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The Panama Papers have identified that there are hundreds of thousands of offshore corporate entities domiciled in countries other than the principal residences of the beneficial owners. However, in many countries, depending on the type of offshore vehicle that is registered, the only formal, and often limited, records are held at a lawyer’s office in the relevant offshore financial centre.
Offshore trusts and companies can, and have, been misused for criminal purposes including tax evasion, money laundering and corruption. For example, the World Bank Puppet Masters report found that over 70% of grand corruption cases involved the use of offshore vehicles. This finding was also highlighted by Transparency International. In spite of these observations and other reports, we should equally recognise that offshore vehicles can also be used for legitimate asset protection or other purposes.
The Financial Action Taskforce (FATF) has been working for over 25 years to make the beneficial ownership of offshore entities transparent, to prevent their illegal misuse. However, implementation by jurisdictions needs improvement as many countries do not have effective mechanisms to identify the ultimate beneficial ownership of corporate vehicles set up in their jurisdiction. For example, anti-money laundering (AML) legislation in many countries doesn't currently apply to lawyers and accountants. In New Zealand, the professional coverage of accountants and lawyers is planned to be included in Phase 2 of the AML reforms.
The development of beneficial ownership registers is equally being pushed globally, to varying degrees. Unless all countries globally are aligned we will experience a race to the bottom whereby arbitrage will occur between jurisdictions for the registration of offshore entities that are used for inappropriate and illegal purposes.