Standing apart – the offshore fallout from the Panama Papers

On April Fool’s Day this year, Panamanian law firm Mossack Fonseca & Co notified its clients that it had sustained an email hack. It instantly became the world’s best-known law firm following the leak of 11.5 million documents, cherry-picked by global media outlets, that revealed confidential client information. The Panama Papers made news and so did offshore law firms. Again.

But for every offshore firm, regardless of jurisdiction, the Panama Papers leak was no laughing matter: the inevitable public outcry further fuelled the enduring debate over tax and transparency.

‘The disclosures have, once again, put the role of offshore centres under the microscope,’ says Jason Romer, group managing partner at Collas Crill. ‘Although it is widely accepted that offshore structures are not illegal, questions still persist around whether offshore centres facilitate a cloak-and-dagger approach to business. The reality for a majority of businesses set up in offshore centres is that this is clearly wrong.’

Six months on, the story lingers, raising questions of whether there will be any sustained reputational damage by association for the leading offshore law firms. As Antonia Hardy, Cayman Islands managing partner of Walkers comments: ‘The unhelpfully sensationalised coverage has not done any of the offshore centres any favours.’

Meanwhile, Harneys chair Peter Tarn is more phlegmatic. ‘While there is no doubt offshore sustained reputational damage in the storm of media sensationalism around the Panama Papers, the so-called revelations have underscored the commitment of Cayman, Bermuda and BVI [British Virgin Islands] to combating money laundering, tax evasion and other financial crime.’

The upshot of the scandal is that it has allowed the offshore legal market to be viewed at a more granular level, emphasising the distinction between ‘white hat’ and ‘black hat’ jurisdictions, showing that some are cleaner, safer and therefore less risky than others.

‘The standout jurisdiction where companies were incorporated by Mossack Fonseca was the BVI, followed by Panama,’ says Stephen Baker, senior partner at Jersey-based Baker & Partners. ‘These jurisdictions have responded by implementing reviews or regulation designed to counteract the perceived failings – whether these succeed will be a matter of time.’

David Cadin, managing partner of Bedell Cristin, develops the point: ‘The impact has raised the level of scrutiny. It has also identified the reputable and the less-reputable offshore centres. If it wasn’t obvious before, it is now absolutely crystal clear that there is clear blue water between properly-regulated offshore jurisdictions and less properly-regulated ones.’

At Appleby, group managing partner Michael O’Connell sees a silver lining: ‘Ultimately, the impact will be a positive one, with further review and focus on those jurisdictions, like Panama, that have less robust client take-on procedures and poor or no adherence to international financial transparency agreements.’

In contrast, he points specifically to Bermuda, BVI, Cayman, Mauritius and the Crown Dependencies (Guernsey, Jersey, Isle of Man) as being ‘committed to the implementation of internationally agreed standards in tax transparency and information exchange. They adhere to the highest of international standards in compliance and client take-on procedures, and will continue to do so.’

The larger offshore players categorise their diverse offices as ‘product’ jurisdictions (such as BVI, Bermuda, Cayman, Mauritius and the Channel Islands) or ‘market’ jurisdictions where they need to be close to their clients. In the latter category, Hong Kong ranks above London or New York: Appleby, Conyers Dill & Pearman, Harneys, Maples and Calder, Mourant, Ogier, and Walkers all have local offices, kept busy with initial public offerings, business trust listings, investment funds and bank finance, especially involving BVI and Cayman. Disputes have also proved a big spur: Chinese clients want BVI and Cayman-qualified litigators on hand.

But despite lawyers comfortably cataloguing the ‘properly regulated’ offshore centres on one side of the ‘clear blue water’, they are much more circumspect about naming those on the other. Nearly 100 jurisdictions are designated as offshore centres by either the International Monetary Fund, the Organisation for Economic Co-operation and Development (OECD) or the Financial Secrecy Index.

However, the list includes several islands that many would struggle to locate on a map. ‘These are small jurisdictions,’ suggests one prominent lawyer. ‘I went to Barbuda [population: 1,638] a few years ago. It’s quite hard to find. These places don’t have the legal infrastructure or the trust infrastructure. Essentially, if you need two flights to get there, it’s probably not right.’

At large firms with a network of offices spread across the major offshore jurisdictions, lawyers enthusiastically champion their transparency, compliance, regulation and adherence to international standards issued by the OECD, the Financial Action Task Force and other regulators. These, they argue, are the paramount benchmarks of premier league offshore status. But last year, the EU blacklisted 30 territories, each deemed problematic by at least ten member states because they were not doing enough to crack down on tax avoidance.

The blacklist of ‘non-co-operative jurisdictions’ included Bermuda, BVI, Cayman and Guernsey, but not Jersey. There was predictable outrage. In the wake of the Panama Papers, the European Commission (EC) is currently drawing up a new common blacklist, to be agreed by every member state.

System error

One issue to re-emerge from the Panama Papers scandal that every offshore law firm agrees is a priority is cyber security. ‘Like every other organisation in the legal and financial services industry, we are under constant attack from cyber criminals,’ says O’Connell. ‘It is our “new normal” and I cannot imagine any organisation that has not had to invest in enhancing their security measures in order to keep their clients’ data safe.’

Mourant Ozannes global managing partner Jonathan Rigby says that offshore firms are already at Defcon one. ‘Now more than ever we are on high alert, and have a continuous programme of review and education for our people to ensure we are as resilient as possible.’

Tarn comments: ‘There will not be a service provider or law firm that has not reacted in some way to the Panama Papers with respect to cyber security and IT risk.’

Irrespective of these concerns, offshore workflow has increased, with Bermuda attracting the most recent attention. ‘We are in growth mode and we have a number of lateral hires in the pipeline,’ says O’Connell. Fellow Bermuda-based Conyers points to XL Group’s re-domiciling of its parent company from Ireland to Bermuda as an example. The firm’s Hong Kong-based co-chair, David Lamb, says: ‘It is an indication of the enhanced regulatory status of Solvency II proving beneficial for insurance companies.’

Bermuda has also attracted more law firms. Walkers, through its association with local firm Taylors, has been enjoying a strong first year of operation, more than doubling in size, according to the firm’s global managing partner, Ingrid Pierce. Harneys also launched a new Bermuda office a year ago, which has focused particularly on disputes work.

Elsewhere, Robert Briant, head of Conyers’ BVI office, notes ‘a decline in BVI incorporations over the last five years’, although the number of active companies ‘remains steady at 450,000’. Nevertheless, having increased its local market share, Conyers expects to hire more BVI lawyers soon.

A week after the Brexit referendum (see part two), the long-awaited advice to the EC from the European Securities and Markets Authority (ESMA) was published on the Alternative Investment Fund Managers Directive passport. There were ‘no significant obstacles’ for Guernsey or Jersey. But for Bermuda and Cayman, ESMA cannot yet give ‘definitive advice on investor protection and effectiveness of enforcement’.

Since many hedge funds are domiciled in Cayman – and to a lesser extent in Bermuda and the BVI – strengthening their rules is essential to meet the ESMA criteria. Rigby says that ESMA’s advice has ‘further underlined the regulatory and international standing of the Channel Islands. This vindication is a positive sign for fund managers and investors’. He suggests that Cayman ‘will soon meet the assessment criteria’. Others suggest the same for Bermuda.

Another new compliance hurdle is the OECD’s common reporting standard (CRS). This requires jurisdictions to obtain information from their financial institutions and automatically exchange it annually with other jurisdictions. Jersey and Guernsey were among the 52 early CRS adopters: jurisdictions committed to provide the first exchange of information by September 2017. Bermuda, Cayman and BVI will also exchange their first CRS information next year.

Romer says that ‘confidentiality will be a key consideration. The information exchanged under CRS, on an annual basis, among relevant tax offices worldwide, will be sensitive and, in the context of trusts, will disclose the identities of personnel who previously benefited from a degree of anonymity’.

From a client’s perspective, the protection of personal and financial data that will be exchanged as a result of the CRS rules will be the biggest challenge for all law firms involved.

‘[CRS] has marginally increased professional advisory work as clients come to terms with its requirements and implementation,’ says Conyers’ Lamb. ‘It has increased the cost of doing business by the need to put in place systems to ensure compliance with its requirements. Otherwise, it has not affected our business.’

And despite the media hype, nor would it appear has any significant fallout from the Panama Papers. At least not yet. LB

For further reading please see Aftermath – the offshore world post the Brexit vote