PANA Inquiry Committee meets in Tax Haven UK

The PANA Inquiry Committee met this past 9 and 10 of February in the UK with academics and NGOs; officials of Her Majesty Revenue and Customs (HMRC) taskforce on Panama Papers, National Crime Agency (NCA), and the Financial Conduct Authority (FCA); Peter Dempsey, a former compliance officer of a law firm, who has presented reports on illicit activity being channelled through the law firm; HSBC representatives; and several representative of different UK law societies, trust estate practitioners, and the Institute of Chartered accountants.

Why did the PANA Secretariat go to a Mission to the UK?

The underlying reason for the PANA Committee to make such a visit to the UK was its role as a tax haven exposed in the Panama Papers. In this sense, the UK hosts the 2nd largest number of enablers identified in Panama Papers (1924 banks, lawyers and other middlemen)

No political representation from the UK government attended the meetings

No representative of Her Majesty’s Revenue & Customs (HMCR) nor of Treasury, nor of any political level, came to the venue. The meeting was held with senior officials of the Panama Papers taskforce, the Financial Conduct Authority and the U.K. Financial Intelligence Unit, who declined to comment any political issues such as crown dependencies and oversee territories. Jane Ellison, from Her Majesty Treasury sent an official response to PANA Chair Werner Langen on the first day of the delegation referring to those technical experts and promising to respond to questions by committee in written.

As observed by MEP Fabio de Masi (Die Linke-GUE/NGL), this attitude mirrors Council approach of not cooperating with PANA and questioning legal basis.

The Crown dependencies (CDs) and Overseas Territories (OTs)

It should be noted, that in the Panama Papers, the British Virgin Islands’ -one of the 14 British Overseas Territories (OTs)- offshore financial sector is involved in scandals involving political leaders and their families, several Conservative politicians and donors, and property magnates.

The UK’s City of London is at the centre of a web of Crown Dependencies and Overseas Territories, over which the UK wields both official and informal influence. As Jersey Finance, the official marketing arm of the Jersey offshore financial centre, puts it, ‘Jersey represents an extension of the City of London’. (Oxfam, 2016)

As a matter of constitutional law the UK Parliament has unlimited power to legislate for the Territories. However, the UK has chosen to not exercise its powers. (FSI, 2015).

UK’s ENABLERS of tax evasion, tax avoidance, money laundering and capital flight

Tax advisors

Under the rules (introduced in 2014) of the disclosure of tax avoidance scheme (DOTAS) professionals and other persons promoting to taxpayers a tax planning scheme that falls within any of a number of ‘hallmarks’ must report the scheme to the tax authority. Tax professional who fail to comply with this requirement risk being labelled a POTAS (Promoter of Tax Avoidance Schemes).

Howeverthe disclosure of tax avoidance scheme (DOTAS) regime in the UK targets only standard schemes which are widely marketed by promoters, so it has not dealt with tax avoidance by multinational entities, which generally use arrangements tailored to specific needs, even if based on standard techniques. For example, it seems that the tax clearances arranged by PwC in Luxembourg over a period of eight years for 343 MNEs were not notified under the UK’s DOTAS requirements, as PwC claimed that these were ‘individual arrangements, each tailored to the needs of individual clients’. Nevertheless, the UK Parliament’s Public Account Committee found that ‘The number of cases involved plainly demonstrates that PwC is effectively selling variations on a scheme to a large number of its clients’. (BMG)

Legal advisors

Linklaters, Freshfields, Clifford Chance, Slaughter and May and Allen & Overy (also called the 5 magic circle law firms) are all named in the Panama Papers, alongside a host of other leading firms. Some of them have claimed that they did not have to conduct CDD because their clients were not PEPs, when they actually were (as was the case of the daughters of the president of Azerbaijan, who were assisted in setting up an offshore company)

In England the legal professions benefit from legal professional privilege. This gives legal protection to confidential dealings that clients have with their lawyers within certain limits. As Mark Pieth had pointed out in the Interparliamentary Committee meeting on 31 January 2017): –Lawyers are acting as financial operators, and as such they should not be granted with professional privilege.

Banks: The Hong Kong and Shanghai Banking Corporation (HSBC)

On the Panama Papers, HSBC and its affiliates appear to have helped open more than 2300 shell companies for clients with Mossack Fonseca.

The HSBC has been the centre of many scandals throughout history, the most recent one relating to the information leaked by Hervé Falciani in 2014, and the findings of the US Senate Investigation on the role of HSBC in enabling money laundering which resulted in fines arising to more than USD 1.9 billion in 2012.

At the PANA hearing of November 14, 2016 in which Europol had mentioned that after downloading Panama Papers’ database and linking it with their database, they had got 3469 probable hits, in which, the UK scored highest (1377 hits) and was also highest in in Islamic terrorism financing hits; Fabio de Masi made some queries on the reporting of suspicious activities relating to terrorist financing by banks.

HSBC replied on 26 September 2016 that in 2015 the SAR filings in the UK numbered in the tens of thousands; of those, over 70 SARs were filed for potential terrorism-related reasons. The reports were made available to law enforcement agencies for investigation.

During the PANA mission to the UK, Fabio de Masi asked HSBC representatives whether any accounts had been frozen on account of these reports. Donald Toon (Co-Chair – Panama taskforce. Director of Prosperity at the National Crime Agency -NCA-) was not able to reply, and mentioned that it was a mater relating to HM Treasury.

HSBC confirmed asset freezes of terrorist finance and terrorist finance also being routed through banks but no answer as to how many asset freezes.

Revolving doors: In Argentina, the designated vice-president of the FIU after December 20, 2016 was an HSBC lawyer on several cases that had reached the Supreme Court, where she was challenging the proportionality and reasonability of the anti-money laundering legislation and fines; and the obligation of banks to present suspicious transaction reports. She denied this relationship saying that she had only been defending an HSBC employee. However, soon after she was designated as vice-president of the FIU, she laid off the main FIU lawyer who had been involved in the HSBC case, as well as other FIU employees working on the same case.

Fabio de Masi questioned HSBC representative on the Argentine revolving doors, but they did not acknowledge any knowledge on the Argentine case, although they did stress strong ties with the public sector, and fended off any criticism on conflict of interest.

Interestingly enough, HSBC commented that public registries with stricter rules on Beneficial Ownership (BO) would be beneficial for the industry as they would ease BO checks and hence lower compliance costs

Beneficial Ownership (BO) in the UK

UK Parliament representatives confirmed in May 2016 that all the CDs and OTs would be sharing Beneficial Ownership (BO) information with the UK and law enforcement agencies. Some of the CDs and OTs have already said very firmly that they will not be creating public registers. (IP/A/PANA/2017-01)

It is understood that Britain’s Limited Liability Partnerships (LLPs) can be created with a form and 40 pounds, and require no check-ups on identification; and Scottish Limited Partnerships (LPs) are still not required to disclose their annual accounts or even the names of the people who control them. Ownership and control can be masked and layered through the use of faceless “general partners” and “limited partners”, and these are often based in secrecy jurisdictions (FSI, 2015). Therefore, it is no clear that B.O. registry in the UK will provide any information on these legal structures. On the contrary, it could even encourage more use of such entities for tax evasion, tax avoidance and money laundering.

On this point, Richard Murphy, observed that while it is possible to get information on U.K. Citizens from abroad via information exchange, there are not sufficient BO checks if foreigners register in the UK and there is no sufficient application of UK company law to all entities. In this sense, he suggested that Limited Liability should be removed from the directors if they do not present their tax returns, as it has also been observed in the UK that most companies do not present their tax returns.

MEP Fabio de Masi inquired the officials from HMRC and NCA on the possible gaps in relation to LLP. However, they did not answer such questions.

Fabio de Masi also took the chance to ask experts on what would be an ideal threshold for a BO registry, as current discussion on the amendments to the AMLD in the European Parliament have seen most of the parties suggesting to lower the threshold to a 10%, but not accepting to have a BO registry that actually includes all BO.

Prem Sikka confirmed GUE/NGL’s position replying that there cannot be a 25% threshold, nor any threshold. All BOs need to be identified, as there cannot be nominee directors, nor nominee shareholders in a BO registry; and  also that there needs to be a registry of trusts.

Murray Worthy, from Global Witness, also observed that all trusts should be included, family trusts as well. The registry of trusts should include all parts.

Land and real estate registries in the UK

Over £180m worth of property in the UK has been investigated by UK law enforcement as suspected proceeds of corruption between 2004 and 2014. Over 75% of these properties use offshore corporate ownership. (IP/A/PANA/2017-01)

A visual example of the problem is presented by BNP Paribas, who promotes a business structure to buy property in London without paying taxes, by being purchased by a Jersey company with loans from a Singaporean PLC and a bank. This means that in the future the Jersey company owning the building can be sold instead of the building itself, avoiding stamp duty land tax on the transaction. A substantial saving. In addition, if the Singaporean owner loans the money to the Jersey company to buy the offices, then rental income can be offset against interest payments, resulting in further savings. Further tax can be avoided if rental income is taken out of the country as management fees. As Kirsten Pritchard Jones of Nabarro, a law firm explaining the structure in a BNP Paribas brochure, says, “The net effect is that J Co should be subject to a very low effective rate of UK tax.”

On real estate deals, Rachel Davies, from Transparency International observed that 2.2 Square Miles of London are owned by anonymous companies registered in BVI, in Jersey. And also, that due diligence checks are only made on the sellers, not on the buyers. Estate agents often say that the lawyers conduct these checks. But since lawyers claim client privilege, they do not need to report.

However, when Fabio de Masi asked about this to HMRC and NCA officials, they refused to acknowledge the existence of a problem.

Peter Dempsey’s report

Peter Dempsey conducted an internal investigation on a law firm, while working as Compliance Officer for Finance and Administration and Money Laundering Reporting Officer, which uncovered substantial evidence of wide-ranging wrongdoing: fraud/theft, money laundering, tax evasion, as well as multiple breaches of the Code of Conduct. The main vehicle he used for this was a secret offshore “Panama style” structure, comprising trusts and companies operated for him and his family by henchmen, but in reality owned and controlled by him. A number of these entities were, or masqueraded as, clients of the firm -a very clever ploy, because that has allowed him to make spurious claims of confidentiality/privilege/privacy/etc.

In July 2013, he left the firm, and reported my concerns to our regulator the Solicitors Regulation Authority (SRA), and to other agencies, notably the Police, HMRC and the NCA. However, no investigation was carried out until SRA started one in mid-2016.

At the PANA UK Mission meeting, Peter Dempsey commented that he is the subject of 5 cases arising from the disclosure of his suspicions in England and France, and observed: – We spend a lot of our time defending our actions rather than focusing on what we should.

On other EU Parliament ongoing discussions

Richard Murphy commented that Country-by-Country (CBC) reporting is not happening yet in the UK because even when it is in the public interest, the Big 4 (PwC, Deloitte, KPMG and Earnst and Young) don’t want it. When asked about this by Fabio de Masi, the representatives from the Institute of Chartered Accountants in England and Wales (ICAEW) refused to comment; however, ICAEW confirm to concur with legal opinion by the Council that CBC reporting should be based on taxation since this would grant unanimity principle; while Richard Murphy who invented CBC reporting insists this is clearly accounting standard and should hence not require unanimity.

Sol Picciotto observed that the Panama Papers reveal that there is a systemic problem, and the EU Parliament should be looking at the relationship between different regulations such as the EU Directives on Anti-tax-avoidance and Anti-money-laundering-directive

On the Post Brexit scenario

Prof. Prem Sikka pointed out during the first panel as a response to MEPs concerns of the UK turning into a tax haven after Brexit: – The UK is already a tax haven, as it promotes secrecy, it has low or null taxes, and it has poor enforcement.

While Prof. Sol Picciotto observed that any threats from the UK turning into a tax haven should lead to more effective changes from the EU, because the UK will still want access to the financial market. Then the EU can say to the UK that in order to have market access they will need to comply with transparency.

In addition, Sol Picciotto reminded the PANA Committee that the UK was not helping with the CCCTB proposal, and that in any case, the CCTB can not only be an intra-European design, but it should also include all foreign entities, son no outside deal will be benefited.