Offshore goes to Paradise?!

Just a year and a half ago when the Panama Papers were unleashed, LAVECO Newsletter was published with the following headline: Panama Papers, Bahamas Papers, UK Papers, Germany Papers, USA Papers, ………..? I wanted to imply in the title, what logically unleashed less than a year and a half later, Panama Papers II, only it was not on the sites I had listed, but on yet another site.

The story was inevitable, as beside Mossack and Fonseca, many other law firms, much greater than Mossack, have dealt with and still deal with offering tax-friendly solutions to their customers around the world. Appleby is exactly one of these; it has been conducting such consultancy and providing business law services to customers from all over the world since 1898. They have done/are doing it, because it is not illegal, but completely orderly, legal.

Perhaps precisely for this reason is there such a great difference between the international reception of Panama Papers and that of Paradise Papers. The Panama Papers made a “bang”, having a great impact on international business public opinion. For weeks, the press was discussing it, and people were raising their heads around the world. Paradise Papers were welcomed with cold indifference almost everywhere. Especially by the grassroots, the average people. They are already very tired of the rich dodging taxes, while everyone “up there” knows about it, yet nothing has been done about it for decades. Then what use is it to talk about it at all? The timing of the case was also unfortunate, since, if you remember, the news emerged on a Sunday afternoon. Sunday afternoon, when everyone else is busy doing something else. And, come Monday morning, a number of newspapers have already removed the story from their front page. The scandal naming much more people, well-known men, politicians, celebrities, famous executives than Panama Papers, was not as significant as expected by the journalists unleashing it.

Nevertheless, it is all logical: why would it have been? The grassroots are no longer interested in these cases. Businesspersons, celebrities, politicians? Well, they have known all along what’s going on. Why would they be surprised? The miracle did not last for even three days this time. Something did start, however: the turning back, the boomerang effect. Immediately interesting comments appeared which openly state: “Oh well, if the English Queen had something to do with offshore, why wouldn’t I?” Some voices even said, “The really cool guys are those involved, the ones who missed out are the unsuccessful ones.” That is to say, successful business people, celebrities used/use offshore techniques. Therefore, instead of illegal, a technology makes us more successful, in a legal way. It’s like someone consuming legal doping substances.

An interesting fact: if we look at the daily turnover in the financial world, this amounts to about 4000-5000 billion dollars! A very large number. This is, of course, only possible by including financial derivatives and FOREX transactions. It is less well known, however, that more than 50% of these businesses/transactions are conducted through offshore financial service providers and offshore companies. Most of the world’s financial system thus is still connected to the offshore system! This could not have been created illegally, or survived for decades, for that matter. This required the international organizations and the governments of the big countries to permit it, or to oppose it orally, but support the process with their actions. Oh, the financial economics textbooks in universities do not mention this? Well, I do not wish to rate university curricula nor their teaching staff by that….

The unleashing of Paradise Papers was something we could safely assume at the time of Panama Papers, almost immediately. There are many companies bigger than Mossack in this genre, and Appleby is not the biggest either. In fact, the amount of information held at banks exceeds all that held by providers. Almost for 20 years now, under the pressure of the OECD, banks around the world have systematically collected data on companies’ beneficiaries. In the modern banking world, there can be no bank account where the bank has not identified the beneficiary of the company. If, however, banks begin to exchange information internationally, journalists will not really be able to have an impact with similar stories. Therefore, they had to rush with its release….

Now let us see what happened after Panama Papers. Banks further tightened their already extremely difficult conditions. A situation has now emerged when it is almost impossible, or very difficult to open an account for a classic offshore company. After Panama Papers, banks began closing accounts that were registered in an address affected by this scandal. It is a terribly unjust treatment, because if it is an office building, then 5-6 corporate law services may be headquartered at the same address, where thousands of companies are registered. However, the banking compliance departments do not care about this; they are not able to think in such a sophisticated way.

This is a sad experience, and we are certainly helpless against the process, since it is impossible to persuade the banks’ lawyers about anything. Smarter banks, which think about their customers and the future, give their customers some time to solve the issue, or offer some alternatives. For example, to change the address of the given company. Of course, this is just a cosmetic solution, because the problem tomorrow will no longer be the address, but the location itself. For example, if it is a British Virgin Islands company, they will not want to keep an account for it, since it is a location of an increased risk level.

This brings us to the point: although the everyday person is indifferent to Paradise Papers, the legal departments of banks will use it as an excellent excuse to further tighten the rules. In my view, it will make certain locations become totally impossible to operate in. And the most vulnerable in this case, are the classic offshore sites, such as the British Virgin Islands, the world’s most famous offshore location. Furthermore, since it does not meet OECD transparency requirements, banks’ legal practitioners consider it a high-risk category by.

Yes, but then something is not clear and altogether incomprehensible here. If this entire offshore story is not illegal, not forbidden, and even the English royal family is concerned, then why are banks so passive? Is it not a business for them? Of course it…was. However, the leaders of the banks have given the right to their lawmakers to make such decisions, who seek to minimize the risk, in fear of losing their job. Ultimately, the fate of the process will be decided in the banks, depending on how much scope compliance will leave to the business divisions, and vice versa. Where they will find a compromise between the strict administrative rules and the conditions dictated by business benefit.

For years, LAVECO Ltd.’s experts have consistently said that only the transparent locations are able to survive this changing age, where the system that has developed over the past 40 to 50 years is to be shaken up, changed, even though under external pressure. The question arises logically: will whatever was created before, cease to exist at all. I would not answer that question, as my answer would not be credible, because of my own interests. I recently had a conversation with one of the top executives of one of the world’s largest auditing companies, who is responsible for auditing multinational companies. In his opinion, as long as people are living on earth and there will be differences between taxes, there will always be a tax competition. What kind of tools the companies will be using is beside the point, because there will always be a demand, and if there is demand, there is an offer, eventually. Call it offshore or anything else. The game is never finished: offshore, in one way or another, is already in Paradise. 🙂