ICC Commercial Crime Service

The ‘Legitimacy’ of Offshore Corporations

It seems everyone is talking about the “Panama Papers.” The International Consortium of Investigative Journalists (ICIJ) blew the top off the offshore financial market with its reporting on the 11.5 million documents obtained through a leak from Panama-based law firm Mossack Fonseca. Now the weaknesses of governments, heads of state, corporate shareholders, bank executives, tax authorities, regulators and law makers have been exposed and the seedy underbelly of offshore corporate anonymity is being smoked out.

‘No Legal Reason to Remain Anonymous’

To an asset-tracing and asset-recovery specialist, like me, it’s not surprising this revelation materialized. After all, I firmly believe there is no truly legitimate reason to anonymously own an offshore company.

Yes, setting up offshore shells can be completely legal and there are so-called legitimate reasons to set them up: In international business, being able to serve clients in their home countries and to transfer currencies easily between countries is necessary, to be sure. But, if you’re acting completely above the fold, why do you need anonymity?

Protection of Privacy

Some, especially the wealthiest among the world’s population, argue that anonymity protects them from criminals going after their wealth. The truth is it protects them from anyone – including law enforcement, fraud investigators, tax authorities and asset-recovery specialists – from having an easier time trying to figure out whether they’re acting in good faith or criminally. Moreover, many of the people who make this claim live ostentatiously, so that justification easily falls away in most instances.

US Tax System vs. Territorial Tax System

In the United States, our tax system was designed to collect taxes on money made by our citizens and multinationals in any other country in the world. If you live here and make money selling goods in Canada, you pay taxes on the taxable income you make in Canada.

Not so in countries that use a territorial taxation system. Money made offshore by investors in Hong Kong, France and Germany, for example, is often exempted from taxes in the onshore country. It’s why the British Virgin Islands, the Channel Islands in Europe and now, some say, Delaware, Wyoming, Nevada and South Dakota in the United States have become safe havens to own corporations used for the purpose of evading taxes.

And while it may seem that as a result of our tax code, many more in the U.S. would be looking to “hide” their taxable wealth in offshore corporations, we also have a central banking system that is heavily regulated. The world at-large has no regulatory body to oversee and impose sanctions against countries not playing by the accepted norms in international banking. The closest we have to true international oversight is the Paris-based Organisation for Economic Co-operation and Development (OECD), which recommends policy changes but doesn’t have the authority to make those changes.

So many throughout the world have learned that to reduce their legitimate tax burden, they can set up and use these offshore shell corporations. This is key, though: If this was a legitimate business strategy, they wouldn’t mind having their name attached to these shell companies. Criminals, fraudsters and Ponzi schemers - who want to be sure they are in no way traceable to the profit of their crimes, use the lack of regulation to distance themselves – and their assets – from the eyes of the world.

Tectonic Shift Toward Transparency’

So what are we in the asset recovery business hoping comes out of the “Panama Papers”? While policy hacks and tax regulators sort through how to harmonize the world’s various tax laws, regulations and practices, we’re hoping for a tectonic shift toward transparency to help us root out the criminals who are greedily grabbing up the world’s assets and hiding them through allowable opacity.

We, like the rest of the world, are watching this unfold and hoping good comes out of it.

Edward H. Davis, Jr. has practiced law for 28 years, and is a founding shareholder of the Miami international law firm, Astigarraga Davis. As a Certified Fraud Examiner, he heads the firm's Asset Recovery and Financial Fraud group, representing victims of fraud and grand corruption including governments, governmental entities, corporations, hedge funds, insolvency practitioners and individuals by investigating and prosecuting civil fraud and asset recovery actions. He serves as inaugural chair of the International Bar Association’s Anti-Corruption Committee’s Subcommittee on Asset Recovery, and is a leading original member of the London-based International Chamber of Commerce Commercial Crimes Services FraudNet Network. In 2013 Ed has been recognized as the Asset Recovery Lawyer of the Year by Who’s Who Legal since 2014.





ICC FraudNet is an international network of independent lawyers, who are leading civil asset recovery specialists in each country. Recognized by Chambers Global as the world’s leading asset recovery legal network, our membership extends to every continent and the world’s major economies, as well as leading offshore wealth havens that have complex bank secrecy laws and institutions where the proceeds of fraud often are hidden. Founded in 2004 by the Paris-based International Chamber of Commerce (ICC), the world’s business organization, FraudNet operates under the auspices of the ICC’s London-based Commercial Crime Services unit.