Panama fallout leaves banks in deep water

Barely a year has passed since HSBC’s chairman admitted to “horrible reputational damage” after the bank’s Swiss subsidiary was implicated in systematic tax avoidance. The Swiss scandal has now been officially superseded, by Central American shenanigans, with Panama the latest jurisdiction to be sent to the financial sin-bin.

The leak of 11.5m files from the database of Panama-based law firm Mossack Fonseca has resulted in secret balance sheets of ruling cliques from China, Iceland, Pakistan, Russia, Syria and Ukraine being laid bare in the world’s press, leading to demonstrations, resignations and pledges to reduce corruption. 

The Panama Papers, like the HSBC affair, offer several important lessons to the worlds of private banking and international financial services. Law firms setting up companies for oligarchs, international business clans, entrepreneurs and politicians use a variety of jurisdictions. 

Many London firms gravitate to nearby Jersey and Guernsey to set up trusts, foundations and structures to facilitate private equity deals. Guernsey attained notoriety during the 1990s, when its structures were used by football agents to minimise tax liabilities of star footballers transferred to top London clubs. 

But the Channel Islands have since cleaned up their act. Guernsey has issued a statement highlighting its own legislation from 2000, obliging beneficial owners of Guernsey companies to be properly identified and recorded by regulated corporate service providers. Only a handful of jurisdictions have such measures in place, say Guernsey publicists. The inference is that wealthy families should use such “reputable” centres to tie up their business structures, protecting assets against spurious legal action and planning for succession and possible divorce.

Is it fair to say regulation gets looser, relaxed and lackadaisical once we enter the palm-fringed world of Caribbean and Central American havens?  Let’s first take a step back from the political brouhaha and look at how Panama built up its reputation as an “offshore” finance centre. 

Bankers familiar with the jurisdiction say the vast majority of Greek shipping companies register their fleets in Panama to shield them from liabilities, including oil spillage. Once it had built up a reputation for efficient financial structuring, Panama began to rival local competitors, including the BVI and Cayman Islands, both under British influence.

The Republic became a major destination for what private bankers call “fear capital”, controlled by politicians and business people – particularly those from Argentina, Brazil, Colombia and Mexico – wary of kidnap, ransom and appropriation of their assets by unfriendly governments.

But things turned ugly during the 1980s, after Manuel Noriega – a supporter of General Omar Torrijos, who signed a treaty with the US to restore the country’s sovereignty over the Panama Canal, before dying in a mysterious plane crash – took over the security services before being eventually ousted in a US invasion.

Shipping tolls for canal use have vied with financial services revenue as the country’s main earner. Local malcontents say the US is determined to destroy the reputation of any such independent financial power centre – benefiting from improving infrastructure and defection of US pharmaceutical companies – in the same way it undermined Switzerland’s private banking success story.

Bankers talk of a “generous and successful country, where investment is regarded with a serious attitude”. Tax lawyers describe a “whole spectrum” of practitioners working in a country of nearly 4m people, from those focusing on setting up structures for “politically exposed persons”, to those who conduct broader transactional business.

Rather than Panama and the activities of international financial centres or tax havens coming under greater scrutiny, it should perhaps be individual firms, and banks that work with them, who must attract a sharper focus.

“The issue here is not the jurisdiction, it is the law firms and banks doing poor due diligence,” suggests global family office adviser Gerard Aquilina, a former member of senior management at HSBC, UBS and Barclays. “I thought most banks had got rid of clients who had corporate structures with bearer shares,” he says, with great concern that such opaque practices still persist. 

Alarm bells have now been ringing for some time, alerting banks to questionable business, driving them to clean up their acts, but some large players have chosen to ignore the sirens. Further sanctions will no doubt await them. But the readiness of the US to point the finger at foreign jurisdictions for domestic political gain should also come into question. One of the world’s major tax havens – Delaware – continues to survive and thrive in the heart of US territory.