From Panama To Paradise Regulation and Role of Lawyers in Cross-Border Commercial Transactions

If a lawyer receives unsatisfactory instructions from a client or information which is incomplete, then the lawyer should cease to act if he or she believes that the client may be seeking to act illegally

In April 2016, the world learned about a rather obscure law firm in Panama, Mossack Fonseca, that had been attending to the offshore needs of clients (large and small companies, trusts, politicians, socialites and just the plain old-fashioned wealthy) for many years.

In late 2017, Panama moved to Paradise where a rich history of client dealings of a well-known Bermuda law firm, Appleby, was published, along with client information, for all to see. Both firms appeared to have suffered from cyber security failings as their confidential information was removed, downloaded by persons unknown (at least publicly) and presented to the International Consortium of Investigative Journalists, then to be published worldwide in a coordinated manner. From Panama to Paradise – what does it all mean for lawyers in India, in Australia and elsewhere and where are governments going?

The immediate consequences for Mossack Fonseca and Appleby are serious. Mossack Fonseca shut numerous offices and its principals are under arrest and subjected to investigation over their conduct¹. Appleby is engaged in litigation before the English High Court against the BBC and The Guardian seeking damages, the return of all documents and a permanent injunction for breach of confidence². The litigation is in its early days and is likely to be hard fought by all sides. There has been a variety of reactions to the Panama Papers – a mix of investigations, fines, high-profile resignations (Iceland's Prime Minister), police raids, arrests, national legal reforms and international conclaves³. Media revelations are driving politicians and citizens alike to bring light to a shadow financial system that, for decades, has resisted reform. Yet most experienced commentators say the structures are legal, it is just the use that is made of them.

We hear much from politicians and tax officials saying that companies should pay their "fair" or "right" tax. Indeed, in an interview with the Commissioner of the Australian Taxation Office, Chris Jordan, the current Head of the OECD's Joint International Taskforce on Shared Intelligence and Collaboration, (focused on anti-tax avoidance practices), Mr Jordan told The Australian newspaper (on 30 November, 2017) the following: 

If the right tax is not collected from multinationals, it "deprives Australians of the funds needed for vital infrastructure and services" he says. "If you come here as a foreign company and you use our infrastructure, we're a good marketplace for you – you should pay tax on the value you create here.

The difficulty in all of this discussion is that the tax laws are created by politicians and governments and they have encouraged, condoned or otherwise permitted complex offshore structures to be used by business for entirely legitimate business reasons in reducing the amount of tax payable in one country or another. Taxpayers are required to pay what tax they are legally required to pay. It is governments that create the environment for business to engage in offshore commercial structures, often part and parcel of an increasingly global economy. While lawyers and accountants are often called upon to advise upon, create and structure offshore commercial activities, it is likely the vast majority of transactions are entirely legal.

Whether it (the structure) is then used by the client for other, potentially illegal purposes, does not of itself make the conduct establishing the structures unlawful. It is worth remembering the sage words of Lord Tomlin in the Duke of Westminster's case, highlighted so forcefully by Martin Kenny:⁴

The intersection between law and morality is traditionally reserved for the most heinous of crimes. Lawful tax avoidance is neither immoral nor unlawful. It does not come close to that intersection. In Duke of Westminster v Commissioners of Inland Revenue [1936] AC 1 (House of Lords), Lord Tomlin held that:

Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow tax-payers may be of his ingenuity, he cannot be compelled to pay an increased tax.

In late 2017, the European Parliament published its Recommendation following the inquiry on money laundering, tax avoidance and tax evasion⁵. While noting the apparent lack of political will amongst its Member States to adequately address these issues, the European Parliament made several important statements set out below:

• It called for a simplification of tax systems in order to "prevent and combat tax avoidance and aggressive tax planning, which may be legal, but contrary to the spirit of the law"⁶.
• It recognized the need for guidance on a clear distinction between what is illegal and what is legal, even if it runs counter to the spirit of the law, to ensure legal certainty for all concerned⁷.
• While the Parliament recognized that a lawyer's duty of confidentiality needed to be balanced with appropriate reporting of suspicious transactions, it should be

  without prejudice to, for example, the rights guaranteed by the Charter of Fundamental Rights of the European Union and the general principles of criminal law⁸. In relation to lawyers (underlining added)⁹:

o Professional secrecy cannot be used for the purposes

of protection or the covering up of illegal practices or violating the spirit of the law;

o Legal professional privilege should not impede adequate reporting of suspicious transactions,

which may be required by relevant national laws (to the extent they exist);

o There should be a clear demarcation line "between

traditional judicial (legal) advice and lawyers acting as financial operators";

o Where lawyers fall outside their specific duties of defence, legal representation or legal advice, they

should be required, for the protection of public order, to inform the authorities of certain information that they are aware of; and

o Lawyers should be held legally co-responsible when "designing tax evasion and aggressive tax plans punishable by law; and money laundering schemes…when they take part in fraud, they must systematically be liable for both penal sanctions and disciplinary measures".

In December 2017, the OECD published a Discussion Draft, Mandatory Disclosure Rules for Addressing CRS Avoidance Arrangements and Offshore Structures (the OECD Disclosure Draft)¹⁰. A consultation period was open between 11 December, 2017 and 15 January, 2018. The OECD Disclosure Draft states that information published in the Panama and Paradise Papers "demonstrates that certain professional advisers continue to design, market or assist in the implementation of offshore structure and arrangements than can be used by non-compliant taxpayers to circumvent the correct reporting of relevant information to the tax administration of their jurisdiction of residence."

A number of features emerge from the OECD Disclosure Draft, as set out below:

• The OECD propose for consideration a set of mandatory reporting rules to apply to certain arrangements with a view to ensuring that ultimate beneficial owners and financial information is properly disclosed concerning an "offshore structure" that has or operates with an "opaque ownership structure" for the purposes of

  implementing a "CRS Avoidance Arrangement".

• An obligation to disclose is to be placed upon an "intermediary", being a person responsible for the design or marketing of the relevant arrangement and

  offshore structure (called a promoter) and those with a sufficient level of involvement in the design, marketing, implementation or management of such schemes (called a service provider providing "relevant services") to be aware that the scheme is likely to be used to circumvent common reporting standards (CRS) or to obscure or disguise the identity of the underlying beneficial owner.

• The definition of an intermediary should not be limited to those involved in "tax aspects" of an arrangement. A restrictive definition would potentially exclude a range of intermediaries such as investment advisers and lawyers who do not provide tax advice or tax services. The definition ought not to capture persons who only provide limited assistance in the implementation or organization of an arrangement and could not reasonably be expected to be aware of the elements of an arrangement that have the effect of circumventing the CRS.
• Reporting obligations are imposed on an intermediary and a "reportable taxpayer". The following conditions arise under the OECD's proposed disclosure model rules, relevant to the role of a lawyer:
• o An intermediary must disclose all the steps and transactions that form part of or constitute the CRS Avoidance Arrangement or offshore structure including key details of the underlying investment, organization and persons involved and the relevant tax details of the client, the reportable taxpayer and any other intermediaries. 

o An intermediary is not required to disclose information concerning a CRS Avoidance Arrangement if it would reveal confidential communications between a client and a lawyer where such communications are produced for the purposes of seeking or providing legal advice or used in connection with existing or contemplated legal proceedings and protected from disclosure under domestic law.

o An intermediary must give written notice to its domestic tax authority, and the reportable taxpayer, that the intermediary (relevantly, a lawyer) has information of a CRA Avoidance Arrangement or offshore structure that is not required to be disclosed.

o The liability to report attaches automatically to every person that is an intermediary, but to the extent only to disclose information within that intermediary's knowledge, possession or control. The model rules of disclosure propose a penalty on an intermediary and on a reportable taxpayer. As the primary intention of the disclosure rules is to target intermediaries, the penalty on an intermediary is suggested as a fixed rate or a percentage of the fees paid to the intermediary for the services to be provided.

• The percentage rate should be set at a rate to remove any economic incentive to avoid disclosure. From time to time, the Financial Action Task Force (FATF) has issued guidance and commentary to lawyers concerning how to manage and respond to money laundering and terrorism financing risks¹¹. In 2013, FATF considered that criminals seek out the involvement of legal professionals in their criminal activities, sometimes because a legal professional is required to complete certain transactions, and sometimes to access specialized legal and notarial skills and services which could assist the laundering of the proceeds of crime and the funding of terrorism. FATF identified a number of money laundering and terrorism financing methods that are commonly employed or, in some countries, require the services of a legal professional.

Inherently these activities pose significant risk and when clients seek to misuse the legal professionals' services in these areas, even law abiding legal professionals may be vulnerable. The methods are: 

(a) Misuse of client accounts;

(b) Purchase of real property;

(c) Creation of trusts and companies;

(d) Management of trusts and companies;

(e) Managing client affairs and making introductions;

(f) Undertaking certain litigation; and

(g) Setting up and managing charities.

While lawyers want to maintain their ability to give fearless confidential advice, and clients no doubt the ability to pay only the tax they are legally obliged to pay, the power of social media and the public push for "fair" tax means disclosures about the tax affairs of the rich and famous (and infamous) will continue. Cyber security breaches will inevitably occur and information once considered safe is now less safe than ever. Lawyers and business need to appreciate that the risks of disclosure are greater now than ever before. The international regulatory landscape for business, for tax liabilities and the cause célèbre of "punishing" multinationals for legally minimizing their tax is not going away. Nor are the challenges faced by lawyers in how to give advice on transactions and structures that on one view are perfectly legal, yet on the other hand, offend against increasingly popular "ethics" of how business should behave.

FATF concluded that the involvement of lawyers in the money laundering of their clients is not usually stark as complicit or unwitting; rather, it involved as a continuum, illustrated in the diagram below:

Lawyers invariably play a role in offshore structures designed and/or created by or on behalf of taxpayers in order that the taxpayer can structure its tax affairs in an appropriate (perhaps aggressive) manner, yet consistent with its legal obligations and the prevailing laws applicable to the taxpayer. What that role is or may be for a lawyer in fact is not always clear. If however, that structure involves tax evasion, then the taxpayer should be held accountable.

Any reporting or disclosure obligations should however, be primarily imposed on the relevant taxpayer. Any reporting obligations on a lawyer should continue to be subject to preexisting professional and legal responsibilities, including domestic rules of secrecy or confidence and legal professional privilege. This point was made in a number of submissions to the OCED on its disclosure model rules. There is generally no offence in any country for "violating the spirit of the law" (despite what the European Parliament may seek), no doubt due to the inherent difficulty of defining the necessary "spirit" to be violated. A lawyer's responsibility, in many countries, involves making certain inquiries and to, in general terms, know the client's business and the persons who might be the ultimate beneficiary of a transaction.

If the lawyer receives unsatisfactory instructions from a client or information which is incomplete, then the lawyer should cease to act if he or she believes the client may be seeking to act illegally. If the lawyer transgresses these responsibilities, he or she can be sanctioned. The right of any client to receive frank legal advice without fear of its disclosure and the duty of a lawyer to keep his client's information confidential is a cornerstone of the role of the legal profession, the rule of law and the administration of justice. Yet these long-standing rules and obligations are increasingly under attack from various governments and have triggered serious reviews of the responsibilities of lawyers and the extent to which the duty of client-lawyer secrecy and confidentiality should be pierced. The legal profession needs to be aware of these developments and to promote integrity and ethical conduct by all lawyers. If the profession does not recognize this as a serious issue, then governments are increasingly likely to consider enhanced reporting or disclosure obligations on lawyers in a manner that cuts through the secrecy and confidential relationship traditionally enjoyed between a lawyer and a client, to the potential detriment of the rule of law and the due and fair administration of justice.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.