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Panama Papers Litigation: Banking, Funds Transfer, Tax Haven & Anti-Money Laundering Expert Witness’s Insights

Expert Witness: Don Coker
Renowned banking and finance expert witness consultant Don Coker calls on his experiences as an expert witness in anti-money laundering litigation for the U.S. Government, financial services companies, and the IRS as he defines and explains some of the factors that will be important in financial litigation that results from the information disclosed in the Panama Papers.

By now, I am sure that everyone knows the basic story on the Panama Papers and how they popped into the news overnight on April 3, 2016, to become a major news story worldwide; so I will not retrace all of that background again here. The focus of this article is to examine what happens next.

Assessment of What Happened in Particular Situations

What happens next is that governments, (including taxing authorities) worldwide as well as other affected parties more likely than not will file criminal charges or lawsuits against parties that are named in the Panama Papers as having committed illegal acts of one type of another, and certainly including hiding and disguising taxable income and illegal payments and receipts, such as bribes and kickbacks. Logically, the next step is to sort out which actions are legal and which are illegal.

The common
element in virtually all of the transactions cited in the Panama Papers is that they involve the establishment of a new foreign (or “offshore”, and I use those two terms interchangeably in this article) entity or offshore bank account through which transactions and funds pass. The key word here is “foreign” since that often means that things happening in the foreign entity usually can be shielded from view in a person’s or company’s home country if the person or company wants to and tries hard enough.

Having said that, the knee-jerk reaction of most people is to use a broad brush and paint all foreign and offshore entity activities as illegal; but that is the wrong way to look at it since there are many, many reasons that a person or entity might want to have a foreign or offshore entity or offshore bank account for perfectly legal purposes.

Let me cite one quick example. Just for demonstration purposes, I recently pulled up the 10-K SEC filing for a random typical large USA-based NYSE-listed US company that every one of you knows of and buys their products, some of which you probably can’t do without. It’s a fine company and you or I would be glad to own their stock. I don’t have any idea if this company is or is not mentioned in the Panama Papers, and that really is not relevant to my point; but here is what I found in their current 10-K relative to the issue of foreign and offshore entities, bank accounts, and other offshore financial services:

● Manufactures its products in over 35 countries.
● Has operations offices in over 60 countries.
● Sells its products in over 175 countries.
● Operates in over 130 taxing jurisdictions.
● Often borrows in foreign currencies.
● Has around 250 foreign subsidiaries around the world.

You can see that for a company that is spread out around the world as this one is, it would be next to impossible for it to operate without local financial connections in the countries where it is located, or in offshore locations that are capable of serving the company’s foreign locations.

Foreign offices need to have funds available for local payroll as well as routine operating expenses and other purchases. In the case of U.S. corporations operating in other countries, certainly it would need the ability to do business in the currency of the country in which its foreign office is located. The foreign location might want to borrow money locally, and that would most likely be in the local currency as well. All of these issues can be dealt with by having a local or offshore entity or local or offshore bank account.

As far as I know, this company has never been accused of doing anything illegal involving any of its 250 or so foreign entities despite the fact that it – like all other huge companies – has US Internal Revenue Service personnel at the company’s facilities every day. This is simply to demonstrate that a normal multi-national corporation typically has to make use of foreign entities and offshore bank accounts in order to carry out its business.

Services Offered by Offshore Banks

Here are some of the banking and financial services that are offered by offshore banks:

● Deposit products such as checking accounts, savings accounts, and certificates of deposit.
● An array of retirement account options.
● Investment management accounts.
● Trust accounts and trust services.
● Securities custody accounts and clearing services.
● Secured and unsecured loans.
● Letters-of-credit.
● Trade financing.
● Foreign exchange and transactions involving multiple currencies.
● Wire transfer services.
● Easy online account opening procedures.
● Online access to accounts.

Non-Banking Offshore Services

Other services that are offered by offshore entities other than banks include Company Formation and Company Secretarial Services.

● Company Formation includes the selection of the right type of entity to meet the specific financial and operational needs of the owners of the entity. Typically, this can be accomplished online without ever having to visit the offshore country. Many of the problems in this area involve shell companies, i.e., companies whose primary purpose is to receive and pass along money without having any significant operations or assets of their own.

● Company Secretarial Services are additional services offered by most offshore company formation firms and include as a service where the company formation company acts on behalf of the offshore company. These company secretarial services vary widely according to the needs of the particular offshore company.

Reasons Companies Use Offshore Entities and Bank Accounts

Let’s look at some of the legal and legitimate reasons that a company or other entity might make use of offshore entities and bank accounts:

● Income may be taxed at a lower tax rate offshore than it would be in the entity’s home country.
● Interest rates on deposits may be higher than they are in the entity’s home country.
● Offshore banks usually – but not always – do not tax at the source interest paid to the customer as is the case in most countries.
● Loans obtained from an offshore bank normally include lower interest rates than are available from typical bank financing in an entity’s home country.
● Offshore banks are more likely to offer or accept unusual loan structuring that may not be legal or otherwise available in the entity’s home country.
● Offshore banks offer greater financial privacy from governmental taxing authorities and other parties than do banks in most other non-tax haven countries.
● A desire to avoid political instability in the entity’s home country.
● A desire to avoid economic weakness in the entity’s home country.
● A desire to avoid economic instability in the entity’s home country.
● Offshore banks usually are able to offer greater flexibility in structuring bank accounts than can traditional banks in non-tax haven countries.
● Offshore bank accounts in time zones different than that of the entity’s home operation can provide access to funds in different time zones.
● Offshore banks often offer bank accounts to offshore trusts, offshore foundations, offshore companies and other entities.
● International employees, and employees of international aid services and NGOs, as well as expatriots, and those who frequently travel internationally may find offshore accounts useful.
● Corporate financial cash management.
● Companies that utilize transfer pricing often use offshore entities and bank accounts. (See more on this later on.)

Domestic Banking and Lending Considerations

Having worked for several mega-banks with large international operations, I have seen instances where large financing requests that are considered too risky for traditional bank loan structuring and pricing, or financing requests that need structuring that will not conform with legal domestic structuring requirements are sometimes shunted off to the bank’s offshore operation where the loan structure can meet the borrower’s needs and the pricing can align with the risk profile of the financing request.

US Citizens and Entities with Foreign Income

The U.S. Treasury’s Foreign Account Tax Compliance Act (“FATCA”) requires that American citizens with accounts in offshore territories declare and pay any taxes on income or investments earned in them that are due to the U.S. Internal Revenue Service. U.S. laws require that U.S. citizens and entities pay income tax on income that is earned anywhere outside the country, including offshore financial centers. This is why any individual or couple filing an IRS Form 1040 will notice a small section on the bottom of Schedule B, Part III, that deals with income earned in foreign countries. And don’t think that you can circumvent the IRS’s notice by incorporating, forming a partnership, forming a non-profit, or even by dying since similar IRS inquiries can be found at the bottom of page 2 of both the corporate tax form 1120 and the partnership tax form 1065, on line 4a of Part 5 of the Non-Profit tax form 990, and even on Lines 3 and 4 of Section G of page 2 of the Estates and Trusts tax form 1041.

Problems and Litigation

You can expect that offshore entity and offshore bank account problems that are brought to light by the Panama Papers generally will fall into six areas:

1. Tax Reduction or Avoidance Issues – Often, this issue itself is a two-part issue that requires (1) the determination of which country’s tax system applies, and then (2) how much tax should be levied against the taxable event such as income or capital gains.

2. Transfer Pricing Issues – Transfer pricing is a very complex (and dull) subject best explained by an accountant with very thick glasses and preferably no social life. Since that accountant is away at a Star Trek convention, let me just say that transfer pricing involves the inter-company allocation of the various costs involved in producing and marketing a company’s products. International corporations have to allocate their worldwide revenues, expenses, and profits so that they match up with the various activities involved in producing the product at various international locations or under the responsibility of various company-owned offshore entities. This means that a portion of the income derived from the eventual sale of a product is taxed on a prorata basis in each of the countries where work on the product takes place. Needless to say, there is a lot of flexibility in how these income amounts are allocated. Also, it is common for more than one country to try to grab onto the same chunk of income, which can result in double-taxation.

3. Economic Substance Analysis – This is a tax concept that disallows tax benefits for a transaction that lacks a true business purpose or economic substance. In other words, is there really an economic activity going on, or is the offshore activity for the purpose of avoiding taxes?

4. Source of the Funds – Where did the funds in the offshore entity or in the offshore bank account originate? Problem areas that may be present include income on which no tax has been or will be paid anywhere, bribes, kickbacks, and similar issues.

5. Money-Laundering Issues – This issue overlaps somewhat with the Know Your Customer (“KYC”) issue (see next item). Aside from the widespread and well-publicized efforts to convert the huge cash flows from illegal drug operations into apparently legal and usable funds, money-laundering often is connected to the payment and receipt of bribes and kickbacks of all types. You can see where it would be difficult to detect an illegal payment to an offshore entity or offshore bank account that does not even carry the name of the individual account owner or beneficiary.

6. Know Your Customer Issues – KYC issues are very important in banking because banks serve somewhat of a Gatekeeper role in determining which transactions can enter the stream of commerce and which transactions cannot. KYC is also important in dealing with Politically Exposed Persons. This KYC issue leads to many problems in dealing with offshore entities and offshore bank accounts since their very nature typically precludes face-to-face meetings between those providing the offshore services and those using the offshore services. In fact, many offshore firms offering entity formation and offshore financial services pride themselves on being able to set up whatever offshore activity that anyone anywhere in the world needs by logging onto the offshore firm’s website. The problem is that jurisdictions other than the United States are not as stringent in their KYC laws and their application as is the U.S. For example, it is not unusual for a law firm or other offshore entity to rely on other parties to determine the true identity of the people with whom the law firm or other offshore entity is dealing; and relying on the work of others in satisfying your KYC responsibilities is a risky way for a bank to do business.

The main thrust of Know Your Customer due diligence in this milieu is to accomplish two things: (1) Verifying the identity of the people or entities that own and use the offshore bank accounts and financial services, and offshore entities whether the owners are domestic or offshore themselves; and (2) Understanding the business model and practices of the person or entity that will own and utilize the offshore entities or financial services.

Moreover, it is legal and common for companies to establish commercial entities in different jurisdictions for a variety of legitimate reasons, including conducting cross-border mergers and acquisitions, bankruptcies, estate planning, personal safety, and restructurings and pooling of investment capital from investors residing in different jurisdictions who want a neutral legal and tax regime that does not benefit or disadvantage any one investor.


If you are an attorney and become involved in legal matters involving the issues mentioned in this article, seek competent expert assistance that can add experience and credibility to your case.

Banking, Financial, Lending, Real Estate, Embezzlement, Business Valuation, Anti-Money Laundering Expert Witness Don Coker – Serving clients nationwide-worldwide from his metro Atlanta Georgia office.

615 cases 150 testimonies, plaintiffs & defendants. All areas of banking, finance, real estate, business & IP valuation, damages, embezzlement. Listed in expert databases recommended by DRI, AAJ members.

Clients: individuals, 67 of top 400 law firms, 105 banks, 50 insurance cos., government clients incl. IRS, FDIC. Clients in 37 countries, work in 64 countries.

Previous officer at Citicorp, other banks & 2 years as a high-level governmental bank regulator.

BA, postgrad, executive ed.- Alabama, Houston, SMU, Spring Hill, Harvard Business School.

1 book, 100 articles. Quoted often.

Copyright Don Coker

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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