The Financial Services Commission handed down a $440,000 fine to the Virgin Islands branch of Mossack Fonseca on Friday, some seven months after opening an investigation over the wrongdoing reportedly exposed in the “Panama Papers,” the roughly 11.5 million documents leaked from Mossack’s headquarters in Panama.
The Panamanian government has not announced whether it will impose punishments on the firm, which has denied any wrongdoing.
After announcing the penalty on Tuesday, Premier Dr. Orlando Smith said the FSC’s action demonstrates that the territory is serious about making sure its regulatory regime is second to none.
However, such assurances haven’t curtailed the ongoing negative publicity affecting the Virgin Islands since stories on the Panama Papers broke in April: Yesterday, a Nobel Prize-winning economist presented the European Parliament with a report highly critical of offshore financial jurisdictions, calling for the abolition of what he called “secrecy havens.”
Investigation
Two days after hundreds of reporters affiliated with the Washington DC-based International Consortium of Investigative Journalists released their first batch of articles on the Panama Papers, the VI government announced that it would launch an investigation into Mossack.
The allegations were serious. For example, one widely reprinted article by Pulitzer Prize-winning journalist Jake Bernstein reported that close associates of Russian President Vladimir Putin used VI-registered companies as part of a complex network through which to secretly move some $2 billion.
Other reports have alleged that high-level public officials from other countries also used VI companies for questionable purposes, including Pakistan Prime Minister Muhammad Nawaz Sharif; Saudi Arabia King Salman bin Abdulaziz Al Saud; and some of the FIFA officials who were charged by the US government over corruption allegations.
The VI was also called out in multiple articles by the Guardian, which reported that the FSC allowed Mossack to keep its licence despite the firm’s repeated failures to provide beneficial ownership information requested by the VI Financial Investigation Agency.
Tight-lipped
After announcing the investigation, VI officials were largely tight-lipped, and their reticence began to draw criticism.
On Oct. 14, for instance, the Berlin-based anti-corruption organisation Transparency International published an article criticising the VI for not taking any action against Mossack some six months after the Panama Papers made world headlines.
“The Panama Papers seem not to have led to a sustained increase in the enforcement actions authorities are taking. … There is also little evidence of a change in attitudes on the part of the country’s leadership,” the article stated. “Aside from a drop in company incorporations, it looks like business as usual in the British Virgin Islands.”
About a month after that article, VI authorities announced the unprecedented FSC fine, explaining that the regulator’s decision came after a thorough six-month investigation.
“Achieving this outcome in the face of intense international scrutiny is testament to the FSC’s conviction, dedication and willingness to conduct such a thorough investigation whilst holding to account those who fail to comply with the territory’s structure and regulations,” Dr. Smith said in the announcement.
The premier also said that along with the fine, the FSC has made adjustments to its “risk assessment framework” in order to reduce the risk that financial services firms are non-compliant with the VI’s laws.
“The BVI remains an engaged participant in the international community and is fully involved in initiatives aimed at creating a global tax and regulatory framework that can be implemented consistently to create a level playing field upon which all countries can fairly compete,” Dr. Smith said.
Scrutiny
Nevertheless, the VI continues to face intense international scrutiny from those who are calling for the end of offshore financial centres.
After government announced the penalty against Mossack, Transparency International’s United Kingdom branch issued a response, calling the FSC’s action “too little, too late.”
“It is at least welcome that the BVI has finally recognised inadequacies in the anti-money laundering controls at Mossack Fonseca, but given that it took a leak for its regulator to work out what was happening in its own backyard, the BVI’s own abilities as a regulator are inevitably called into question,” said Transparency International UK Executive Director Robert Barrington.
Another shot to offshore financial centres came this week in the form of a policy paper released by Nobel Prize-winning economist Dr. Joseph Stiglitz and Swiss anti-corruption expert Mark Pieth, who said that offshore financial jurisdictions like the VI are a drain on the world economy.
“With the assistance of legal and accounting firms, multinational corporations shift earnings from the place of economic activity to low- or zero-tax jurisdictions through transfer pricing manipulations and other contrived outbound payments, thereby leaving the place of economic activity to carry the social cost,” states the paper, which was published Tuesday. “From a global perspective, this form of competition is destructive.”
To curtail the use of offshore centres by multinational corporations, Dr. Stiglitz and Mr. Pieth recommended a number of policy reforms to be implemented in those jurisdictions, including public registries that list the beneficial owners of property and companies, whistleblower protection laws, and freedom-of-information legislation.
The VI has none of those institutions, and has pushed back on calls for a public beneficial ownership registry while promising to establish an “electronic platform” available to UK law enforcement authorities.
The authors of the paper encouraged offshore jurisdictions to undertake the suggested reforms on their own, but called on the global community to impose change if they don’t.
Economists’ spat
Dr. Stiglitz and Mr. Pieth were originally part of a commission formed by the Panamanian government to investigate the Panama Papers, but they quit the commission after the country’s authorities balked at making the report public.
“When the [Panamanian] government refused to provide those assurances, we felt we had no choice but to resign,” the report states. “We believed that a report on transparency that was not itself transparent would simply not be credible.”
Yesterday, Dr. Stiglitz presented the paper to the European Parliament’s “committee of inquiry into money laundering, tax avoidance and tax evasion,” a panel established to investigate the Panama Papers.
“The intention of our report was not to present concrete legislative proposals, but rather to show the magnitude of the task before the community, and to argue that the international community needs to take a comprehensive approach, going well beyond those embodied in standard practices today,” Dr. Stiglitz told the panel, according to a transcript on the European Parliament’s website.
Attempts to reach officials at Mossack Fonseca were unsuccessful.
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