Banks set to face greater scrutiny in wake of Panama Papers

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Global banks will likely be subject to greater regulatory and law enforcement scrutiny following the release of leaked documents that shed light on shell companies and overseas tax havens.

Royal Bank of Canada was one financial institution named in millions of documents obtained from Mossack Fonseca, a Panama-based law firm that helps create offshore tax havens, raising concerns related to account secrecy and the possibility of unsavoury tax avoidance.

"The 'Panama Papers' revelations have shone the light on Panama's culture and practice of secrecy," Angel Gurria, secretary-general of the Organization for Economic Co-operation and Development (OECD), said in a statement.

"Panama is the last major holdout that continues to allow funds to be hidden offshore from tax and law enforcement authorities," Mr. Gurria said.

While the trove of leaked documents has revealed previously hidden details about the individuals behind secret offshore accounts, an anti-money-laundering expert believes that banks will welcome changes to the way they record and track client information.

Brian Kindle, executive director of the Miami-based Association of Certified Financial Crime Specialists, said the use of offshore tax havens presents banks with enormous challenges, given that they must know who is behind all accounts.

"This issue has been on everyone's radar for a very long time – these tremendous loopholes in the global financial system – as a result of anonymous company formations and the jurisdictions in which they thrive," Mr. Kindle said.

"There has been some progress, but the progress seems to be much more gradual than what you see in a lot of other areas of global financial crime, compliance and regulation," he said.

One detail in the Mossack Fonseca documents alleges that RBC used the firm to set up more than 370 shell companies – although there was no evidence of wrongdoing and no dates attached to the allegations drawn from data going back decades.

"Tax evasion is illegal, and we have established controls, policies and procedures in place to detect it and prevent it occurring through RBC," the lender said in a statement.

Canadian banks had substantial investments in Caribbean-based retail banking and wealth management operations, but some have been retreating from the region in recent years – especially RBC. While the small scale of the operations and relatively dismal local economies were cited as reasons for the withdrawal, some observers believe it was also due to a murkier regulatory environment that posed a risk to Canadian banks.

The association of Panama to overseas tax havens arrives from what has historically been cheap and easy access to anonymous corporations.

"There is an entire ecosystem of providers like Mossack Fonseca to help you do this," Mr. Kindle said, adding that it costs less than $1,000 (U.S.) to get a corporation up and running, allowing the owner to essentially disappear from the view of government revenue agencies and regulators.

This isn't always good news for global banks, though, given that regulators have made them far more responsible for who their clients are and where their money comes from.

In 2009, UBS agreed to pay $780-million to settle a U.S. investigation into the Swiss lender's use of offshore accounts to help Americans evade taxes.

The OECD's Mr. Gurria noted that in the past seven years, better international standards on tax transparency have led to a decline in offshore companies, but added that more needs to be done.

"The time has come to make sure that no jurisdiction can benefit from failing to meet their commitments," he said in his statement.

Mr. Kindle believes that changes could be good news for banks as well.

"It might give banks a hand," he said. "Banks don't have the proper framework, in terms of regulation and information sources, provided to them to do the due diligence they need to do. There needs to be reform around how companies are incorporated and what information they are required to give and who is responsible for updating that when the information changes."