One year after the European Parliament set up the Panama Papers’ Inquiry Committee…

…where are we, and where are we going to?

In an international news publication coordinated by the International Consortium of Investigative Journalists (ICIJ), 11 million leaked documents from the law firm Mossack Fonseca in Panama revealed a global network of shell companies and hidden bank accounts used to facilitate tax evasion, human trafficking, bribery, arms deals, financial fraud and drug trafficking. The leak showed that banks, legal and tax advisors and wealth managers had been involved in setting up secret offshore structures for their clients.

Following these revelations, the European Parliament set up a Committee of Inquiry to fight tax avoidance, tax evasion and money laundering (PANA), by a decision taken in 8 June 2016; on which the Confederal Group of the European United Left/Nordic Green Left in the European Parliament (GUE/NGL) played an important role in building pressure within the Parliament to set it up.

The mandate of this Inquiry Committee has as its objective the evaluation of how EU law in place has been breached or not administered properly and whether the EU laws due to be implemented in 2016 and 2017 were fit for purpose.

Since September 2016, PANA has had various hearings with ICIJ journalists; representatives of the United Nations, the OECD, FATF/GAFI, Moneyval, EBA; with Commissioners Jourova and Moscovici; with representatives from Europol, Eurojust, Member States’ Financial Intelligence Units (FIUs), OLAF; with experts such as Elise Bean, Richard Murphy, Ronen Palan, Brooke Harrington, Mark Pieth and Joseph Stiglitz; on the role of banks such as HSBC, Berenberg Bank and Société Générale; on enablers and promoters, such as the Big 4 accountancy firms, bars gathering lawyers in different countries, and associations of accountants; and on tax havens such as Madeira, Jersey, Gernsey and Gibraltar.

Reflecting on its work over the past 12 months, PANA Committee Vice-Chair and GUE/NGL’s Fabio De Masi says: “The ‘Panama Papers’ Committee of Inquiry has increased public pressure on tougher laws against money laundering, corruption, terrorism financing and the tax loopholes as used by the super rich and the corporations. But we have also got to be very honest with ourselves and acknowledge the fact that the competences and resources of the Committee are insufficient in order to live up to public expectation. Witnesses do not show up; those who do are neither compelled to cooperate fully nor to testify under oath. The Commission and the Council still block access to essential documents or redact the most important parts in them. This poses a severe obstacle to our inquiry.”

Fellow GUE/NGL MEP Stelious Kouloglou, Member of the PANA Committee, chimes in with his colleague: “In one year of work, the PANA Committee has addressed a multitude of cases linked to serious financial crimes. Compared with the power of oligarchs and multinational corporations that of the Committee is limited, but our determination to continue the work, to support the creation of stronger legislation and to acquire evidence that will bring those responsible for serious crimes in the face of law, remains strong.

One of the most reputable experts speaking to the Panama Papers Inquiry Committee was Stiglitz who observed that “financial centers (both onshore and offshore) are creations of globalization—and should not be allowed to engage in regulatory and tax arbitrage. Doing so undermines the positive effects of globalization. If secrecy-havens serve as centers for tax avoidance and evasion or in any way facilitate corruption or illicit activities, they are acting as parasites, and should be cut off from the global financial community”.

Another very interesting observation, shared by Europol and the German Wuppertal Finance Office for Tax Crime and Tax Investigations was that it is quite normal to find offshore companies that are, economically speaking, inactive, as they are only used to register accounts with banks. Europol also noted that if a shell company is being used to commit a crime or to receive criminal funds without any laundering it will indeed have a very short lifetime (usually form 90 days to 6 months). In such cases criminals continuously purchase and use new shell companies from corporate service providers to make sure they can be used as intermediate legal persons to conceal the true owner of such funds.

Europol downloaded the Panama Papers database and did a check against its own databases for detecting common entities; and got 3469 probable hits relating to the following focal points (FP): Sustrans (Suspicious  Transactions  –  Money laundering related); Eastern European  Organised  Crime  (EEOC); Missing trader intra-community (MTIC)[1]; Ethnic  Albanian  Organised  Crime  (Copper); Outlaw Motorcycle  Gangs  (Monitor); Smoke[2]; Asset recovery; global Islamist terrorism (Hydra); etc.

During one of the PANA hearings, Mark Pieth observed that the Panama Papers show a wild mix between tax optimization through transfer pricing, foreign ministers, organized criminals, and traffickers of human beings. And the German Wuppertal Finance Office for Tax Crime and Tax Investigations confirmed that 90% of the cases the schemes where used for tax evasion according to their findings.

Several studies have been commissioned per request of PANA, such as a first study on the mandate of the Inquiry Committee; a study on the impact of tax havens and offshore financial centers on EU Member States; a study on the roles played by four countries’ (Canada, France, Switzerland and the UK) administrative and judicial authorities in fighting tax evasion and money laundering; a study on the offshore activities and money laundering; a study on the roles of enablers and promoters revealed in offshore schemes and the rules applicable to them; and a study on the offshore practices in EU Overseas Countries and Territories (OCTs).

According to the study on “The Impact of Schemes revealed by the Panama Papers on the Economy and Finances of a Sample of Member States” (by Blomeyer and Sanz et al.; April 2017), the amount of tax revenue lost due to the use of schemes by individuals such as the ones highlighted in the Panama Papers was estimated to be between EUR 109 billion and EUR 237 billion in 2015 with a midpoint of EUR 173 billion in the eight sample countries analysed in the study. A previous comprehensive study estimated the tax evasion loss by the EU28 Member States in 2011 at EUR 956 billion (including corporate tax avoidance and evasion).

PANA Missions to different countries

PANA has had 4 missions to the UK, Luxembourg, Malta and the US; and will soon have 3 more missions to Portugal, Cyprus and Switzerland.

The use of tax havens by criminals is made to take advantage of the existing lack of transparency regarding the ownership of the assets ensured by strong professional secrecy laws (banking and legal) and practices of strong administrative secrecy that prevent international exchange of information about the real owners of funds; but also because of the null or insignificant taxes for non-resident entities.

The Missions to UK, Luxembourg, Malta and the US where made on the basis of their role exhibited in the Panama Papers, but also because they are internationally known tax havens. In this sense, the UK hosts the 2nd largest number of enablers identified in Panama Papers (1924 banks, lawyers and other middlemen); and according to the information revealed in the PANA hearing held with ICIJ journalists in September 27, 2016, an employee of Mossack Fonseca in Luxembourg created 115 companies for final clients or banks in one week.

During the Mission to the UK, Rachel Davies, from Transparency International, commented on the role of real estate in money laundering, as it is known that 2.2 Square Miles of London are owned by anonymous companies registered in British Virgin Islands and Jersey; and that due diligence checks are only made on the sellers, not on the buyers; and even so, there is a loophole in these checks due to the fact that Real Estate agents often say that the lawyers conduct these due diligence checks; but since lawyers claim client privilege, they do not need to report.

Journalist Fabien Grasser confirmed to the PANA Inquiry Committee during the Mission to Luxembourg that trying to access information from the tax administration in Luxembourg is an almost impossible mission.

On the role of enablers and promoters exhibited in the Panama Papers

The German Wuppertal Finance Office for Tax Crime and Tax Investigations bought information leaked from Mossack Fonseca and presented some of their conclusions to the PANA Inquiry committee. What can be learnt from this information?

  • Beneficial owners of offshore companies have all contacted Mossack Fonseca via an enabler or promoter such as a bank or another financial services provider (e.g. wealth consultants). In no case beneficial owners contacted Mossack Fonseca by themselves.
  • The financial services industry – be it banks, investment advisors or law firms – offer opportunities for tax evasion to their clients. The actions taken by these institutions as systematically aiding tax evasion. Insider knowledge is important to prove this systematic aid.
  • If a bank created an offshore company for a client, it was entirely linked to the bank. Whenever the client changed the bank, they changed the offshore companies. It is almost as a specific monopolized product. The client could not use such offshore companies with other banks.
  • Power of attorney documents protect the identity of the beneficial owner that is known to the bank, to Mossack Fonseca and to the beneficial owner.

It should be noted that Mark Pieth observed that the role of legal advisors should be reviewed, since legal advisors creating offshore structures and shell companies and opening bank accounts for their clients, should not be seen as classic legal advisors, but as financial operators, and as such, they do not deserve professional privilege.

On the cooperation between Financial Intelligence Units to tackle money laundering

The study “Fighting tax crimes – Cooperation between Financial Intelligence Units. Ex-Post Impact Assessment” by Amadine Scherrer (March 2017) analyses the role of Financial Intelligence Units and their capabilities for cooperating in four countries (Canada, France, Switzerland and the UK) and notes the following:

  • Financial institutions are the main providers of suspicious transaction/activity (STRs/ SARs) reports for FIUs. Legal professionals and accountants do not provide a significant proportion of STRs.
  • The number of STRs received is not necessarily correlated with the size of the national financial market at stake. The paper gives the example of two different defensive strategies: Switzerland ‘under-reports’ (something which afterwards enables it not to exchange the information it has never received, and still comply with international anti-money laundering standards), and the UK ‘over-reports’.
  • Threshold-based disclosures are seen as critical tools against tax evasion by some countries, such as Canada, where financial institutions have been required since 2015 to send electronic funds transfer reports of CAD10 000 (approximately €7 000).
  • The exchange of information between FIUs is always associated with the explicit determination of appropriate conditions of use (purpose limitation), which depends largely on domestic requirements and some FIUs might accept to exchange some information, but will specify that this information cannot be used for tax related matters.

Mutual cooperation and reciprocal arrangements between FIUs and tax authorities require that FIUs have access to tax-related data and information to effectively fight tax crimes. The EU ‘ECOLEF’ project (2013) recently presented updated findings (Unger, 2017: 45) showing that FIUs do not have access to tax-related information in at least two Member States (Germany and Ireland).

Concluding remarks

These are some of the facts regarding the work of the PANA Inquiry Committee. No results are yet observable, as the draft report will not be ready before June 27, 2017. However, some comments can be made on what can be expected.

First of all, there is a limitation on what an Inquiry Committee can do in the European Parliament. The PANA Inquiry Committee has not analysed the leaked information at first hand. This is so because the leak was an anonymous one, and will remain anonymous as it has no guarantees that it will not be judged or condemned or forced to exile due to the information that it has leaked, as has been the case of Antoine Deltour, Raphaël Halet, Rudolph Helmer, Hervé Falciani, Peter Dempsey, to name just a few whistleblowers that were not protected or are being sued in their home countries after the service they rendered to the society.

Moreover, the European Parliament faces some constraints into what it can do in an Inquiry committee, as it can only invite people to speak, but it has no subpoena powers; and it is not clear whether it can focus on a specific case (e.g, the legality or illegality of the activities of one of the banks exposed in the Panama Papers). The mandate of the PANA Inquiry Committee is only limited to reviewing the legislation, and the way in which it has been breached.

In addition to this, the European Parliament can request the European Commission to reveal information on the discussions held with the Council of the European Union on topics related to the mandate of the Inquiry Committe (e.g. anti-money laundering directives, anti-tax avoidance directives, automatic information exchange, etc.), but Member States can request that their opinions on specific issues not be shared, and for such reason, the European Parliament has seen its investigative capacity seriously limited, having been able to see some relevant documents completely blackened by the European Commission.

Consequently, it can be said already that some structural issues that facilitate the movement of capital through and towards tax heavens will probably encounter some difficulties to be addressed such as:

– the freedom granted to capital to move (and not that clearly to people);

– the role of EU tax heavens in impoverishing the rest of the EU and the rest of the world; or even

– the fact that banks, legal and tax advisors and capital asset managers should be considered as promoters and enablers of tax evasion, tax avoidance and money laundering (as they are already in Irish legislation), and not simply as “intermediaries”.

However, the Inquiry committee is still on-going, and a fight needs to still be presented for such issues to be dealt with at the European Parliament.

 

[This article by Verónica Grondona -GUE/NGL advisor on the Panama Papers- is a modified version in English of that published in French by Kairos Europe (Wallonie Bruxelles)]

 

[1] MTIC fraud is a form of sophisticated tax fraud carried out by criminals attacking the value added tax (VAT) regimes of EU Member States.

[2] Dedicated to tobacco smuggling