It’s Time to Shine a Light on the Shadowy World of the Tax Middle Men

On Tuesday this week, the Panama Papers Committee welcomed two panels of experts to hear evidence on the role played by middle men, or “intermediaries”, in the shadowy world of money laundering, and tax avoidance and evasion. A lot has been made of the role of the Panamanian company Mossack Fonseca, the law firm at the heart of the world’s biggest data leak, but they were not the only intermediaries involved in these activities nor even the only such company mentioned in their own leaked documents.

Several of the people we spoke to during our hearing pointed out that few individuals become wealthy and suddenly decide the stash their wealth in tax havens. Quite often the accumulation of wealth means being introduced to middle men — like wealth managers, accountants and lawyers — who all offer to help those individuals look after their money in the most “tax efficient” way possible. Many of them go to great lengths to assure their customers, authorities and themselves, that what they’re doing is perfectly within the realms of the law.

Indeed, when we spoke to representatives of these intermediaries, they quite proudly stated that no lawyer has been imprisoned as a result of activities exposed in the Panama Papers. Whether this says more about the enforcement of the law than its scope is something that our committee needs to consider when we make our recommendations later this year.

Threats of fines, being struck off or even jail time are needed to make people think twice about their actions.

MEPs on the committee pushed our witnesses on whether in many cases lawyers were operating within the confines of the law, but not the spirit of it. This does indeed seem to be the case, and so we need to find a way both to improve the existing law itself, and to incentivise lawyers to act in keeping both with the letter and the spirit. The academics and experts we spoke to suggested that one such way of incentivising good behaviour would be to make deterrents for intermediaries personal to the individual staff members involved, rather than for punishments to sit just at the level of the company. Threats of fines, being struck off or even jail time are needed to make people think twice about their actions.

Beyond that, there are other actions we can take at EU level to crack down on intermediaries who operate on the blurred line between what’s illegal and what’s immoral. We can create public registries of beneficial owners — identifying who really owns offshore companies and trusts. We can create European oversight of law firms and auditors to ensure that they either regulate themselves properly, or a new regulatory regime is introduced. And we can make sure that we investigate all allegations of improper conduct.

One question that I asked the intermediaries on the panel was about the steps that such companies take to prevent conflicts of interests when they advise both governments and businesses when it comes to new tax laws. If they are helping Ministers to draft new laws, is it proper for the same company to then advise companies and individuals on how to pay the lowest tax within those same laws?

They answered by assuring us that these are separate departments within the wider company, and that they do not collude to circumvent tax law — but they also conceded that avoiding such conflicts of interest can be difficult. The only sure-fire way to prevent them is either create much more rigorous ‘Chinese Walls’ within the company to separate these departments from one another, or else to separate the companies altogether — and force them to choose whether they want to advise governments or businesses.

The wealthiest individuals and companies can no longer dodge paying their fair share of tax by hiring a bunch of clever middlemen who make a mockery of the law.

Hearing from experts and those on the front lines is one of the strongest tools an inquiry committee has at its disposal. By hearing first-hand accounts from experts we can make sure the steps we propose in our report are fair, realistic and most importantly, effective. We have a duty to expose where laws are being broken or circumvented, and where laws are not fit for purpose. We can then make sure that our proposals stand the best possible chance of spearheading a new, global response to aggressive tax avoidance and tax evasion — one in which everyone pays their fair share of tax, and the wealthiest individuals and companies can no longer dodge paying theirs by hiring a bunch of clever middlemen who make a mockery of the law.