift some clients towards big corporate law firms.
‘The “Overton window’’ has already shifted considerably to tax affairs. The Panama Papers aided another sizeable shove in that direction.’
One of the City’s top funds lawyers told Legal Business ‘the tide is turning against guys trying to hide money in offshore jurisdictions’ and that, while the tax benefits remain, new transparency commitments are making the jurisdictions not putting in information sharing ‘fewer and farther 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.
Debevoise & Plimpton’s London co-managing partner Richard Ward says: ‘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.’
On top of that, the increasing odds that embarrassing disclosures will be leaked online or hacked, have shifted the goalposts for companies and general counsel in judging reputational and commercial risk. Cyber security is forcing law firms – claimed by many to be the soft underbelly of data security – to spend much more on protecting client files. As recently as March, a federal investigation was launched in the US amid claims 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.
For corporate law firms, the good news is cyber security will become a scaleable, competitive edge against smaller rivals. The bad news is they will be required to spend a lot of money buying that edge and it’s an investment they will have little choice but to make.
The final issue for the legal profession, at least for those that wish to market themselves on pragmatic commercial judgement, is that they will need to get better at advising on legal liability-meets-reputational risk, rather than sticking to the letter of the law. That is going to be a stretch for some lawyers struggling to accept that we have passed an age in which the refrain ‘But it is legal!’ ends the matter.
tom.moore@legalease.co.uk