The Pandora Papers: associated risks and the rising importance of beneficial ownership

On October 3, 2021, the International Consortium of Investigative Journalists (the ICIJ) leaked the “Pandora Papers” – a collection of roughly 11.9 million documents identifying various world leaders, public figures and business executives as maintaining nearly US$11.3 trillion in more than 29,000 offshore companies. The leak, originating from the confidential records of 14 offshore services providers, included a wide ambit of documents, including passports, bank statements, tax declarations, company incorporation records, real estate contracts and due diligence questions.

The Pandora Papers join the growing list of significant information leaks that have brought concerns about money laundering and the improper use of offshore financial services to the forefront of public consciousness. In 2016, the ICIJ released the Panama Papers, which revealed significant money laundering in Canada through the use of shell corporations. More recently, in 2020, more than 2,100 suspicious activity reports filed by banks and other financial firms with the U.S. Financial Crimes Enforcement Network (the FinCEN Files) were also released.

The distinction between tax evasion and tax avoidance

It is important to note that the use of offshore vehicles is not illegal and does not in and of itself signal any wrongdoing. There are many legal and legitimate reasons for holding assets offshore, such as capitalizing on preferable tax treatment, for compliance reasons, holding assets in a more politically stable climate, or facilitating international investments. This should be distinguished from instances where offshore accounts are used with the intention to facilitate illegal activity such as corruption, fraud, tax evasion or money laundering, among others. The Panama Papers, FinCEN Files, Pandora Papers and other similar information leaks bring to the forefront the importance of this distinction.

Importantly, it is necessary to contrast illicit activities and tax evasion with legitimate tax planning and avoidance. Tax avoidance is the act of minimizing taxes legally. In contrast, tax evasion involves the intentional contravention of tax laws. This could include intentionally misrepresenting one’s income, overstating expenses, or knowingly falsifying tax returns. Tax evasion is illegal and may lead to criminal prosecution. Conversely, tax avoidance uses legal planning to purposively structure one’s affairs in the most tax-efficient way while still following the law. Appropriately used, offshore accounts are a legal and appropriate mechanism for such tax planning, although tax authorities may challenge tax avoidance structures or transactions that are deemed aggressive.

Compliance, KYC and beneficial ownership

Companies should nonetheless be live to the risks associated with offshore accounts. An essential aspect of a company’s compliance program is identifying the counterparties it does business with through proper diligence and “Know-Your-Customer/Counterparty” (KYC) measures. While there are many legitimate purposes for offshore corporations, they may also be used for illicit purposes, which can cause regulatory risk not only to the owner or beneficiary of the company or account, but also to parties doing business with them.

The release of the Pandora Papers has reignited the conversation regarding the improper use of offshore tax havens and anonymous corporations to facilitate illicit activity. As we have previously written, leaks such as the Panama Papers have revealed significant money laundering in Canada through shell corporations and have led to increased attention to such issues. Among other things, in May 2019, British Columbia established the Commission of Inquiry into Money Laundering in British Columbia (the Cullen Commission) to determine where and how money laundering is taking place in the province, why it has been allowed to happen, and whether and how it can be prevented. Since its establishment in 2019, the Cullen Commission has held five community meetings and 143 hearing sessions across British Columbia. At the time of writing, hearings at the Cullen Commission have concluded and closing oral submissions were made by participants’ lawyers on October 15, 18 and 19.

Regulated entities in Canada such as financial institutions and money services businesses are required under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the PCMLTFA) to take various measures to combat money laundering, including conducting KYC checks (including by taking reasonable steps to obtain and confirm the accuracy of beneficial ownership information), maintaining a compliance program, and making reports to the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC). Although these obligations are restricted to specified entities subject to the PCMLTFA, all companies in Canada are prohibited under the Criminal Code from transacting with property while knowing or believing it to be the proceeds of crime. Effective compliance with these obligations requires companies to be aware of the parties with whom they are doing business and make appropriate inquiries into any areas of suspicion. For more information about anti-money laundering in Canada, see our Anti-money laundering and terrorist financing “Things to Know” page.

Beneficial ownership transparency

A significant development in anti-money laundering compliance in recent years is the increasing prevalence of beneficial ownership registries. A “beneficial owner” is the real person (i.e., not a corporate vehicle) that ultimately owns, controls, or benefits from a company or trust and the income it generates. In the anti-money laundering context, beneficial ownership information is used to prevent the abuse of corporate vehicles for money laundering or other criminal purposes.

As we have previously written, in its Budget released April 19, 2021, the Government of Canada proposed a heightened focus on beneficial ownership through the introduction of a publicly accessible beneficial ownership registry by 2025.^[1] Similarly, in April 2021, FinCEN issued an Advance Notice of Proposed Rulemaking (ANPRM) to solicit public comment on questions relating to the implementation of beneficial ownership reporting provisions for certain companies included in the Corporate Transparency Act (CTA). Specifically, the CTA (which amended the Bank Secrecy Act) requires certain corporations, limited liability companies and similar entities to report specified information about their beneficial owners. These reporting obligations will only take effect upon the promulgation of final regulations by FinCEN, which FinCEN must issue by January 1, 2022.

Although specifics of the Canadian registry have yet to be announced – including the information required to be included and the degree of public access – this registry would provide a significant tool for regulated entities to draw upon for their KYC compliance, while substantially boosting beneficial ownership transparency in Canada’s efforts to combat money laundering.

Key takeaways

While there are many legal purposes for the use of offshore companies, they represent an important area of compliance risk, and companies should take rigorous steps to ensure compliance when either making use of or dealing with counterparties making use of such vehicles. The release of the Panama Papers in 2019, the FinCEN Files in 2020, and now the Pandora Papers has brought renewed attention to the legal and reputational risks associated with failing to adequately abide by an organization’s responsibilities in this context. Businesses, individuals, and financial institutions should carefully ensure that they are in full compliance with the law and their responsibilities thereunder.

It is critical that companies undertake sufficient due diligence and KYC measures to properly understand the parties with whom they are doing business to avoid becoming the unwitting dupes of bad actors. Regulated entities must also abide by their more stringent obligations under the PCMLTFA. While regulated entities having access to beneficial ownership information can assist in this process, the onus remains on companies to take appropriate measures commensurate with their legal obligations and the risks associate with their business.