In March this year, the FATF updated its guidance on how financial service providers are required to identify the beneficial owners of offshore companies and trusts, highlighting methods for the verification of this information.
Additionally, mindful of the fact that much illegally obtained monies held in offshore companies derives from tax evasion, international initiatives such as the common reporting standards and the automatic exchange of information have been established to facilitate the exchange of financial information between companies.
These initiatives recognise the next lesson to be learnt from the leak of the Panama Papers, which is the importance of global co-operation. The Panama Papers evidenced how disreputable individuals and companies could operate in different jurisdictions, using the cross-border nature of transactions to help conceal the illegal origin of their funds.
Collaboration between governments, law enforcement agencies and international authorities is essential if these complex issues are to be addressed effectively.
The effect of the new measures in response to the Panama Papers leak has unquestionably had a cooling impact on the financial activities of offshore jurisdictions. In the year following the leak of the Panama Papers, Panama’s business establishing offshore companies fell dramatically, by 40 per cent.
A continuing role to play
This is not to say that the offshore market for financial services has become redundant. Jurisdictions such as Panama and the British Virgin Islands continue to pay important roles in the global economy.
While tax evasion constitutes criminal conduct, it is still perfectly lawful for an individual or business to arrange its affairs in such a way as to minimise the amount of tax that falls to be paid.
Offshore companies and trusts can continue to play a role in this activity, providing legal entities in a low tax jurisdiction into which lawfully obtained income can be paid.
It remains the case that offshore jurisdictions can still be used for estate planning purposes, including the creation of trusts, foundations, and other succession planning vehicles. This can help individuals manage their wealth and ensure the smooth transfer of assets to future generations.
In the commercial sector, companies in offshore jurisdictions can facilitate international business transactions by providing a neutral, flexible and tax-efficient framework for cross-border commercial transactions. Typically a joint venture, or mergers and acquisitions transaction, may wish to take advantage of this arrangement.
Also, the use of offshore companies and trusts to hold an individual’s assets can play an important protective role in cases where the retention of the assets may be threatened.
