COLUMN: Paradise Papers — does this expose directors in Australia?

Money laundering reporting officers will be reviewing the Paradise Papers to check their firms’ exposure to beneficial ownership concerns, transfer pricing and profit alleviation to offshore jurisdictions. The revelations seem unlikely to expose any directors to charges under the Corporations Act 2001, however, if they have relied upon expert advice.

It remains to be seen whether the Paradise Papers will have as big an impact as the Panama Papers. The Australian Tax Office (ATO) has lodged a number of assessments to individuals and companies mentioned in the Panama Papers. It is confident of raising A$4 billion based on the information received. The ATO announced on November 6 that it was making “enquiries” into 19 companies, mentioned in the Paradise Papers; it is significant that it did use the word “investigation”.

Little international government action concerning the Panama Papers

Little work has been done since the G20 meeting in Brisbane in 2014, when governments agreed to take action to ensure the fairness of the international tax system and to secure countries revenue bases; the Paradise Papers have highlighted that much. The G20 mandate of the governments was to ensure that profits should be taxed where the activities took place and the profits were derived.

The OECD also introduced a base erosion and profit shifting action plan to modernise international tax rules. In addition, the Financial Action Task Force (FATF), has called upon Australia and other governments to extend anti-money laundering laws to gatekeepers, such as lawyers, estate agents and accountants. Australia is yet to introduce such legislation and has lagged behind New Zealand, Hong Kong and Singapore. The Paradise Papers raise issues for financial institutions in relation to better understanding their beneficial ownership of accounts and to what extent they can rely upon correspondent banks conducting due diligence.

The onus on directors

The Paradise Papers have exposed a number of corporations which have established tax minimisation structures and shifted profits
to Bermuda, on the advice of law firm Appleby. Minimising tax is not illegal; however, fictitious accounting and the exaggeration of offshore assets and tax losses, is usually referred to as fraud. The use of “dummy directors”, who also happen to be lawyers of Appleby and who have the power of attorney to move billions of dollars of profit, may raise questions of directors’ duties in the relevant home jurisdictions and create a reputational risk for the firms involved.

More importantly, the Panama Papers and the Paradise Papers indicate to firms that privacy may be a large assumption on their part when considering the establishment of appropriate corporate structures offshore. It may also raise questions as to whether shareholders in the home country have been deprived of dividends from profits to which they were entitled.

A question of responsibility for directors

The Centro case (ASIC v Healey (2011) FCA 717), shows that directors need to have all relevant information and that key matters are highlighted and explained in board papers. The obligation for directors, in the home jurisdiction, is that they must fully understand the financial framework and the tax structures in which they operate. This would cover, for instance, whether they know the terms of the power of attorney, provided to “dummy directors” who may have authority to move significant funds through offshore accounts on behalf of the home company or on behalf of the parent company. Directors must understand how different assets are valued in the offshore jurisdictions or if they are over-inflated. It would be concerning if board directors in Australia lacked understanding of the full mechanics of the movement of funds through various tax havens and how those fund flows are achieved to produce losses in the home jurisdiction that substantially reduces their taxation requirements.

Reliable directors defence

The Paradise Papers may raise issues for the 19 corporations in Australia who are currently under review, if they have been involved in avoidance structures (as opposed to minimisation). Much will depend upon the reliance on information or professional or expert advice — for example, whether the advice was given or prepared by an employee, professional adviser or expert, another director or officer, or a committee of directors in relation to matters within the committee’s authority.
Section 189 of the Corporations Act 2001, may provide directors with a defence of reasonable reliance on information where professional or expert advice was provided to a director or the board. It means legal or regulatory proceedings brought, claiming that a director may have breached their duty (i.e., by being involved in a tax avoidance framework), may be difficult to establish if the director in question relied on professional or expert advice.

The law provides that if the directors’ reliance on the information or advice is in good faith, this is taken to be reasonable, unless the contrary is proved. In effect, this means that any director in a corporation, who received professional advice concerning tax structures from a law firm or other expert, would be likely to have a good general defence (depending on the specific circumstances).

The only issues that can be raised to question the defence of Section 189 of the Corporations Act 2001, is whether the directors provided all the necessary information to the adviser, whether the instructions were comprehensive in the circumstances or whether the advice was specific enough, given the structure, complexity and operations of the corporation. This may be a difficult bridge to cross if there are competing expert views about what was reasonable in the circumstances.

End note

There is nothing to date in the Paradise Papers that has exposed any criminal activity about individuals or corporations. The operation of offshore jurisdictions is legal and no action to date has been taken against them by international governments, despite the sentiments raised in the G20 communique in 2014 and the operations of Mossack Fonseca, the trust services provider in the Panama Papers. This caused the demise of Mossack Fonseca after it was exposed to be laundering corrupt money from South American governments and politicians.

Governments have done little to restrict the operations of tax havens, which implies their existence is condoned and embraced by some of the most senior politicians and market practitioners. Irrespective of such little action, one thing that may change the status quo, is that these offshore jurisdictions can no longer rely on the assumption of privacy.

UPDATE: A geographical identifier was added to this story after deadline and an old version of the edit removed; it may have appeared twice for some subscribers.

By: Niall Coburn, Regulatory Intelligence

Produced by Thomson Reuters Accelus Regulatory Intelligence

If you are interested in learning more about this news update, please read more here