EU blacklist presents new offshore challenges

On Dec. 5, the EU Council agreed on a blacklist of 17 countries that the European finance ministers consider uncooperative in tax matters. They also voted on a commitment list of 47 countries that would be deemed uncooperative, according to the EU’s own criteria, had they not agreed in writing to remedy their shortcomings by the end of 2018.

EU finance ministers said American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates had not done enough to crack down on tax evasion and avoidance schemes.

The EU claimed tax legislation, policies and administrative practices in blacklisted countries have caused or may cause a loss of revenues for its member states. The listed countries are therefore strongly encouraged to make the changes requested of them, but the EU Council stopped short of agreeing specific sanctions. The lists will be updated once a year.

Another eight Caribbean jurisdictions – Anguilla, Antigua and Barbuda, the Bahamas, British Virgin Islands, Dominica, Saint Kitts and Nevis, Turks and Caicos Islands, and the U.S. Virgin Islands – affected by last year’s hurricanes will be assessed by the EU by February.

The Cayman Islands and other U.K.-linked offshore centers were placed on the graylist of 47 countries and jurisdictions that have made written commitments to meet the EU criteria applied to the process of singling out countries for their lack of tax transparency and “tax fairness.”

Cayman complied with most EU criteria in relation to the exchange of tax information or the implementation of the OECD’s base erosion and profit shifting (BEPS) program. It also does not offer preferential tax regimes that would treat local companies differently than Cayman-registered overseas companies.

But, according to the EU Council, Cayman has fallen foul of a fair tax criterion aimed at tax regimes that facilitate offshore structures which attract profits without real economic activity. The Cayman government, together with Bermuda, Guernsey, Isle of Man, Jersey and Vanuatu, has committed to addressing the concerns relating to economic substance by 2018, the EU said.

In a statement, Cayman’s Ministry of Financial Services said, as part of this particular criterion, the EU wants to ensure that jurisdictions do not facilitate letterbox companies. These companies, which are set up to circumvent tax obligations, do not have a physical presence, and therefore do not perform tangible economic activities, in the country where they are established.

Exempted companies in Cayman rarely have staff on island and under the law they are not allowed to trade with any person or business locally, except to further the business of the exempted company carried on outside the Cayman Islands.

This means that exempted companies can, and some do, have substance but often they are mere legal structures, a fact that may be at odds with the EU’s desire to ensure that jurisdictions do not facilitate letterbox companies.

Premier Alden McLaughlin acknowledged that the majority of Cayman’s companies “are not bricks and mortar,” but he insisted, “they also are not letterbox companies,” i.e., entities that are solely used to avoid certain tax obligations rather than pursue economic objectives.
Instead, he stated, “they are financial instruments that pool investment capital and facilitate international transactions.”

Taking into account the existing transparency regime that shares information with foreign tax authorities, including all EU member states and the G20, the premier noted, “there is no interest in setting up these companies to circumvent tax obligations.”

In cooperation with the EU, the government said it is further assessing the fair taxation criterion, and will work with EU Council officials to address this issue by December 2018.
The Crown dependencies in the British Channel indicated they are prepared to change their laws to introduce legal substance requirements and some stated that this would be an opportunity to grow their local economies.

Howard Quayle, the chief minister of the Isle of Man, said his government had a constructive dialogue with the EU’s Code of Conduct Group, which developed the tax criteria, about their concern “relating to a potential lack of substance, which it highlighted may be due to the absence of legal substance requirements for entities doing business in, or through, the Isle of Man.”

Quayle said his government will create an island of enterprise and opportunity: “We have a strong and diverse economy which we will grow, alongside encouraging a skilled workforce to relocate to the island. We can do that while ensuring we meet our EU and international commitments.”

Jersey’s Chief Minister, Senator Ian Gorst, said his government’s discussions with the Code of Conduct Group may include changes to Jersey’s legislation on economic substance.
“We have already begun the necessary preparations, having regard to the Code Group requirements and Jersey’s best interests. I am committed to ensuring that, working with the finance industry, this process will be completed by the end of 2018,” he said.

Appleby sues the BBC and Guardian over Paradise Papers

Appleby took legal action against the BBC and The Guardian over their reporting of offshore transactions by the law firm’s clients based on what Appleby calls confidential information taken in a “criminal act.”

Appleby is suing for breach of confidence and seeks a permanent injunction against further use of the information, as well as the disclosure and return of the documents.

The BBC claimed the leak of financial documents, branded the “Paradise Papers,” had revealed “how the powerful and ultra-wealthy secretly invest cash in offshore tax havens.”
A spokesperson for the BBC said the organization’s “serious and responsible journalism is resulting in revelations which are clearly of the highest public interest,” and has revealed matters which would otherwise have remained secret. As a result, authorities were taking action.

The Guardian said the legal action was an attempt to “undermine responsible public-interest journalism.”

Media organizations are typically allowed to disclose confidential documents, provided their content is deemed to be in the public interest. Data protection legislation in most countries, including the incoming Data Protection Law in Cayman, contains such exemptions for the media.

Appleby, in turn, argues that the documents were stolen in a data breach and that there was no public interest in the stories published about it and its clients, according to reports in the BBC and The Guardian citing legal documents Appleby sent to the organizations. About half of the 13.4 million leaked “Paradise Papers” documents belonged to the offshore law firm.

An image used by Süddeutsche Zeitung to illustrate its coverage of the ‘Paradise Papers.’

The documents were first obtained by the German newspaper, Süddeutsche Zeitung, which shared them with the U.S.-based International Consortium of Investigative Journalists (ICIJ). The ICIJ then coordinated the Paradise Papers project with 380 journalists from 96 media organizations in 67 countries.

The consortium also included the New York Times, Le Monde, the ABC in Australia and CBC News in Canada. However, Appleby has only taken legal action in the U.K.

A spokesperson for The Guardian told his own newspaper that the claim does not challenge the truth of the stories that were published. “Instead it is an attempt to undermine our responsible public interest journalism and to force us to disclose documents that we regard as journalistic material.”

The Guardian spokesperson added that the claim could have serious consequences for investigative journalism in the U.K. “Ninety-six of the world’s most respected media organizations concluded there was significant public interest in undertaking the Paradise Papers project and hundreds of articles have been published in recent weeks as a result of the work undertaken by partners. We will be defending ourselves vigorously against this claim as we believe our reporting was responsible and a matter of legitimate public interest.”

In a statement, Appleby said it was “obliged to take legal action.”

“Our overwhelming responsibility is to our clients and our own colleagues who have had their private and confidential information taken in what was a criminal act. We need to know firstly which of their – and our – documents were taken,” Appleby said.

“We would want to explain in detail to our clients and our colleagues the extent to which their confidentiality has been attacked. Despite repeated requests, the journalists have failed to provide to us copies of the stolen documents they claim to have seen. For this reason, Appleby is obliged to take legal action in order to ascertain what information has been stolen.”

Colin Riegels, a partner at Harney Westwood & Riegels, published a brief analysis of the case, arguing that the media companies’ defense would rely on establishing that either the disclosure of confidential material was necessary to prevent serious harm to the public or justified by the so-called “defence of iniquity.”

While the former was difficult to prove, mainly because most of the reported cases happened in the past and therefore the publication of confidential information could not “prevent” anything, the latter relies on case law that no duty of confidentiality should protect any “crime, civil wrong or serious misdeed of public importance.”

This will largely rely on the ability of the media company’s defense to demonstrate actual illegal activity in the reported cases and data dump, unless the court will “hold that tax planning is morally offensive, which is something the courts have historically refused to do,” Riegels said.

Gerard Ryle, the director of the ICIJ, said the lawsuit is a potentially dangerous moment for free expression in Britain. “By sharing the data with journalists across the world, we are able to bring a new kind of scrutiny to power.

“The BBC and The Guardian have been part of recent collaborations into financial secrecy that have changed laws from the United States to New Zealand to Europe, sending a strong message to the corporate world that some of the behavior we revealed is no longer acceptable,” Ryle said.

Wolfgang Krach, the editor-in-chief of Süddeutsche Zeitung, which received the data first, said his newspaper would not allow The Guardian, or any other partner, to make the leaked documents available to third parties.

“At the same time, Süddeutsche Zeitung is extremely worried about the attempt to force a journalistic enterprise to hand over highly sensitive data that could endanger the life and well-being of sources,” Krach said.

“Journalists must be allowed to protect their sources by all means, especially when they clearly report in [the] public interest. Therefore, we appeal to the court and the public to support The Guardian’s legitimate wish to keep the material protected.”

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Michael Klein
Michael Klein Editor Compass Media Ltd. PO Box 1365, Grand Cayman, KY1-1108, Cayman Islands T: 345-326-1720C: 345-815-0064 E: [email protected] Michael is a financial journalist and copywriter.  In the past he has been responsible for the Risk Management and Corporate Finance sections of a British monthly Corporate Treasury publication.  He has written various financial handbooks, notably on European Banking and Cash Management and the Debt Capital Markets.   In addition he has worked as a copywriter for banks and investment funds and served as corporate communications consultant to US and European blue chip companies.   Michael holds an MA in Political Science and International Law from the University of Bonn in Germany. 

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