Milos Barutciski is co-head of Bennett Jones LLP's international trade and investment practice. He has represented Canadian and international companies in anti-corruption, sanctions, export control and cartel investigations on five continents.
The Panama Papers disclosures have understandably focused attention on tax fairness and the ability of corporations and high-net-worth individuals to manage their affairs in a way that minimizes tax exposure compared with the average taxpayer. Mitigating tax exposure through lawful means is perfectly legitimate, but it does evoke the observation that Warren Buffett made a few years ago (in a domestic rather than offshore context) about his effective tax rate being considerably lower than that of his personal assistant.
Governments have been considering this issue for several years. The controversies over tax inversions, prominent companies failing to pay a "fair" share of British taxes, and continuing work at the Organization for Economic Co-operation and Development on base erosion and profit shifting are just further examples of a broader concern about perceived inequality.
The second issue that has come forward is the use of offshore entities for unlawful purposes, including tax evasion and money-laundering. Those who engage in illegal activities will have much to fear as the 2.6 terabytes of information gathered by the International Consortium of Investigative Journalists begins to flow into the public domain.
There is, however, a third and potentially deeper concern that will be front-of-mind for companies and professional services firms as the Panama Papers start coming out as a trickle or a flood. The information that emerges will likely identify numerous instances where otherwise law-abiding companies and service suppliers have had relationships – in various degrees of proximity – with foreign entities that are implicated in misconduct. Canadian and international law-enforcement agencies, as well as the news media, are certain to be poring through the Panama Papers searching for leads for tax evasion, but also evidence of other forms of illegality.
Companies may also find that their activities become front-page news – not because they have done anything improper, let alone illegal – but merely because of the company they keep. Production orders under the Criminal Code and other statutes are increasingly used by Canadian police and other agencies to gather information from third parties who are not themselves targets of investigations. Responding to such orders is an expensive undertaking and can take up significant management time, to the detriment of other business. Businesses and service suppliers would be well advised to prepare in advance for unwanted media attention and inquiries from law enforcement.
A further and more significant layer of risk arises from indirect implication in unlawful activities, such as corruption and sanctions busting. The record is clear that a very high proportion of corruption investigations worldwide implicate agents, representatives and other middle men who are frequently offshore entities located in tax havens. Similarly, sanctions circumvention by countries and entities that have been designated by the United Nations and national economic sanctions are often executed through hard-to-trace offshore entities.
At this point, we don't know what, if any, evidence of illegality will come out of the Panama Papers. However, the sheer volume of information in those papers (11.5 million documents relating to over 200,000 entities) suggests that the risk is real. Indeed, we already know that certain entities represented by Mossack Fonseca, the Panamanian law firm whose files were leaked, were at one time on U.S. sanctions lists.
Even companies that have never been clients of Mossack Fonseca may find themselves dragged into investigations of illegal conduct by their joint venture partners, contractual counterparties, agents or other intermediaries with which they have merely done business.
At the very least, companies should be taking steps to mitigate their potential exposure.
As a first step, they should consider system-wide searches of their databases to determine whether they have any business or other connections to Mossack Fonseca and determine the nature of those links and any third parties identified in relation to those connections.
Second, companies should review their compliance procedures and third-party due-diligence procedures, then test those procedures to determine their effectiveness. Any deficiencies identified should be promptly addressed and remedied.
With additional revelations pending from the Panama Papers, it's time for companies to take measures to identify matters that may give rise to scrutiny, to seek professional advice to understand and mitigate potential exposure, and to take steps to reinforce compliance procedures and remedy existing gaps.