Panama Papers and the average investor: Family offices report from the front line

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With the publication of the ‘Panama Papers’ earlier this year by a US consortium of investigative journalists, many anti-tax avoidance campaigners, politicians and others pronounced the beginning of the end for the offshore “tax haven”, and certain types of wealth-holding structures, such as trusts.

No doubt the global move in the direction of automatic tax information disclosure – overseen and encouraged by the OECD, with its Common Reporting Standard (CRS) set to come into force in 2017 – and the growing clamour for countries to freely exchange beneficial ownership details will, financial services experts say, have a chilling effect, as it should, on the use of offshore institutions for the sole purpose of hiding wealth.

But as Paul Golden reports below, many family offices and their advisers insist that reports of the imminent death of offshore financial services institutions, and many of the wealth holding structures they offer, are greatly exaggerated.

To an extent few people outside the industry realise, these insiders say,  families and individuals are motivated by factors other than simply reducing their tax bills.

The sums said to be lost to tax evasion annually by certain anti-tax evasion organisations – and even many government tax collection agencies – can be staggering, and even, some critics say, hard to believe. A US university professor earlier this year stated that “more than US$12tn has been siphoned out of Russia, China and other emerging economies into the secretive world of offshore finance”, citing research he’d done on behalf of the UK’s Tax Justice Network.

At the end of 2014, some US$1.3tn of assets from Russia were estimated to be sitting, undeclared, in offshore accounts, the professor, Columbia University’s James Henry, also said.

Oxfam, meanwhile, estimates that Africa misses out on about US$14bn annually, as a result of undeclared wealth being secreted abroad. The International Monetary Fund says the offshoring of private wealth leads to annual tax revenue losses of between $190bn and $280bn worldwide.

Few of those in the business of helping wealthy individuals to look after their wealth safely and efficiently are keen to challenge such figures publicly, or to criticise the generally worthy organisations that disseminate them. And as the leak of the Panama Papers documents in April showed, for now, at least – ahead of the implementation of major new information exchange programmes – there still does seem to be a great deal of money being parked out of sight offshore.

However, such HNWI wealth managers and tax advisers insist that the reasons their clients make use of offshore financial centres and seemingly arcane asset holding structures is not about tax evasion, at least any more (though a certain amount of tax “efficiency” may come into play).

Stonehage Fleming partner Michael Maslinski, for example, notes that family offices make use of such holding structures as trusts and companies for perfectly legitimate reasons on behalf of their clients that have nothing to do with hiding money – the most prevalent reason, in fact, being succession planning, to ensure a family’s assets are handed down to the future generations in a fair and organised way.

“There will undoubtedly be a reduction in the use of such structures for tax evasion, but most trustees do not accept this type of business [anyway], and it represents a small proportion of the total,” he insists.

Indeed, Maslinski says he and his colleagues believe the overall use of trusts and companies will actually “continue to grow” rather than fall off, “in line with increases in global wealth”.

Privacy and security

Many of these structures address HNWIs’ understandable concerns about privacy and security, some wealth managers point out, citing as an example of the dangers that wealthy families can face the recent kidnapping of Formula One boss Bernie Ecclestone’s mother-in-law, from her home in an outer suburb of São Paulo, Brazil. Ecclestone is said to be worth as much as US$3.1bn. (Although the kidnappers were said to have demanded a ransom, Aparecida Schunck was reportedly rescued, unharmed, by Brazilian authorities, without any money having been handed over.)

“Likewise, in volatile economies there may be viable reasons to keep money outside the home jurisdiction, so painting it all with a broad brush of tax evasion is not accurate,” Holly Isdale, founder of Wealth Haven, a Greater New York area-based family office and wealth manager, says.

According to Geoffroy Dedieu, chief executive of TY Danjuma Family Office, a UK based single family office that looks after the assets of Theophilus Yakubu Danjuma, a now-retired Nigerian entrepreneur, politician and philanthropist, the term “offshore” is often used as a finger-pointing expression these days, and is “a bad choice of words, as it does not really mean anything in law.”

Middle East estate planning

Much growth in offshore financial centres in recent years has come from emerging market countries, including many in the Middle East, which has been targeted by financial institutions as well as international financial centres like Jersey and Guernsey.

Structures in offshore financial centres are also used primarily for estate planning purposes in the Middle East and there has been no decline in their use in recent years observes Walid Chiniara, head of Deloitte’s private, family enterprise consulting practice in the region.

“We are, however, beginning to see the effects of the publicity surrounding the ‘Panama Papers’ as well as increasing awareness of the transparency implications of the Common Reporting Standard,” he says. “To date, we have not seen major shifts of wealth from one offshore financial centre to another, but we have noticed increased caution and requests for further information around the effects of transparency.”

Paul Kearney, head of the private investment office at Kleinwort Benson,  suggests that family offices are becoming increasingly focused on tax compliance and tend to prefer to deal with jurisdictions with more robust legislative systems – a view shared by Dedieu, who says that in view of developments in socially responsible investing and environmental, social and governance, his office avoids jurisdictions with poor money-laundering regulation, poor governance or association with irresponsible social practices.

Maslinski reckons lifestyle will normally come well ahead of tax in deciding where to live, unless the tax implications are particularly severe or relocation has only a marginal impact. Dedieu agrees, stating that family members often accept higher tax levels as a trade-off for better quality of life, safety and better education for their children.

At least one wealth management expert, however, who asked to remain anonymous, disagreed.

This adviser, who looks after wealthy families on behalf of a globally-focused, independent firm, claims that at least half of the world’s wealthiest families are using structures that would struggle to stand up to a full and comprehensive audit.

“On the one hand they feel under attack from governments in austerity mode that are focusing on getting more tax revenue from the wealthy, and on the other hand there is sense that their tax burden is always too high no matter what it is,” he says.

“There is no way of safely hiding assets from the taxman [though]. Increasingly, discovery is coming from theft of personal data that is then turned over or sold to tax authorities.”

What’s more, he adds, those with undeclared assets they are thinking of bringing in from the cold, through one of the numerous government tax amnesty schemes currently on offer ahead of the implementation of the CRS, need to “make sure [they are] squeaky clean” in what they are disclosing, “because partial disclosure will only place them on the radar of the tax authorities from that point onwards.”

‘Opacity ≠ confidentiality’

According to Dedieu, some advisers still confuse confidentiality and opacity, and the fact that complex structures often embed significant risks.

“The main risk is lack of transparency – if we cannot clearly understand risks and performance, we are already running a financial risk to incur losses and pay excessive (often hidden) costs. Opaque tax structures also foster risks of fraud by advisers.”

Graham Reeve, a Melbourne-based family office adviser, describes increased disclosure requirements and complexity as a constant battle.

“There are ongoing moves for families to be required to disclose their assets/liabilities/income as part of normal corporate registration. Of course, the authorities believe that this is only reasonable for large family enterprises, as it lines them up with public company disclosures.

“However, in my view it is often no more than voyeurism.”

Family offices are generally more concerned about confidentiality than opacity, and so will want to be certain that any information exchanged will be adequately protected, adds Chiniara.

“However, many are not yet aware of what information will be shared, and where,” he explains. “It is the responsibility of the wider wealth management sector to ready clients for increased transparency by ensuring that their affairs are up to date, and that the right amount of tax is paid in the appropriate jurisdiction.

“This is particularly the case in tax-free jurisdictions where reporting has not previously been required, and where there is often a co-mingling of personal and business assets, and/or unclear or disputed ownership of assets. A housekeeping exercise to resolve such issues is therefore a necessity for all family offices.”

This article first appeared in the latest edition of International Investment. To subscribe please follow this link for details.