Mossack Fonseca: The Panama Papers and Regulatory Problems – Are You Sitting Comfortably?

On 09 May 2016 the International Consortium of Investigative Journalists will publish a searchable database of those corporations and individuals, from around the world, who have used the services of the Panamanian law firm, Mossack Fonseca, in placing money and assets within that jurisdiction. This database could lead to a whole host of regulatory problems (as well as professional and criminal law consequences) for investors (and their professional advisors). This article looks at the details of this case and, as regulatory and compliance solicitors, looks at the likely legal issues, HMRC’s powers, the legal advice that should be sought and how Neil Davies & Partners can help.

Mossack Fonseca, the Leak of Data and Potential Criminal and Regulatory Problems

In a huge data leak, an unknown whistleblower has copied and made available some 11 million pages of documents, covering a 40 year period of Mossack Fonseca’s clients.  A lot of ‘investors’ and their professional advisors will be (or should be!) losing sleep, worrying about the professional, regulatory and criminal law consequences that will inevitably follow the disclosures.

Governments and regulatory agencies around the world are now waiting to mine the data trove in order to commence or progress investigations that could result in civil and/or criminal proceedings for many of those persons appearing on the list.

Neil Davies & Partners are an award winning law firm based in Birmingham, United Kingdom, comprising a team of regulatory and compliance solicitors with specialist skills in tax disputes, regulatory law, money laundering regulation, trusts disputes and commercial litigation.  We are well placed to assist persons facing these issues arising from the Mossack Fonseca revelations.

Why Were Panamanian Banking Facilities and Mossack Fonseca Used?

There is a strong perception, and in some quarters, a presumption, that the use of Panamanian banking facilities or opaque trust arrangements, arranged via the Panamanian law firm, Mossack Fonseca, was done for the predominant reason to hide the true ownership of assets.

Organised Crime, the Banking System and the Tools Available to Fight it

It is said that the biggest problem organised criminals had, 20 years ago, was getting money out of banks, whereas the biggest problem they have now is getting money into banks, owing in large part to recent anti-money laundering regulations.  It would appear that is not such a big problem if your offshore law firm is willing to assist in the laundering of criminal proceeds to secretive off shore locations.

Following the implementation of the Proceeds of Crime Act 2002 the UK authorities now have some of the most robust tools at their disposal to recover the proceeds of crime.  These include:

  • The making of confiscation orders,
  • Default time in prison of up to 10 years (without remission) in the event of non-payment,
  • The option to pursue the recovery of sums in the civil courts (with a lower burden of proof required than in the criminal court), and

A variety of interim and preservative measures, including worldwide Freezing Orders and interim receiving orders.

Regulatory Problems Could Include Dawn Raids

The prospect of an early morning regulatory raid on Panamanian investors and/or their professional advisers, by HM Revenue & Customs (‘HMRC’), the Police and others are likely to be a very real concern in many cases that come out of Mossack Fonseca and the Panama Papers.

Tax Evasion is One of the Regulatory Problems that Could Arise

Tax evasion is the illegal non-payment or underpayment of tax.  It often involves dishonesty in relation to a tax payer’s representations to the tax authorities, which in the case of the UK is HMRC. There are general and specific offences in the UK relevant to this type of conduct:

  1. Cheating the revenue is a common law offence with no sentencing upper limit.  Life sentences are possible for the most serious offences.
  1. Specific taxes have specific statutory offences dealing with the most serious types of conduct.  For example in the case of VAT, section 72 Value Added Tax Act 1994 makes it an indictable offence to be concerned with the fraudulent evasion of VAT.

HMRC will often make an early decision as to whether any particular case is destined for the criminal or the civil track.  Where dishonesty is suspected but a civil route has been selected by HMRC they will expect early and frank disclosure when requested.  The Finance Act 2007 Schedule 24 sets out the regime and the applicable penalties that HMRC would seek to apply.

Tax Avoidance is Another Likely Problem Area Following Significant Rule Changes

A significant proportion of the resources of HMRC are now taken up with contesting alleged tax avoidance schemes. These schemes have often been promoted by firms of accountants and tax advisers and are now the subject of considerable scrutiny by HMRC.

HMRC have brought about significant rule changes that mean that disclosure of participation in tax avoidance schemes must now be made to HMRC.  Subject to a Trigger Event (detailed below), and the minimum thresholds being met, Taxable Persons who knowingly take part in a scheme of VAT avoidance must tell HMRC about the following transactions:

  1. ‘Listed Schemes’
  1. Arrangements and Transactions that include or are associated with at least one of a range of designated provisions that are often linked with avoidance.  These are referred to in the legislation as the ‘Hallmark Schemes’.

Click here for the full article.

Accelerated Payment Notices – Pay First and Argue Later

HMRC also now have a further fearsome weapon in their armoury with the introduction of Accelerated Payment Notices (‘APN’s’).  APNs demand an advance payment of tax even in circumstances where HMRC are continuing to investigate the question of whether the tax ought to be paid or where an appeal to a tax tribunal remains outstanding. It really is a question of ‘pay first and argue later’.

APN’s now apply to a range of taxes including income tax, capital gains tax, corporation tax and inheritance tax.  Click here for more details.

Regulation Problems and Litigation With HMRC

In order to successfully litigate with HMRC it is important that your legal advisers have a complete skill set to deal with all of the powers available to HMRC, which include, but are not limited to, the following:

  1. Powers to raise assessments and deny tax recovery.
  1. Civil recovery and criminal confiscation powers pursuant to the Proceeds of Crime Act 2002.
  1. Familiarity with the Tax Tribunal Rules 2009.
  1. Tax related criminal offences and procedure.
  1. Anti-avoidance disputes and APNs.
  1. Early morning regulatory raids on homes and business premises, designed to assist in evidence gathering.

Professional Advisers Can Also be Pursued

Most people investing monies and assets in a jurisdiction such as Panama will do so with the advice and assistance of professionals such as Tax Advisers, Accountants and Lawyers.  These groups will owe a duty of care to their client to ensure that their advice, where relied on, does not cause you loss or break the law.

Financial professionals may often recommend beneficial tax planning arrangements, also known as tax avoidance schemes, which are designed to reduce the overall level of tax payable by their clients.

Investment Fund or Scheme Managers who promote these types of schemes will often use accountants, financial advisers, or intermediaries to sell their product. Those intermediaries, or ‘introducers’, will usually be paid significant sums in commission which may impact upon the impartiality of the advice given.

Problems arise when it turns out that the scheme does not work. In other words, HMRC may determine that a scheme is not permissible, leading to legal and regulatory problems for the investor (and also the advisers). Under these circumstances, the tax that the client thinks it has saved has to be paid to HMRC, along with penalties for late payment and interest. These sums can be considerable and can have a crippling effect on an individual or business.

Contact Us if You Believe You are Likely to Face Legal and Regulatory Problems as a Result of the Panama Papers Case

If you have relied upon the advice or representations of either the scheme managers, promoter or introducer, accountant or other tax adviser, to invest in a tax avoidance scheme – linked or otherwise to the Panama Papers – which you now understand may not work, and you have or will suffer financial losses as a result, then you may be able to bring a professional negligence claim against them.  There are strict time limits for bringing such claims.  Do not delay in seeking advice.

Likewise, if you are an investor or professional advisor who is named in or involved in the Panama Papers’ disclosure list to be published on 09 May 2016, you should seek advice now, rather than wait for the knock on your door.

Here at NDP, as regulatory and compliance solicitors we are well placed to help. Contact us or call us now on 0121 200 7040 for an initial discussion.