Yet Again – Perception is Reality. What Do the Pandora Papers Tell Us Today?

Today, when one hides the identity of the true owner of funds, the only conclusion – the only perception – that will be reached is that the funds were the result of some nefarious activities.  Gone are the days when the true owner of the funds can hide in the “reality” of the statement “I did it to avoid paying taxes”.  There is no good reality around tax avoidance.  The perception, which is reality, is that tax avoidance is tax evasion.

We see it again today with the Pandora Papers.  The outcry for change is immediate and intense.  In the United States, for example, in a recent article by Debbie Cenziper, Will Fitzgibbon, and Greg Miller in the Washington Post, “US lawmakers call for crackdown on financial ‘enablers’ after Pandora Papers revelations,”the authors note “A bipartisan group of lawmakers will introduce legislation this week that for the first time would require trust companies, lawyers, art dealers and others to investigate foreign clients seeking to move money and assets into the American financial system The proposed law, known as the Enablers Act, would amend the 51-year-old Bank Secrecy Act by requiring the Treasury Department to create basic due diligence rules for American gatekeepers who facilitate the flow of foreign assets into the United States.”  In Europe, the European Parliament “slams EU governments” in a recent press release, stating “MEPs denounced EU governments for allowing taxes to be dodged en masse due to their inability to properly reform outdated tax laws.”  A key issue, however, is that the outcry for change is directed towards those who benefit from the opaque offshore financial system.   So the question remains, what will be done?

Financial institutions, already subject to due diligence requirements to identify Ultimate Beneficial Owners (UBOs) and other participants in the global financial system, may have such a requirement soon and should be concerned with a tarnished reputation.  All will face heightened scrutiny from regulators.  All will need to focus attention on identifying UBOs and the source of wealth (SOW) and source of funds (SOF) associated with customers and accounts.  Due diligence will require understanding whether the SOW/SOF is legitimate andif the means of transmission and use of the funds is done in a way to mask the UBO and hide the SOW/SOF from legitimate taxation by the home or host governments.  Consideration will need to be given to filing Suspicious Activity (Transaction) Reports when determinations cannot be made for the UBO and SOW/SOF.

All need to understand the outcries will continue, at least for a time.  Regulations will come about.  Financial institutions and those players in the financial system will have tarnished reputations and will need to take corrective measures.  This is the circle of “financial life”.