Tuesday, June 28, 2016

Havens for Corruption

What do international tax evasion and the bribing of a foreign official have in common? You might guess that the primary nexus is the practice of paying off a foreign tax officer to lower the tax burden on an international deal, but you’d be wrong. The 2014 OECD Report on Foreign Bribery, however, found that only a minuscule percentage (0.21%) of the bribes studied were offered or given to a tax official.

My economist friends might say that both tax evasion and official corruption result in extracting funds that would otherwise flow to a government thereby reducing needed public sector resources. Political scientists might note that both undermine people’s faith in the fairness of rules and institutions established for the common good thereby encouraging normally law-abiding citizens to elbow their way to the front of the line. And both would in theory be right.

But experienced international business lawyers would respond more practically. What the two crimes have in common is the perpetrator’s need for secrecy. The same methods used to conceal income - methods revealed in the Panama Papers - are often used to hide evidence of bribes. Since the number of investigations under the Foreign Corrupt Practices Act (FCPA) began to skyrocket a decade ago, practitioners helping clients comply with anti-bribery rules have learned that one of the brightest of “red flags” is the involvement of an offshore company in a tax haven.  Or, what might better be called havens from transparency or secrecy jurisdictions.

The OECD Report mentioned above states that more than a third of the 400 hundred plus bribery cases studied involved the use of a corporate affiliate, often a company located in a secrecy jurisdiction. The Panama Papers tell the same story in a different way. The leaked documents show the offshore holdings of twelve current and former world leaders, 128 other public officials and politicians around the world and several associates of Russian President Putin.

Some of that wealth may have legitimate sources.  But, not surprisingly, the Securities and Exchange Commission (SEC), which is one of the agencies charged with enforcing the FCPA, is reportedly scrutinizing the Panama Papers for any evidence of violations.

My next blog will take a final look at secrecy jurisdictions - from the point-of-view of illegal trafficking in arms, narcotics and human beings.

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