Have the Panama Papers Taught Us Anything We Didn’t Already Know?
Over the last few weeks, the media has breathlessly reported the leak of the so-called Panama Papers, a set of over 11.5 million confidential documents about over 200,000 offshore companies formed by the Panamanian law firm, Mossack Fonesca. Each day, headlines scream about the steps that the uber-wealthy have taken to hide assets and launder money through the use of off-shore bank accounts and, in many cases, South Florida real estate. But, when you cut through the TMZ style shock and awe, there seems to be an “everyone does it” undercurrent to the reporting. Mossack Fonesca’s clients include heads of state, government leaders, athletes, movie stars and even cartel leaders. But they also include “regular, every day” wealthy people, many of whom sought the law firm’s assistance for presumably legitimate reasons.
Any attorney or accountant who deals in sophisticated transactions has dealt with off shore companies. There are many legitimate reasons for going off shore. There are clearly favorable tax reasons for doing so. Often, a client is doing business in a foreign jurisdiction and a foreign entity is required. But as long as the client is reporting the foreign activity on US tax returns and other US reporting mechanisms, there is never a need for suspicion.
But one has to question why a client needs to go off shore simply for “anonymity” purposes. There are plenty of vehicles right here in the US to accomplish that. Delaware, Nevada and Wyoming, to name a few, are famous for shielding the identities of the true owners of corporations. Even Florida’s entity laws do not require disclosure of the true owners of corporations, partnerships or limited liability companies in public records. Annual filings only require names of officers and directors of corporations, the general partner of limited partnerships and the manager of limited liability companies. None of those are necessarily the owners of the respective entities. If anonymity is the goal, why go off shore?
Absent legitimate tax or business reasons, the hairs on the back of your neck should begin to stand on end if a client pushes for an off shore entity. Mossack Fonesca’s public comments since the story broke ring hollow. The firm and its attorneys chose not to ask simple questions about their clients’ activities and intentions and therefore helped perpetuate the fraud and laundering activities that have been alleged. A lawyer has an obligation under the Rules of Professional Conduct (see, for example, Florida Rules of Professional Conduct 4-1.6(b)(1)) to reveal confidential information to the extent the lawyer reasonably believes necessary to prevent a client from committing a crime. In addition, a lawyer may not represent a client and must withdraw from representation if representation has commenced if the client has used the lawyer’s services to perpetuate a crime or fraud (see, for example, Florida Rules of Professional Conduct 4-1.16(a)(5)).
The use of off shore entities for numerous purposes has been going on for many years. Many people use these entities for legitimate purposes. As the Panama Papers show us, many people likely use them for illegitimate purposes, to no one’s surprise. Most of what has come out of this revelation is celebrity gossip. The real moral of the story, I think, is that attorneys and other professionals have a legal and ethical responsibility to know who is behind these entities and to inquire why they are being created. While it is not possible to look into the future and confirm that clients will do everything correctly and legally, due diligence must be undertaken and questions must be asked. If the answers aren’t correct and the client can’t be convinced to use a more appropriate structure, withdraw.