The Panama Papers – naming and shaming

This week the news services are falling over themselves regarding the information that they want to publicise about the Panama Papers. The reporting initially covered the working method employed by the Panamanian service provider, but as time goes by, more and more names of the service provider’s customers are being disclosed. But what is the relevance of publicising these names? What is keeping them from presenting the facts in a negative way? In short, the reporting ties in perfectly with naming and shaming.

Stand, sun, sea, palm beach chair. So one imagines a tax haven.

Panama Papers

The Panama Papers are documents from the service provider’s (internal) administration in, you’ve already guessed it, Panama. This service provider provides legal advice and trust services to its customers. As the press releases show, the customers are from a variety of backgrounds. Not only heads of governments would avail of the service, but also the butcher around the corner.

The Panama Papers would divulge the service provider’s working method. That working method would entail the service provider setting up an offshore company for a natural person. A share of the natural person’s assets would be incorporated into this offshore company. What is the advantage of that? The most straightforward advantage that comes to mind is – of course – that various tax rates can be used. In most cases, the offshore company will be established in a country where the tax rates are somewhat more attractive than in the country where the natural person resides. But that is not by a long shot the reason why all natural persons invest offshore. Other reasons could be spreading the risks or protecting the natural person’s estate.

The current press releases only bring the initial benefit (reducing the tax burden) to light because this is obviously ‘juicy gossip’ and sells well. This is quickly followed by the fact that it would not be quite so easy to derive from the information from the offshore companies which natural person is hiding behind the company. While normally speaking that would be a ‘disadvantage’, or as Johan Cruijff used to say ‘every disadvantage has an advantage’ of this working method, this is not the case with the Panama Papers. After all, it seems from the news reports that the cooperative of journalists were able find out which natural persons are behind the offshore companies relatively easily based on the information known to them.

How the documents from the service provider’s administration wound up in the hands of Süddeutsche Zeitung is still a mystery. That newspaper has in turn shared the files with the ICIJ (The International Consortium of Investigative Journalists), an international association of journalists. This association, which includes the Dutch newspapers the Trouw and the Financieele Dagblad, is working on analysing the documents. Bit by bit, information is being disclosed to the outside world.

The journalist association shrouds itself in mystery, while the service provider takes the stand that the computers have been hacked. This immediately raises the question whether the Tax Authority should be allowed to use the information in a legal proceeding or has this information been obtained by illicit means. Given the case law in the area of microfiches from the KBLux bank affair, this will most likely not be the case with the tax authority and will be glossed over as usual.

Tax avoidance vs. tax evasion

A man is but a man and (apparently) every man, big or small, fat or thin, preferably wants to pay as little tax as possible. Given that there are also people at the top of all large international companies, this also explains why these companies are keen to avail of complicated constructions and advance certainty by means of tax rulings, etc. A lot has been said about this in the past months.

The country where a natural person has to be pay tax depends on his/her place of residence (Article 4 of the Dutch State Taxes Act). To reduce the tax burden a natural person will have to initiate a working method that ensures that part of his assets are transferred, so that this can be accommodated elsewhere (read: in a country with a more lucrative tax system). That is also the direct crux of the Panama Papers.

The bottom line is that the working method of the Panamanian service provider is that an offshore company is set up for the natural person. The core of the working method is that a share of the natural person’s assets is incorporated into the offshore company. Consequently, the tax levy of the natural person’s country of residence no longer applies, but that of the country where the offshore company is established. The tax levy of this country is usually considerably lower than that of the natural person’s country of residence. This therefore offers a direct advantage.

The question that then remains to be asked is whether the financial advantage gained qualifies as tax avoidance or tax evasion. That qualification is extremely important because everyone is within their right to avoid tax (reduction of the tax burden within the boundaries of the la), while tax evasion (reduction of the tax burden outside the boundaries of the law) is a criminal offence.

While not all of the facts and circumstances of the issues surrounding the Panama Papers are known yet, we all have to make do with the information exposed by the journalists, the media is already screaming ‘blue murder’ and every effort is being made create the impression that it is all about tax evasion. That conclusion, however, cannot be reached just like that.

Tax avoidance only applies if the reduction of the tax burden is effected outside the boundaries of the law. It may well be the case that the natural person incorporates a share of his/her assets in an offshore company and does not declare his/her stake in that company on his/her income tax return. Whether this involves the Panamanian service provider’s customers, is not known. That information is only known to the relevant customer and possibly the Tax Authority of the natural person’s country of residence. While the customer concerned does not feel the need to justify its financial wheeling and dealing publically, the Tax Authority is bound by the obligation of confidentiality (AWR, Article 67) and will therefore also have to ‘keep their mouths shut’. In short, that’s playing right into the hands of the journalists, because this gives them ammunition to continue to speculate and make assumptions, which the majority of people believe to be true.

Naming and shaming

As I already mentioned, the initial publication on the Panama Papers focus on analysing the Panamanian service provider’s method of working. The first names of this service provider’s customers were quickly publicised. While these were foreigners yesterday, as of today, there are also Dutchmen among them. But is it necessary to publicise the service provider’s customers by name and in doing so give the impression that this is a matter of tax evasion? And what do we stand to gain by publicising these names?

If it is a case of tax evasion, is it any worse if it concerns a footballer or a former member of the Supreme Court? I don’t think so. Article 69 of the AWR states that “anyone that intentionally fills out a tax return provided for under the Tax Act incorrectly or incompletely (…) whereby they do not pay enough tax, that person will be fined, punished (…).” This legislative text does not make any distinction between different tax obligations. Be it the butcher on the corner, the footballer or a former member of the Supreme Court, if he/she files an incorrect or incomplete tax return, he/she is equally liable to punishment.

This does not exclude dubious reporting of information. The information that is provided on the former member of the Supreme Court initially suggests that the member in question has used his/her Supreme Court membership for an offshore company. However, on closer examination (insofar as all the facts are known) it transpires that the offshore company was only set up 11 years after the Supreme Court membership ended. Even so, public opinion will not bear this in mind, but rather emphasise that even a former member of the Supreme Court has made use of an offshore company to reduce his/her tax burden.

The only reason for naming the names of the service provider’s customers in newspaper articles is therefore within the context of ‘naming and shaming’. ‘Naming and shaming’ basically comes down to certain, unsatisfactory situations being exposed publically. In this case, the natural person is exposed by a publication (naming) and the announcement and/or information is portrayed in this publication in a bad light (shaming). That is exactly what has happened in the current news coverage. Customer names are publicised, and the information painted in such a light that any random reader will think that the person in question has evaded tax and is therefore a villain.

While freedom of the press goes too far, that same freedom is still subject to certain boundaries. You see, the press hounds may not injure a person’s good name or reputation. The Supreme Court deems rumours being presented as facts and the accuracy of the information not being first verified as the deciding factor for defamation. So, before going to press, certain information has to be verified to ensure its accuracy. Whether that was also done in the case of these Panama Papers is doubtful. A number of reports did indeed point out that the Tax Authority was asked to respond, but the Tax Authority have an obligation of confidentiality and are unable and will not provide any information on the accuracy of the information. There is nothing to indicate that the customers concerned, who have been now been named and shamed, have been asked to respond.

In short, as interesting as the information from the Panama Papers may be, the cooperative of journalists would do well to disclose this information in an accurate and proper manner. To my mind, that manner should be such that naming and shaming is avoided. After all, that does not in any way whatsoever contribute to the tax levy in, for example, the Netherlands. Hopefully the cooperative of journalists will take this into account before publishing the information.

Conclusion

The world is in turmoil after announcement of the Panama Papers. The manner in which this information is being exposed raises the necessary questions. The cooperative of journalists are not afraid to name and shame. In doing so, the Panamanian service provider’s customers are shunned as tax fraudsters, while there are known facts that do not (yet) give any cause for this. Making use of an offshore company does not automatically imply tax evasion (a criminal offence), but may qualify as tax avoidance (everyone’s right, because this falls within the boundaries of the law). The latter may well not strike a positive chord either, but it doesn’t necessarily mean that anyone involved is a villain or fraudster

12 tips for a visit from the FIOD, the Dutch fiscal intelligence and investigation service (for you as a service provider). What should you do (and why)?

An FIOD investigation may have far-reaching consequences for your customer. Not to mention that the possible consequences it may have for you as a service provider. Below you will find twelve tips on what to do if the FIOD suddenly comes knocking at your door.

Close-up Of Businessperson Holding Magnifier Over Money Wallet

You do not necessarily have to be a suspect to be confronted with a visit from the FIOD. Regardless of whether you are a suspect (or at risk of being one), as a rule, such a visit is unpleasant and even intimidating. Unlike, for instance, a tax inspection, the FIOD usually arrives unannounced. In this consternation, your initial reaction is to be cooperative. However, even if you are not regarded as a suspect, it is important that you know what to do.

Bear in mind that it is perfectly normal to only comply with a request or even a demand to provide information that you would not normally share with strangers when you are under an obligation to do so. Moreover, as a service provider you are obliged by your rules of professional practice or contract to maintain secrecy. Unless you are under a legal obligation, you shouldn’t even voluntarily cooperate under coercive force applied by investigation services.

Investigating officials like the FIOD should not be given the opportunity to use their powers beyond the scope for which they are intended.

TIP

  1. Escort the investigating officers to an empty room (where there is no administration lying about) and ask them to identify themselves.
  2. Call the manager, person in charge of the file and contact a lawyer.
  3. Do not (as yet) answer any questions.

Why:

Investigating officers that cannot identify themselves as such – also check that the ID is still valid – have no powers. They can be shown the door without any discussion.

Because this will only apply on very rare occasions, it is wise to realise that under Article 83 of the Dutch General Tax Act (AWR), FIOD officers have access to any location ‘to the extent that this is reasonably required for them to do their work’. When FIOD officers are escorted to a separate room to await the summoned manager and/or accountable person, there is generally no need for them to use their power to start browsing.

Leaving FIOD officers to walk about poses a risk. Pursuant to Article 81 of the AWR, the FIOD are authorised to confiscate objects at all times. The FIOD may even ask for these objects to be handed over to them. Even from a suspect. The less opportunity is given for extending the investigation the better.

TIP

  1. Keep desks tidy and filing cabinets locked.

Why:

The FIOD officials’ power to seize objects and gain access to anywhere is limited to the power to ‘browse’. This explicitly means that the power to search does not extend to ransacking the place. In case law, the term ‘browse’ is, however, stretched. ‘Browse’, for example, also means opening a cupboard or cabinet door. If objects are found other than the ones the investigating officers are looking for, these objects may also be seized.

It has already been stated above that as long as no opportunity is given for browsing, the officers may not proceed to do so. Also bear in mind here that saving (sub) files separately in networks, on servers and the cloud, prevents all data from being recorded in the search for that one component. In this context, please also refer to the Tax inspection guide.

TIP

  1. Determine your position. Are you a:
  • ‘third party’?
  • (potential!) (fellow) suspect?
  • (derived) professional entitled to privilege? 

Failure to comply with a request to submit is ‘failure to comply with an official order.’ This is a criminal offence. Although, as already mentioned, during an FIOD investigation of tax offences, a suspect may also be requested to hand over documents. A suspect may refuse if this order is given on the basis of Article 96a(3) of the Code Of Criminal Procedure (hereafter ‘Sv’), which does not specifically provide for the investigation of tax offences. Do not hesitate to consult a lawyer if there is any doubt about whether the investigation concerns a tax offence. In the case of a suspect, a further request may not be made to obtain (digital) data on the basis of Article 126nd(2) of the Sv. Under Article 126nh(2) of the Sv, a suspect may not be forced to decrypt code-protected (digital) data. For this reason alone, it is good to be clear whether you qualify as a suspect.

Not least because the prosecution policy of different Functional Prosecution Offices increasingly focus on so-called ‘facilitators’ over the past few years, it is important that you realise that as a service provider you may be taken as a suspect along with your client in a criminal investigation (Also read my blog on this: Co-perpetrators: accountants and other riffraff beware!). Whether as a manager or even as an employee of the suspected natural person you are entitled to the same rights as the suspected natural person, his affairs will have to be assessed on a case-to-case basis. If you have difficulty determining this, it is important that you seek the assistance of a lawyer the moment you are confronted with such requests.

If you have performed services by order of or in cooperation with a professional entitled to privilege, such as a lawyer, you may be obliged not to cooperate as a derived professional entitled to privilege.

If you have difficulty determining your position, do not hesitate to request deferment and find out, and, if necessary, engage a lawyer to represent you.

 

  1. Ask what they are looking for and where and what the object of suspicion is
  2. Ask for written requests and authorisations.

Why:

There is a significant difference between requesting ‘tangible’ objects and recording ‘digital’ data.

Objects may be demanded (AWR, Art. 81, Sv, Art. 94, 94a) for:

  • the process of establishing the truth (investigation relating to suspicion);
  • proof of illegally obtained advantage
  • as capital lock-up for a financial penalty/confiscation of illegally obtained assets (read more about this in this blog: ‘Does reaping benefits in a roundabout way led to double trouble?’)
  • as capital lock-up for confiscation/removal from circulation.
  • When FIOD officials record data be aware that a distinction is made between:
  • identification data (‘who are you?’);
  • other identification data;
  • sensitive data (race, religion, political persuasion, sexual preference).

Depending on the extent to which the recording of data intrudes on the privacy of individuals, stricter conditions will be set for exercising the method of coercion. Be aware of why something is being asked.

TIP

  1. Only provide what is specifically demanded.
  2. Check (yourself) whether you have the requested information available.
  3. Make a note of what you hand over (do this together).
  4. If necessary, ask for an extension of the term in which information has to be provided.

Why:

You cannot hand over objects or data that you do not have in your possession. There is no obligation to tell investigating officers where they might be able to find the objects or data they are looking for. Nor is there any obligation to inform investigating officers of any other matters that might be interesting for their investigation.

An order to decrypt requesting, for instance, to make encrypted digital data accessible for security reasons, may only be given to the person that encrypted the data. Knowing how to decrypt does not constitute an obligation to proceed to do so. Bear in mind that if decryption is not possible, this may give cause to seize the entire server.

TIP

  1. Questioning as suspect or witness (hearing)? No obligation to answer!

Why:

As a suspect, you do not have to cooperate on your own conviction. You therefore do not have to answer questions that are put to you.

A professional entitled to privilege, derived or otherwise, may decide to invoke this right to refuse to answer any questions put to him/her.

However, third parties or professionals that have a (derived) entitlement to privilege that do not invoke their right of nondisclosure are not obliged to answer questions put to them by FIOD officials or an attending prosecutor. An obligation to answer the questions asked only exists after a person (not being a suspect or a (derived) professional entitled to privilege is summoned by a (supervisory) judge to make a statement as a witness. Bear in mind that in many cases whereby as a service provider you have made a non-disclosure agreement with your clients, you are obliged to remain silent until you are summoned! If it should come to a hearing, read our hearing tips.

This blog can also be downloaded as a Guide via our website.