As most of us are aware, the unprecedented leak of secret documents, coordinated by the International Consortium of Investigative Journalists (ICIJ), and multiple journalists globally, has exposed the inner workings of offshore companies and trusts used to limit identification of company ownership.
Beyond the sensational headlines and resulting scandals (and there will be many), we need to be aware the various financial and company instruments used by these 14 offshore services are not in themselves inherently illegal, and most of the companies and individuals using these offshore instruments have legitimate reasons for doing so. In certain countries, there are needs to create anonymous companies and ownership to reduce the risk of criminal activities, including kidnapping, extortion and the like. In countries with immature legal and financial systems, legitimate domestic and international companies need to be protected from potential corruption and exploitation in their host countries to maintain stability of operations.
The Pandora Papers and previous document leaks (such as the Panama Papers) have highlighted the fine line between privacy and the need to identify the ultimate beneficial owner (UBO). Understanding the UBO is key to identifying legitimate financial transactions. However, there is a need to balance the privacy of these UBOs against the need to provide UBO data for Know Your Customer (KYC) due diligence.
This is a fine line that varies based on jurisdiction. Certain countries/jurisdictions are reticent to provide this UBO data (commonly but not always labelled as tax havens) while other countries/jurisdictions are pressing these tax havens for more UBO data to identify individuals who are potential tax cheats. As the Pandora Papers continue to provide potentially embarrassing headlines, these countries/jurisdictions have additional incentives to go after these individuals. While, tax havens will continue to defend the need for privacy for their customers.
Ultimately, regulated financial institutions (especially banks) need to identify UBOs to meet Anti-Money Laundering (AML) regulatory requirements and ensure the sources of funds are not criminal. Tax havens will need to demonstrate to their banking counterparts these due diligence procedures have in fact been conducted. Banks require the UBO be identified and screened in each financial transaction. Transparency is key and it is about identifying the UBO in a manner where their right to privacy is also considered.
At Encompass, we support the global financial system to ensure legitimate commerce across borders. Full and accurate UBO identification is the foundation of effective KYC. The Pandora Papers shine a light on financial abuse which ultimately impacts the regular tax payer. We understand the need for privacy but also understand the need for transparency that will help limit this financial abuse.
As more information comes to light from this current scandal, we will provide our perspective on why proper financial UBO identification matters.