Run to Paradise: it's all on again!

The release of the Paradise Papers this morning highlights the importance of financial intelligence and global data sharing. These leaks will do for corporate tax evasion what the Panama Papers did for private client asset concealment. They will also put pressure on governments worldwide to bring lawyers, accountants and real estate agents within the financial intelligence regime.

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IN THE ERA OF DIGITISED FINANCIAL INFORMATION, there's nowhere truly safe to hide for kleptocrats, multinational tax dodgers, high net-wealth individuals who are concealing assets from domestic authorities — or their facilitators.

Today's massive offshore tax avoidance exposé from the members of the International Consortium of Investigative Journalists (ICIJ) looks set to dwarf even the Panama Papers in its scale and impact. While the activities of Mossack Fonseca provided a porthole into the world of high-net-worth individuals and tax evasion, the Appleby and Estera leaks look set to shine a light on the activities of "gatekeepers" who facilitate large-scale corporate tax avoidance. Already some high-profile corporate names have come under scrutiny, most notably global resources and commodities behemoth Glencore.

Behind the scenes, financial intelligence units (FIUs) have been working closely with tax authorities to draw connections between transaction data and the entities named in the various offshore leaks. They have been building sophisticated "data lakes" that allow them to conduct surveillance on so-called "federated databases" of information. In layman's terms, this means they are able to crunch data held across different agencies and public data sets without needing to centralise all of that information into a single pool. The power, speed and agility of the "data lake" approach is going to prove crucial as information starts to leak from the troves held by Appleby and Estera.

Mark Konza, deputy commissioner at the Australian Taxation Office (ATO), said authorities were already cross-referencing information from a number of sources, including from concerned citizens, advisers, partner agencies and international bodies. The ATO is relying on data and intel software from the financial intelligence agency AUSTRAC to build an intelligence database, cross-check information from multiple sources, find new connections and track cross-border financial flows through IFTI reports. The authorities will then use this information to undertake targeted investigations and audits. Where appropriate, the ATO refers cases to the Serious Financial Crime Taskforce for criminal investigation.

This work will become even more powerful as FIUs, led by AUSTRAC, start to pioneer the use of cutting-edge intel software from Palantir and open source tools to analyse transaction data. The capability of Palantir to analyse data sets and identify patterns is mind-blowing. With this software AUSTRAC can perform complex analytics in minutes; the type of work that took weeks under the old system.

This quantum leap in FIUs' analytical capacity will massively speed up their intel work. It will also put a lot of pressure on tax evaders — both individual and corporates — to move quickly, to self-report and to take advantage of any amnesties that are on offer.

Multinational tax investigations

Tax authorities from around the world have been working quietly with FIUs and their partner agencies for months in preparation for the release of the Paradise Papers. The ATO confirmed this morning that it had known about the imminent leak of 13.4 million records from the Bermuda-based offshore law firm and was preparing its systems and partnerships to strike.

"The ATO has been working closely for several months with our partner agencies here and overseas in anticipation of a data release by the ICIJ. These relationships have enabled the ATO to commence analysis of the intelligence received to identify possible Australian links," the ATO said in a statement issued this morning.

The ATO is part of the Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC). The task force brings together 37 national tax agencies that have committed to more effective and efficient ways to deal with tax avoidance.

At the heart of the JITSIC partnership lies a collaborative approach to sharing intel and expertise on data analysis and the mining of both classified and publicly available information. The intelligence platforms that were developed in the wake of the Panama Papers have meant that these global agencies will be in a position to mine the data from the Paradise leaks with unprecedented speed and accuracy.

"Given our early analysis of the data and the ability of the JITSIC member countries to come together quickly to build on each other's intelligence holdings and insights, I am confident the ATO is in a position to respond decisively to this data release," the ATO's Konza said.

The dark side of Paradise

The ICIJ has said the Paradise Papers are the largest ever leak of offshore financial information, eclipsing even the Panama Papers. The 13.4 million records expose ties between Russia and U.S. President Donald Trump's billionaire commerce secretary, the secret dealings of the chief fundraiser for Canadian Prime Minister Justin Trudeau and the offshore interests of more than 120 politicians around the world.

The biggest impact from these leaks, however, will be felt in the corporate sphere. While high-net-wealth individuals were rocked by the Panama Papers, large corporates survived relatively unscathed. The nature of the Appleby/Estera client base means that the activities of some of the world's largest and most respected brands are about to come under the spotlight.

"The leaked documents ... show how deeply the offshore financial system is entangled with the overlapping worlds of political players, private wealth and corporate giants, including Apple, Nike, Uber and other global companies that avoid taxes through increasingly imaginative bookkeeping maneuvers," the ICIJ said.

Global Financial Integrity (GFI), the Washington DC-based advisory firm, said the leaks once again demonstrated the disconnect between law firms and other advisers' public statements about regulatory compliance and their private advice. It called on governments around the world to push ahead with the regulation of so-called Designated Non-Financial Businesses and Professions (DNFBPs) in line with their public commitments via the Financial Action Task Force.

"Law firms and other DNFBPs cannot continue to be left to police themselves." — Global Financial Integrity

"Jurisdictions need to require and publish public beneficial ownership information," said Heather Lowe, GFI's legal counsel and director of government affairs. "Appleby has shown on paper that it is aware of its requirements to conduct thorough and honest customer due diligence with potential and existing clients. But the leaked files seem to show that it's rarely putting this into practice." 

The documents in the Paradise Papers are already sending shockwaves through the private sector. In Australia, for example, they have revealed that Glencore's local division used cross-currency interest rate swaps and offshore entities in Bermuda to minimise its tax liabilities.

These types of revelations will add fuel to the global pressure to move to a country-by-country disclosure model for large multinational companies. Such a framework would help governments, journalists, NGOs and concerned citizens to identify sham arrangements whereby companies shift profits to low-or-no-tax jurisdictions.

Raymond Baker, president of GFI, said all large multinationals should be required to report their numbers of employees and facilities and revenue on a country-by-country basis to help reveal tax abuses.

"Allegations regarding Appleby's relationship with Glencore demonstrates this insidious relationship perfectly. From purportedly helping handle Glencore's moves in Congo with Katanga Mine and Dan Gertler, to maintaining a 'Glencore Room' to help shore up the company's claim of a Bermuda office for tax purposes," Baker said. 

Intelligence in the public interest

Non-government organisations (NGOs) have been quick to condemn the level of corporate tax evasion that has been exposed in the latest data dump.

Helen Szoke, Oxfam Australia chief executive, said the continued data leaks from offshore centres exposed the urgent need for tax reforms.

Oxfam has backed the calls for reforms to make large companies' tax affairs public for every country in which they operate. They have also called for reforms to reveal the individual beneficial owners of companies and trusts, along with special provisions to make mining companies reveal their tax practices.

"Oxfam is again calling on the federal government [in Australia] to follow suit and introduce public country-by-country reporting as the first step in stemming the billions of dollars being siphoned offshore to tax havens, and to make the register of beneficial ownership public," Dr Szoke said.

GFI estimates that tax havens, anonymous companies, trade-based money laundering and lax financial crime enforcement are having a major impact on developing countries in particular. It said that illicit financial flows through developing countries have surged to between 14 percent and 24 percent of developing country trade each year.

"This global shadow financial system bleeds the world's poorest economies and propels crime, corruption, and tax evasion," GFI said in a statement.

The Paradise Papers are drawn from the two offshore services firms — Appleby and Estera — as well as from 19 corporate registries maintained by governments in jurisdictions that serve as "waystations in the global shadow economy", the ICIJ said.

The leaks have been shared across a network of more than 380 journalists in 67 countries, coordinated by the ICIJ.

Click here to listen to Will Fitzgibbon, journalist with the ICIJ, discuss the impact of the Panama Papers on the Thomson Reuters Risk Report.