Just a day after the story broke, the Pandora Papers story has already been covered by more than 140 different media organisations around the world. There have been many financial leaks over recent years, such as the FinCen files and Paradise Papers, but the Pandora Papers feel as big as the Panama Papers in terms of interest and long-term ramifications.
The leak is huge. It contains more than 11.9 million files, containing 2.98TB of data, which is larger than the Panama Papers. Interestingly, these leaked files do not come from a single company, but from 14 offshore providers of corporate, legal and fiduciary services, including Trident Trust and Fidelity Corporate Services.
It’s too early to draw conclusions about the leak’s long-term implications for the reputations of high-net-worth individuals (something that we will look at in a new survey this month), but there is an immediate lesson that wealthy individuals should draw: information about their finances, including tax affairs, structuring, and the beneficial ownership of offshore entities can never be assumed to be private.
On one hand, many Offshore Financial Centres (IFCs) are taking increasing steps – such as introducing Beneficial Ownership Registers (see Jersey) – to make financial structures in their jurisdictions more transparent.
On the other hand, and most importantly, data leaks show that even in still relatively opaque jurisdictions, it is best to assume that data, information, and correspondence may end up coming to light in a different way.
Complacency is not acceptable
This is not the place to talk about the rights and wrongs of OFCs. This is a complicated argument.
On one hand, OFCs are often wrongly maligned; they play an important role in our global economy and many people inherit offshore structures without having had any say in their original setup. On the other hand, they can be misused and, indeed, abused.
But, this latest leak will hopefully shake individuals – and, indeed, advisers – out the sector’s complacency. In particular, regardless of the rights and wrongs of OFCs, assuming that personal information about wealth held in OFCs will always be private is now not only mistaken but, further than that, reckless. It exposes individuals and families to much too much uncontrolled reputational risk.
If the worst were to happen, currently, many individuals and families are left without a clearly prepared defence, even though one may exist, to safeguard their reputations amongst their important stakeholders.
As an aside, the Pandora Papers scandal is also likely to cast a larger, deeper, and darker reputational shadow over all high-net-worth individuals regardless of whether they use OFCs or not.
The scandal will contribute to the growing perception that all wealthy individuals and families consciously go out of their way to avoid tax or, else, run their money through obscure locations for nefarious reasons.
Preparing for breaches
So, what should individuals and families do instead if their wealth and business activity brings them into contact with IFCs? There are three potential courses of action, and which one is most appropriate will depend significantly on the individual family in question.
- Crisis preparation. The first potential route is to ensure that whenever a family uses an offshore structure or a transaction is undertaken through an offshore vehicle that alongside all the legal, financial, and corporate preparation, the family takes the time to get to paper why this structure was used; the family should understand this reason and get comfortable with it before a transaction takes place. Perhaps the counterparty requested such as structure? Perhaps it is a structure that has been inherited? This will provide the family with a clear and factual response, and paper trail, if questions are ever asked in the future. A response to such a question can be prepared for when it might need to be used.
- Conscious openness. Alternatively, some individuals and families might want to be more open about their use of OFCs, and take the time to contextualise their use as early as possible. If a structure has been inherited or been deployed for a specific reason, it might make sense to explain this in documentation – such as a family’s Annual Report – rather than be seen as hiding its use, if the structure is revealed at a later date. This approach has to be used carefully, but it can be very effective amongst informed and financially literate stakeholders, such as business partners.
- Focus on impact. Finally, a family may want to take selective actions to contextualise their impact. The reputational risks around the use of OFCs usually concern whether families are paying their ‘fair share’ of tax; often a family will be paying large amounts of tax across their portfolio of companies and have used an IFC for a specific reason for a specific structure or transaction. In that case, it can be very helpful for a family to have firm, quantified, and audited data on their wider impact and contribution to society. More families are choosing to quantify this impact, so that they can contextualise any accusations around tax avoidance with a wider, broader picture of their societal contribution and impact.
The public is rarely the core audience
There is potential for misunderstanding here: many successful individuals and their advisors may, understandably, say that they are not too concerned (or concerned at all) about their perceptions amongst the public; this is usually the case because, with the exception of the very highest-profile multi-millionaires and billionaires, most successful people are not high-profile enough to attract the attention of the public.
But inclusion in offshore leaks often risks damaging the family’s reputation amongst business-critical stakeholders: business partners may worry about doing business with the family for fear of exposing themselves to risk; banks and financial partners may come to believe that working with the family is above their risk appetite; it may put off investment targets, employees, and others; and -- even worse -- it may not align with how the family sees themselves, which may dilute the family’s collective sense of purpose and mission.
Plus, even if the family is never publically associated with an IFC through the media, if an IFC is listed in private documents shared with important stakeholders, this can still raise the same private questions and reputational concerns amongst partners.
The upshot is that questions around the use of IFCs by families are always difficult to answer, but this latest leak shows that it's no longer possible or responsible for individuals to assume that their data will always be private and put their heads in the sand.
Regardless of which option families opt for, it is important that they make a conscious choice about how to manage the potential reputational risk, that they are comfortable with that choice, and that they take steps to prepare accordingly.
If you would like to discuss any of the issues discussed in this article, please don’t hesitate to contact firstname.lastname@example.org or +44 (0) 207 126 8249.