What's the impact of the Panama Papers on global regulation? What could this mean for you? Here are Contego's thoughts...

The 11.5m files leaked from Mossack Fonseca, the world’s fourth-largest offshore law firm, provides an unprecedented, and some say a long-overdue window into how the rich exploit offshore tax regimes.

Whilst the mere existence of offshoring reinforces the public’s belief that the rich function by a different set of rules and expectations, it has long served as a way for the wealthy to minimise taxes. Yet as the data leaked from the Panama-based firm now shows, offshore schemes also attract corrupt officials, criminals, money launderers with a desire to conceal funds from regulators as well as law enforcement.

How might the regulatory environment change in light of the Panama Papers?

In response to the revelations detailed in the Panama Papers, politicians and global regulators are coming under increasing pressure to cut out loopholes associated with offshoring such as the pervasive use of shell companies. Regulators also face increasing demands to initiate investigations of those mentioned in the Panama Papers.

According to a recent article in the Financial Times, the Financial Conduct Authority (FCA), the Serious Fraud Office and HM Revenue & Customs have all received instructions from the prime minister to “look at” cases resulting from the Panama Papers leak. Yet Mark Steward, the head of enforcement for the FCA, hinted at the challenges facing his department. “This is very difficult territory. No one should underestimate the task. Most [authorities] are set up to do a domestic job, not to do things internationally. Collaboration is easier said than done,” cautioned Stewart.

At Contego, we think, despite the public pressure to make offshoring less attractive and investigate those implicated in the leak, changing laws in tax havens could possibly take years to accomplish if it happens at all. Further, unmasking those involved and determining whether they broke the law will consume untold time, effort, and expense and likely result in limited prosecutions.

While some regulatory agencies will allocate resources to conduct investigations of historical activity, given the interdependence of the global financial system and the need to stop funds from entering offshore havens in the first place, it’s likely that most financial regulators will focus their efforts on exerting increased control over the financial institutions subject to their oversight.

At Contego we suspect that banks in UK and US, in particular, will see an increase in the enforcement of existing laws as well as the creation of a new wave of regulatory requirements designed to combat activity consistent with the offshoring of funds. That means KYC, anti-money laundering prevention, and transaction monitoring, etc. will all increase in their importance.

Banks are already good at detecting suspicious activity as well as criminal activity. However, given the revelations detailed in the Panama Papers, they will need to become even more adept at detecting, tracking, reporting, and in some cases blocking transactions associated with offshoring schemes.

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