Written by Milos Barutciski, Matthew Kronby, Richard Stone, and Sabrina A. Bandali
It's Not Just About Tax Evasion
The "Panama Papers" story hit the international press this week. An anonymous source leaked 11.5 million documents from Mossack Fonseca, the Panamanian firm believed to be the world's fourth largest provider of offshore legal services. The documents reveal the use of offshore holdings by thousands of entities and individuals around the world, including Canadian companies and residents of Canada.
The disclosures mean that companies may find their activities becoming front page news in the coming days, weeks, and months. Global regulators have taken notice of the disclosure and begun to investigate them: UK tax investigators have written to media organizations requesting access to the documents, and Australian and New Zealand authorities have announced that they are investigating Mossack Fonseca clients over possible tax evasion. Additional law enforcement authorities are sure to follow, and Canadian companies and individuals have been named in the leaks.
However, some businesses may not realize the extent of their exposure. Companies that have never been clients of Mossack Fonseca may find themselves implicated in investigations due to the use of offshore havens by joint venture partners, contractual counterparties, agents, or other intermediaries with whom they have done business. Those investigations may extend beyond tax evasion, to corruption, sanctions and export controls violations, money laundering, and other economic crimes.
For companies potentially implicated in wrongdoing revealed by these leaks, a crucial question will be whether the compliance programs they have had in place are sufficient to protect them. Robust compliance programs that include asking the right questions of third parties before entering into business transactions with them provide a foundation for a company to demonstrate that it is innocent or at least was not willfully blind to the possibility of illicit activity when conducting business. Now is the time for companies to take further steps to identify matters that may give rise to scrutiny as a result of the Panama Papers disclosures and seek the advice of legal counsel on their risk exposure and the appropriate response.
Scope of the Disclosures
Approximately 2.6 terabytes of data have been leaked, making the Panama Papers leak the largest in history, orders of magnitude larger than both the 2010 WikiLeaks or the 2013 offshore secrets disclosure by Edward Snowden. A previous smaller set of Mossack Fonseca documents had been sold to German authorities by a whistleblower in 2014, leading to several investigative raids and charges in Germany in 2015.While the full scope of disclosures is not yet known, so far media sources have reported that the leaked information dates back to 1977 and relates to 214,488 entities in over 200 countries and territories. The International Consortium of Investigative Journalists (ICIJ) has been investigating the leaked information for over a year, and has stated that it will release the full list of companies and people linked to them in May 2016. Infographic: The Scale of the Leak
[caption id="attachment_3389" align="alignnone" width="2256"] Süddeutsche Zeitung, "About the Panama Papers" (April 3, 2016)[/caption]The disclosures reveal links to 12 current or former heads of state, 60 relatives and associates of heads of state and other politicians, and FIFA (the Fédération Internationale de Football Association), among others, including several hundred Canadians. In many cases, the Mossack Fonseca client may not have been the ultimate owner or beneficiary of the offshore holdings. Instead, middlemen and service providers such as banks, law firms and company incorporators may have provided instructions to and retained Mossack Fonseca to set up the companies, foundations or trusts used, leaving the true or beneficial owners anonymous. According the ICIJ, the disclosed records include emails, financial spreadsheets, passports, and corporate records that reveal the identity of previously secret beneficial owners of companies and bank accounts in 21 offshore jurisdictions.
Do You Know the Risk and Are You Ready to Face It?
With more revelations from the Panama Papers around the corner, now is the time for companies to ask themselves if they face potential risk from their past business activities whether directly, or indirectly. Companies should consider adopting a targeted approach to determine their exposure. This may involve reviewing specific partners, counterparties, or projects identified in the leaks. In some cases, internal investigations or other efforts to determine the scope of potential liability can be undertaken with the guidance of experienced legal counsel to ensure that if law enforcement in any jurisdiction comes knocking, the company is ready to respond in a responsible and evidence-based fashion.
 The Guardian, "What are the Panama Papers? A guide to the biggest data leak in history" (April 4, 2016).  The Guardian, "UK tax officials seek access to huge leak of Mossack Fonseca papers" (April 4, 2016).  The Guardian, "What are the Panama Papers? A guide to the biggest data leak in history" (April 4, 2016).  ICIJ, The Panama Papers "Giant Leak of Offshore Financial Records Exposes Global Array of Crime and Corruption" (April 3, 2016).  Source: Süddeutsche Zeitung, http://panamapapers.sueddeutsche.de/articles/56febff0a1bb8d3c3495adf4/  BBC, "Panama Papers Q&A: What is the scandal about?" (April 4, 2016)  CBC, "Panama Papers: Document leak exposes global corruption, secrets of the rich" (April 4, 2016).  ICIJ, The Panama Papers "Giant Leak of Offshore Financial Records Exposes Global Array of Crime and Corruption" (April 3, 2016).  ICIJ, The Panama Papers "Giant Leak of Offshore Financial Records Exposes Global Array of Crime and Corruption" (April 3, 2016).