Effective Asset Protection Shouldn’t Be Compromised by Lack of Banking Secrecy
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The Panama Papers: Effective Asset Protection Should Not Be Compromised by Lack of Banking Secrecy

08/04/2016 | Asher Rubinstein, Esq.

The “Panama Papers” purportedly show how one law firm in Panama City with branches from Switzerland to Hong Kong utilized offshore entities and bank accounts to hide money for a world-wide clientele of wealthy people, including political leaders in various governments.  While foreign entities and bank accounts are legal, it is against the laws of many countries to hide income from taxation, to launder bribe money and other proceeds of corruption and criminal activities.  If the reports are true, the Panamanian law firm of Mossack Fonseca participated in tax evasion and money laundering on a global scale.

The “Panama Papers” raise issues, not for the first time, about foreign tax havens, banking secrecy and offshore asset protection.

In 2012, I visited Panama and met with trustees, attorneys and bankers, all eager for business and client referrals.  While I was witness to the explosion of Panama’s banking industry, and I knew that Panama banks were a gateway for doing business in Central and South America, I have not sent a single client to Panama nor recommended Panama as an asset protection jurisdiction.  Years earlier, we had made the decision that we preferred other jurisdictions for asset protection, for reasons including:  the strength of local laws, the degree of difficulty for outsiders to challenge those laws and asset protection structures, and our contacts and experience with other jurisdictions.

One of the factors that we look for in an asset protection jurisdiction is the social, economic and political stability of that country.  Panama was ruled by a military dictatorship from 1969 to 1989.  In 1989, within recent memory, U.S. troops entered Panama to arrest its president, who was also a military general and drug dealer.  While the Panamanian banking system developed since those years, and Panama City skyscrapers soared, the prior history made us hesitant.  Other jurisdictions offered better laws, a better record of political stability, and lawyers, trustees and bankers who we already knew to be professional and honest.

The “Panama Papers” is apparently the second time that a whistleblower has offered Mossack Fonseca documents to tax authorities.  The first instance resulted in raids and tax fraud prosecutions in Germany, and the information was then shared with the UK and U.S. governments.  The current situation arose as a result of a hacker penetrating Mossack Fonseca’s computer system and transferring millions of documents to the International Consortium of Investigative Journalists (ICIJ), which released the documents earlier this year.

In the “computer age”, nothing is immune from hacking and therefore there is no real secrecy.  Four days before the Panama Papers were made public, the Wall Street Journal reported that elite New York law firms Cravath, Swaine & Moore and Weil, Gothal & Manges were hacked.  J.P. Morgan Chase, the biggest bank in the U.S., was hacked in 2014.

Hacking, leaks and whistleblowers can happen anywhere, not only in Panama.  In 2013, ICIJ, the same group that released the Panama Papers, released a trove of offshore account details based on confidential documents obtained from the British Virgin Islands and Singapore.  In 2008, an HSBC tech employee in France stole banking records and handed them over to the French government, which then shared the information with other governments, leading to investigations and prosecutions of many Europeans for tax fraud.  In 2006, an employee at LGT Bank in Liechtenstein (once the most secret of tax havens) sold confidential banking records to the German government for millions of Euros.  The German government shared that data with other governments, including the U.S.  When foreign governments pay millions for stolen banking data (which they have done again and again), it creates an incentive for theft.

It may be said that the entire unraveling of Swiss banking secrecy can be attributed to a single causative event:  UBS employee Bradley Birkenfeld revealing to the U.S. Government how UBS lured wealthy Americans to open accounts in Switzerland, how UBS advised on keeping the accounts secret from the IRS, and how the bank earned high fees for managing the accounts.  So began DOJ’s civil and criminal cases against UBS, UBS paying $780 million in penalties, revealing the names of some 5,000 Americans with non-compliant accounts, and the end of Swiss banking secrecy.

While hacking, theft by bank employees and whistleblowers are universal, Panama is being singled out today due to the size of this latest leak of data, the historical scope (thirty to forty years) as well as the details of illegality.  What makes the “Panama Papers” leak different are the revelations of illegality: banks apparently willing to open accounts for entities without knowing the true beneficial owner of the corporation or trust, or knowing the beneficial owner to be connected to a rogue government but looking the other way; attorneys offering bearer share corporations (which most of the rest of the world no longer does and is illegal in all fifty U.S. states), and attorneys willing to backdate documents.

In better jurisdictions, these practices should not exist.  I personally have not seen a bearer share corporation in about a decade and a half.  Lawyers, banks and trust companies with whom we work around the world have strict “know your client” and due diligence requirements to vet and protect against money laundering and other illegal activities.  We disclose the beneficial owners of foreign accounts, because legitimate banks and U.S. laws require this.  Our asset protection clients are not looking to hide behind sham entities, and our clients do not rely on banking secrecy, because our clients understand that sham entities are ineffective and, where disclosure to tax authorities is involved, bank secrecy has been proven to be extinct.

Of course, another crucial difference is that despots, criminals and tax evaders need a jurisdiction like Panama, where attorneys and bankers look the other way.  Simply put, money laundering and tax evasion requires banking secrecy and the cooperation, or at least the “willful blindness”, of attorneys at Mossack Fonseca.  Asset protection of legitimately earned and tax compliant money does not require banking secrecy.  In that light, Panama is simply offering the very same services that got Switzerland in trouble.

The UBSHSBC, LGT, Mossack Fonseca and other leaks clearly demonstrate that banking secrecy can be compromised by hackers and renegade bank employees.  Further, the success of the U.S. Department of Justice in penetrating Swiss banks and obliterating Swiss banking secrecy, the adoption of the Foreign Account Tax Compliance Act (FACTA) by banks and governments around the globe, and a host of Mutual Legal Assistance Treaties and Tax Information Exchange Agreements signed between governments, all point toward the conclusion that banking secrecy, at least as it relates to government mandated disclosure, has been effectively destroyed.

Good asset protection does not rely upon banking secrecy.  Foreign banking secrecy has been compromised by hackers, whistleblower employees, investigations and prosecutions of foreign banks and bankers, treaties and governments cooperating with each other and sharing banking information.  In addition, foreign accounts, and foreign trusts and corporations which own foreign accounts, must be disclosed to the IRS.  Even in civil litigation, tax returns are often discoverable by one’s adversaries.  Again, reliance on secrecy to protect offshore assets is no longer a viable strategy in today’s world.

Instead, our clients rely on full compliance with tax and disclosure laws, but they achieve effective asset protection from civil creditors through the use of time-tested asset protection laws in safe and stable jurisdictions.

As we have long-counseled, any of the threats to banking secrecy, whether by governmental agreements, weakened bank secrecy laws, hackers or renegade bank employees, is not material if the funds are legitimately earned and the foreign account is tax-compliant.  It is completely legal to have funds offshore, for many reasons (e.g., international business transactions, global investment and diversification, asset protection), as long as the foreign accounts are part of a tax compliant strategy.  If the offshore accounts are tax-compliant, then the threat of information sharing - - from whatever source, governmental or individual - - is eliminated.  As the window of banking secrecy closes further, those people whose foreign assets do not rely on secrecy and are tax-compliant need not worry.