The offshore sector is once again making international headlines following a leak of millions of documents to a group of investigative journalists. The scandal, known as the “Pandora papers”, concerns a leaked cache of around 12 million records which were handed over to a group of international reporters.
Whilst details of the leak are developing, the journalists claim that the documents confirm that around 300 world leaders and billionaires have sought to hide their assets in as many as 29,000 offshore investment structures to avoid paying tax in the jurisdiction in which they reside. So far the stories have centred around celebrities and politicians using shell companies or trusts to purchase assets, typically properties, in a tax efficient way.
Generally the use of such structures is not illegal but commentators have been quick to highlight the ethical concerns around the ability of the offshore sector to give the wealthy access to tax privileges not available to many. In the current socio-economic climate the distinction between legitimate tax avoidance and illegal tax evasion is one in which the general public may not be interested; it is all about newsworthy headlines.
From Panama to Pandora
The Pandora papers is the latest in a series of high profile data leaks. In 2016 the “Panama papers” thrust the offshore sector into the headlines. The Panama papers was a leak of around 11 million files implicating some 145 politically exposure individuals who had been known to use offshore jurisdictions to reduce their tax expenditure.
Whilst details continue to emerge, the Pandora papers is set to be an even bigger scandal implicating the tax affairs of current and former heads of state.
It is therefore of no surprise that in recent days, offshore jurisdictions have been keen to seek to calm the fall-out from the Pandora papers. Local press reports in the largest offshore jurisdictions, the Channel Islands, have been quick to highlight that typically offshore structures are used for entirely legitimate purposes. This can include protecting sums from unstable governments or allowing international travellers convenient access to their investments at short notice.
Rightly or wrongly, the latest leak will nevertheless inevitably lead to the widespread critique of offshore structures and the jurisdictions that host them.
Will the regulators bare their teeth?
Whatever your view on the morality of these offshore structures, the Pandora papers have shone an unwelcome light into the offshore sector.
The Guernsey Financial Services Commission has responded to the leak stating that:
“If accusations emerge suggesting improper conduct by any Guernsey regulated entity, the Commission will treat them with the seriousness which they deserve.”
Evidently, local regulators will be keen to introduce tough measures to sanction anyone found guilty of wrongdoing. This increased scrutiny will inevitably mean that the professionals working in the offshore sector will be under the microscope.
Concern for Insurers?
Our experience of the previous leaks is that the offshore professionals will look to their D&O and Professional Indemnity polices for protection for defence costs, should they face civil claims or regulatory interest. Free-standing cyber cover may also come into play in cases where insured firms’ IT security perimeters have been breached.
A key preliminary consideration for insurers will be whether the policy is triggered by enquiries from the regulator. Whilst many polices will respond to indemnify the costs associated with a regulatory investigation, the polices often seek to carve out any costs associated with day to day engagement with a regulator. Determining the dividing line between the two may not always be easy.
If insurers do receive a valid notification, an important consideration will be which policy is the appropriate insurance programme to respond. This can be particularly important if the retention provisions are different across D&O and Professional Indemnity (or indeed cyber) programmes.
A further factor to bear in mind is the often substantial costs associated with defending civil claims and regulatory investigations in offshore jurisdictions. We are often engaged by Insurers to monitor these claims and work with local firms to manage defence spend and ensure that a strategy is devised to resolve the claim as efficiently as possible.
Whilst Pandora’s box seems to be open, Insurers will have to monitor the headlines closely to see whether the lid remains closed on their coverage obligations.
