Will public anger over the secret, untaxed hoards of some of the world’s wealthiest people put paid to the tax havens where this wealth is concealed?

Questions of survival have arisen as tax havens already face pressure from other countries determined to stem the erosion of their tax bases by companies that shift profits to offshore entities beyond the reach of domestic tax collectors.

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In addition to low or zero taxes, many tax havens also offer secrecy to account holders. Often these are shell companies, trusts and foundations, which shelter the wealth of the ultra-rich or the proceeds of crime and corruption, unknown to tax authorities in their home countries.

Breach in the wall

Leaked data about offshore entities from Panamanian law firm Mossack Fonseca in April breached a hole in that valued wall of secrecy, through which tax experts and investigators are now rushing.

The certainty that prosecutors from many countries will be delving into this trove of data has triggered waves of anxiety in corporate boardrooms and financial institutions. “This is information that prosecutors would kill for,” says one former prosecutor.

Experts say ‘know your client’ will become the mantra for financial institutions, some of whom may be deterred by the increased risk from assisting clients to establish offshore entities. 

The investigations could touch not only the parties identified but also their business partners, customers, suppliers and other associated entities. Some lawyers advise companies to pre-emptively determine if any of their clients – or senior executives – are tied to the names in the Panama Papers, especially if there is a risk of corruption or sanctions violations.

Some long-resistant offshore centres have rushed to sign up to a global Common Reporting Standard allowing the automatic exchange of tax information between governments. Other countries are following the UK in passing ‘beneficial ownership’ laws, which force companies to keep a register of all the people or legal entities that have significant influence or control over them.

Due diligence law

The US Treasury swiftly finalised similar long-stalled ‘customer due diligence’ regulations. The existing law already requires foreign financial institutions to report information to the US government about financial accounts held by US taxpayers – even though some US states offer secrecy and low taxes.

Besides regulatory risk, individuals and companies worry about the legal and reputational risks they could face, according to Polly Greenberg, a managing director at corporate finance adviser Duff & Phelps in New York. “It comes down to due diligence, and sometimes you can’t discover something if people want to keep it hidden,” she says.

Despite the new risks, Ms Greenberg believes tax havens will survive, saying: “There are other benefits to offshore, and some of those will continue. I don’t think the industry is dead.”

Furthermore, Unctad warned in a 2015 report: “Any measures aimed at limiting the role of offshore hubs in order to counter tax avoidance should consider the potential impact on global investment.” It noted that 30% of global crossborder investment passes through low-tax offshore financial hubs and special purpose entities.