DIRECTORATE GENERAL FOR INTERNAL POLICIES POLICY DEPARTMENT A: ECONOMIC AND SCIENTIFIC POLICY Role of advisors and intermediaries in the schemes revealed in the Panama Papers STUDY Abstract The use of offshore entities that facilitate money laundering, tax avoidance and tax evasion undermines the fair distribution of the tax burden in onshore jurisdictions. The Panama Papers shed some light on the activities that are usually conducted in secrecy, with the disclosure of information on 213,634 offshore entities in jurisdictions such as the British Virgin Islands, Panama and the Seychelles. This analysis assesses the role of advisors (tax experts, legal experts, administrators, investment advisors) and intermediaries (law firms, accounting firms, trust companies, banks, etc.) involved in the phases of the identified decision-making cycle (advice, creation, maintenance, enforcement). This document was prepared for Policy Department A at the request of the Committee of Inquiry into Money Laundering, Tax Avoidance and Tax Evasion (PANA). IP/A/PANA/2016-05 PE 602.030 April 2017 EN This document was requested by the European Parliament's Committee of Inquiry into Money Laundering, Tax Avoidance and Tax Evasion (PANA). AUTHOR Willem Pieter DE GROEN (CEPS) ACKNOWLEDGMENTS The author would like to thank Apostolos Thomadakis for his research support and Jorge Nunez Ferrer for his useful input. RESPONSIBLE ADMINISTRATORS Mariusz MACIEJEWSKI Policy Department A: Economic and Scientific Policy Rudolfs VERDINS Policy Department D: Budgetary Affairs European Parliament B-1047 Brussels E-mail: [email protected] LINGUISTIC VERSIONS Original: EN ABOUT THE EDITOR Policy departments provide in-house and external expertise to support EP committees and other parliamentary bodies in shaping legislation and exercising democratic scrutiny over EU internal policies. To contact the Policy Department or to subscribe to its newsletter please write to: [email protected] Manuscript completed in April 2017. Brussels, © European Union, 2017. This document is available on the Internet at: http://www.europarl.europa.eu/studies DISCLAIMER The opinions expressed in this document are the sole responsibility of the author and do not necessarily represent the official position of the European Parliament. Reproduction and translation for non-commercial purposes are authorised, provided the source is acknowledged and the publisher is given prior notice and sent a copy. Role of advisors and intermediaries in the schemes revealed in the Panama Papers ____________________________________________________________________________________________ CONTENTS Contents 3 List of Abbreviations 4 List of Tables 5 List of Figures 5 Executive Summary 6 1. Introduction 9 2. Decision-making cycle 12 3. Ultimate Beneficiary Owners 14 3.1. Types of UBOs 14 3.2. Purpose of offshore structures 15 3.3. Location of the UBOs 16 4. Role of Advisors 18 4.1. Tax experts 19 4.2. Legal experts 20 4.2.1. Lawyers 20 4.2.2. Notaries 21 4.3. Administrators 21 4.3.1. Accountants 21 4.3.2. Auditors 21 4.4. Investment advisors 22 5. Role of Intermediaries 23 5.1. Law firms 25 5.2. Accounting firms 25 5.2.1. Big Four accounting firms 26 6. Role of Banks 28 6.1. Advising and managing offshore structures 28 6.2. Bank accounts 29 6.3. Other financial products 30 6.4. Correspondent banking 30 7. Role of Trust companies 32 8. Role of Public authorities 35 9. Conclusions & policy recommandations 38 References 42 Annex 45 PE 602.030 3 Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________ LIST OF ABBREVIATIONS AML Anti-Money Laundering BVI British Virgin Islands CDD Customer Due Diligence CTF Combating the Financing of Terrorism CRS Common Reporting Standard EDD Enhanced Due Diligence EU European Union FATCA Foreign Account Tax Compliance Act FATF Financial Action Task Force FIU Financial Intelligence Unit ICIJ International Consortium of Investigative Journalists KYC Know Your Customer MCAA Multilateral Competent Authority Agreement ODD Ongoing Due Diligence OFC Offshore Financial Centre PEP Politically Exposed Persons STDR Service de Traitement des Déclarations Rectificatives UBO Ultimate beneficiary owner 4 PE 602.030 Role of advisors and intermediaries in the schemes revealed in the Panama Papers ____________________________________________________________________________________________ LIST OF TABLES Table 1: Roles of advisors in offshore structures 19 Table 2: Roles of intermediaries in offshore structures 25 Table 3: Advisors hired by the main intermediaries 39 Table 4: Main requirements for establishing offshore entities 45 Table 5: Offshore entities by jurisdiction and type 46 Table 6: Intermediaries by region and type (number of entities) 47 Table 7: Intermediaries by member state and type (number of entities) 48 Table 8: Intermediaries by region and type (number of intermediaries) 49 Table 9: Intermediaries by member state and type (number of intermediaries) 50 Table 10: Shareholders by region and type (number of entities) 51 Table 11: Shareholders by member state and type (number of entities) 52 Table 12: Location of intermediaries serving EU citizens (number of entities) 53 LIST OF FIGURES Figure 1: Distribution of entities across jurisdictions 10 Figure 2: Establishment of entities across time 11 Figure 3: Actors involved in offshore structures 12 Figure 4: Types of shareholders (share of entities) 15 Figure 5: Location of identified private shareholders (share of entities) 17 Figure 6: Intermediaries bringing in clients (share of intermediated entities) 24 Figure 7: Establishment of entities intermediated by banks across time 29 Figure 8: Types of entities established 32 Figure 9: Location of intermediaries (share of intermediated entities) 36 Figure 10: Intermediaries involved in offshore structures as revealed in Panama Papers 38 Figure 11: Location of intermediaries serving EU citizens (share of entities) 40 PE 602.030 5 Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________ EXECUTIVE SUMMARY Introduction The use of offshore entities in tax havens and offshore financial centres facilitating money laundering, tax avoidance and tax evasion undermines the effort of governments in onshore jurisdictions to distribute the tax burden fairly. Ultimate beneficiary owners (UBOs) of offshore entities are often high-net-worth individuals or corporations in onshore jurisdictions, who do not disclose their offshore wealth and revenues appropriately to onshore tax authorities, making use of the opaqueness and/or secretiveness of the system. The leaked files – known as the Panama Papers – on 213,634 offshore entities served by Mossack Fonseca, a Panama-based trust company, provided valuable information for better understanding of offshore structures. Mossack Fonseca had a market share of approximately 5 to 10% of this market and incorporated entities across 21 jurisdictions. But almost 90% of all these offshore entities were incorporated in just four jurisdictions, i.e. the British Virgin Islands, Panama, the Seychelles and the Bahamas. The Panama Papers allowed to get a better understanding of the functioning of the offshore industry. This in-depth analysis focuses specifically on the role of the various advisors and intermediaries in the schemes revealed in the Panama Papers, and provides recommendations to encourage the actors involved to play a positive role or at least no negative role in the fight against money laundering, tax avoidance and tax evasion. Objectives The analysis has three key objectives: • Identification of the decision-making cycle with all actors involved in the schemes as revealed in the Panama Papers. • Review and categorise critically the role of both advisors and intermediaries involved in the schemes. • Formulation of policy recommendations for actions to discourage advisors and intermediaries from facilitating money laundering, tax avoidance and tax evasion through offshore structures. Decision-making cycle Many actors are involved in the offshore structures as revealed in the Panama Papers. The decision-making cycle starts with UBOs. Even with the Panama Papers at hand, it is difficult to trace UBOs, since in many cases bearer shares, nominee shareholders or foundations are used to hide their identity. Based on the shareholders identified as private persons, EU citizens own approximately 9% of the offshore entities incorporated by Mossack Fonseca. UBOs mandate their advisors, e.g. tax experts, legal experts, administrators and investment advisors, and intermediaries, e.g. law firms, accounting firms, trust companies and banks, often after having received advice from them toward the creation and maintenance of offshore entities. Advisors and intermediaries further ask trust companies and fiduciaries such as Mossack Fonseca to incorporate offshore entities and obtain an account from a licensed bank. Moreover, in case of an indictment a lawyer will need to be hired for the litigation. Finally, there is an important role for public authorities in the jurisdiction where UBOs, advisors and intermediaries, and offshore entities are located. Public authorities can be responsible for company registers, regulatory and supervisory frameworks for both advisors and intermediaries, and tax authorities. 6 PE 602.030 Role of advisors and intermediaries in the schemes