The now infamous “Paradise Papers” contain personal data obtained from Appleby’s Bermuda office via an illegal hack. This data in part details the utilisation of International Finance Centres (IFC), by high net worth persons and corporates, for tax mitigation purposes. This post makes no comment on the legality or otherwise of using such data. Nor, is it a commentary about tax havens vs IFCs, the ethical considerations of society, and the freedoms for legal persons to engage in trade or invest in or through an IFC. Our focus instead is the failings that Trustees, Foundation Officials, Directors and Employees in Financial Services Businesses (FSB) must learn from in the wake of this saga. We do not purport to be a tax experts and so have not commented on the validity or otherwise of any advice given whether regarding tax or structuring. Our intention is to look at the compliance and “good business practice” considerations at the heart of good corporate governance. With offices in Guernsey, Jersey and having experience of working in Bermuda we believe analysis of legal and regulatory frameworks by jurisdiction offers a less valuable insight than a clear understanding of the general principles and terms of good corporate governance.
In order for Trustees, Foundation Officials and Directors to fulfil their responsibility and work in the best interest of their clients they must understand and follow the professional tax advice received. They must evidence that they are compliant with this advice and periodically, depending on the type of arrangement they are administering or controlling, ensure that they have up-to-date tax advice on file. They must also evidence that these arrangements remain legal and all tax liabilities are settled when due. The following are instances where those responsible may find that they have failed to attain an appropriate standard:
• Legal arrangements over time becoming tax non-compliant;
• Legal arrangements set up with draft tax advice without the advice ever being formalised;
• Legal arrangements undertaking new activities outside the scope of the original tax advice;
• Failure to follow tax advice fully, e.g. the non-repayment of a commercial loan arrangement;
• Tax advice provided by those who are not appropriately qualified;
• Tax advice held by the client but never shown to the Trustees, Foundation Officials and Directors.
To ensure tax and legal compliance the Trustees, Foundation Officials and Directors must exert control. Here again to fulfil their responsibilities they must clearly document evidence that they have overarching control of the activities of the legal arrangement. The following are instances where those responsible may find that they have failed to attain an appropriate standard:
• Beneficiaries committing the legal arrangement to a business arrangement without due consideration and approval of the Trustees, Foundation Officials and Directors in the first instance;
• Those responsible acting without due consideration;
• Those responsible committing the legal arrangement to business activities which do not accord with the arrangement’s rationale;
• Those responsible lack sufficient independence from the client;
• Those responsible are unable to evidence their control of the assets and/or activities of the arrangement.
The Paradise Papers have also raised questions regarding the suitability and legality of investments undertaken by legal entities. Trustees, Foundation Officials and Directors must ensure that the investments or business activities undertaken by the entity are in line with its intended purpose. Those responsible must also ensure the legality of any investment or business activity does not breach any international sanctions. Though investments or business activities do not require due diligence to the same standard of beneficial ownership due diligence, sufficient research and evidence must be attained to ensure such activity is in the best interest and in line with the objective of the legal arrangement. At the same time sufficient checks must be undertaken to ensure legal compliance and suitability with its objectives both at initiation and on an on-going basis thereafter. The following are instances where those responsible may find that they have failed to attain an appropriate standard:
• Investing or engaging in a business relationship with legal entities related to a sanction regime or jurisdiction;
• Not undertaking sufficient due diligence to ensure that the investment or business engagement does not involve sanctioned legal persons or sanctions breaches;
• Investing or business relationships that are out of line with the entity’s purpose.
Source of Wealth and Funds
Trustees, Foundation Officials and Directors must ensure that they have sufficient understanding and evidence of their clients’ Source of Wealth and Funds (commensurate with their risk classification) to prevent and detect criminality and terrorist financing. Understanding the origin of assets and their usage assists those responsible in forming a picture of the true beneficial ownership, intention and nature of the relationship. This also allows those responsible to have sufficient transparency and enable effective reporting required by international regulatory and legal bodies.
Ethics of Doing Business
Those responsible must ensure that they have given ethical consideration to the activities of any legal arrangement. Ethical considerations must accord with the documented risk appetite and it must be understood that legal arrangements engaged in aggressive tax mitigation or higher risk industries pose a higher reputational risk to the Trustees, Foundation Officials and Directors, their business and those of the jurisdictions in which they are active. As such, these relationships must be properly understood and documented as they may be open to future challenge.
The ethics of doing business must also consider whether sufficient knowledge, qualifications and experience are inherent in those responsible. Trustees, Foundation Officials and Directors must document and evidence their consideration of whether a business relation, either new or continuing is within their realm of knowledge, understanding and experience. Where this is not the case they should remove themselves from responsible positions or obtain suitably experienced individuals as their replacement.
The integrity and professional actions of those responsible will ultimately be assessed by the authorities to ensure that the best interests of stakeholders have been met at all times. This responsibility includes timely reporting of non-compliance with appropriate authorities.
While the Trustees, Foundation Officials and Directors remain responsible and accountable for both and their own and the legal arrangements activities, a suitably resourced compliance function is required to assist and advise. Compliance must be a proactive force within a FSB rather than merely a tick box exercise. It must assist in ensuring that the business has attained appropriate tax and legal advice as well as ensuring it is understood and followed. Those responsible must demonstrate the required control and oversight of activities undertaken for and on behalf of the legal arrangement. Findings and recommendations must be reported back to those responsible and any remediation must be tracked to ensure that the business can demonstrate compliance, integrity and appropriate levels of knowledge and understanding of the entity’s activities.
The Paradise Papers also clearly highlight the importance of implementing suitable and sufficient data security controls to protect stakeholders. These controls are not just IT system-focussed and must include effective staff training to reduce the risk of an unintentional data leak. Data security systems and processes must be monitored, tested and kept up-to-date. It goes without saying that failure to implement an efficient and effective control environment may lead to a catastrophic loss of data with disastrous reputational consequences for all stakeholders. FSB’s must also be aware and ensure that any 3rd parties who hold data do so effectively and have the necessary safeguards and review processes.
IFCs adhere to international standards and best practice. While recent data hacks have revealed that there are practitioners out there who have not abided by these requirements, the vast majority are conscientious and highly professional.
However, the current political backdrop is unfavourable to offshore jurisdictions and we should expect greater scrutiny in our professional activities for the foreseeable future. Applying the highest standards of corporate governance is our best path to a successful future.
If you have any concerns or would like to know more please either contact myself