Blog: Pandora Papers, Panama Papers etc.: Impulse for Change or Just Lip Service?

Another financial scandal that has outraged people worldwide. As usual, those involved are the rich and powerful who use letterbox companies in tax havens to hide their assets from the tax authorities. The most explosive aspect of the revelation of the Pandora Papers was the involvement of high-ranking politicians, whose job it is to prevent this kind of economic crime. Dubious offshore transactions by more than 330 politicians and public officials from almost 100 countries are documented in the Pandora Papers. The outcry was great, for it is not the first scandal of this kind. The best-known case was the Panama Papers published in 2016, but the Luanda Leaks (2020), Paradise Papers (2017) and Lux Leaks (2014) also revealed dubious dealings in so-called tax havens.

In retrospect, the question arises whether and what has happened at the legal and regulatory level after the aforementioned revelations. This blog post sheds light on the impact of the Panama Papers. For this purpose, we will take a closer look at regulatory developments before and after the revelations of the Panama Leaks in order to be able to draw conclusions about their influence.

What problems were revealed by the Panama Papers?

The Panama Papers data leak was published in April 2016. It revealed that complex ownership structures were used to conceal criminal activities and evade tax obligations. The documents showed that transparency regarding the actual beneficial owner of certain legal entities needs to be improved and that a closer international cooperation is needed as well. At the same time, pressure was put on governments and judicial authorities to tackle the culprits – and there were calls for stricter regulatory requirements worldwide. Some of the politically exposed persons (PEPs) named in the documents had already been on international lists or had previously appeared as "special interest persons".

Through the analysis of the leaks, more than 38.4 million euros in back taxes were collected in Germany alone, and a further 19 million euros through criminal prosecutions.^[1]

Regulatory developments prior to the publication of the Panama Leaks

Even before the publication of the Panama Papers, the EU Commission saw the need for more transparency with regard to the ownership of legal entities. Therefore, the 4th Anti-Money Laundering Directive^[2] (4th AMLD), which entered into force in June 2015, included a comprehensive framework for the collection, storage and access to information on the beneficial owners of companies, trusts and other forms of enterprise. Member states were required to establish national registers of beneficial owners in order to make certain ownership relationships more transparent.³

Germany's reaction to the Panama Leaks

At the time of the publication of the Panama Leaks, the transposition deadline of the 4th AML Directive had not yet expired. Under pressure from the revelations, the German government presented a 10-point paper. The most far-reaching proposal contained therein was the demand for the implementation of globally networked registers that would keep the names of the persons who are actually behind the companies and profit from their earnings. This approach had already been agreed upon with the 4th AML Directive of the EU but not yet transposed into national law in Germany. In fact, the implementation of publicly accessible registers at EU level was not initially advocated from a German perspective. ^[3]

A new approach in the 10-point paper was the push to network these registers as much as possible and to make the information available to tax authorities and specialised journalists. Another demand related to the exchange of tax information between states. However, this idea was not entirely new, as the OECD had already been working on this topic for some time. An innovative proposal within the framework of the 10-point plan was the tightening of the statute of limitations for tax offences. The limitation period should only begin to run once a taxpayer has fulfilled their information obligations.

The result of the proposed action plan was sobering. The Tax Justice Network (TJN) published a review in April 2017, in which it became clear that only one proposal (statute of limitations for tax offences) of the ten points had been fully implemented. It criticised the suitability of the proposals to achieve significant success in the fight against money laundering, institutional corruption or letterbox companies. ^[4]

Introduction of the German legislation to combat tax avoidance

One consequence of the publication of the Panama Leaks was the introduction of the law on combating tax avoidance (Steuerumgehungsbekämpfungsgesetz - StUmgBG), which was passed in June 2017.^[5] This was preceded by a discussion on the avoidance of taxation by means of the establishment and use of domiciliary companies (so-called letterbox companies), most of which are located abroad. Some of the amendments contained therein were due to ECJ case law/EU Commission.^[6] In order to determine the taxable events, extended obligations to cooperate were introduced both for the taxpayers themselves and for third parties (banks). The new investigative powers of the tax authorities should make it easier to identify domiciliary companies in the future. The law should also have a preventive effect due to an increased risk of detection.

The core of the draft law was the creation of transparency regarding "controlling" business relationships of domestic taxpayers with business partnerships, corporations, associations of persons or assets with registered offices or management in states or territories that are not members of the European Union (EU) or the European Free Trade Association (EFTA) (so-called third-country companies).^[7] Criticism was voiced during the consultation of the professional associations that the new regulations refer to all third-country companies and not only to those that do not develop their own economic activity.^[8] Furthermore, it was criticised that the limitation to third countries outside the EU and EFTA excludes many problematic companies or structures, especially in Liechtenstein and Switzerland.^[9]

The objective of the anti-tax avoidance law to fight the use of offshore letterbox companies is fulfilled by the new regulations. All relationships with third-country companies – irrespective of their economic activity in the case of certain control or determination relationships – are covered by the notification obligations. The journal of the German Economic Criminal Law Association (Wirtschaftsstrafrechtliche Vereinigung e.V.) sums up that the double fulfilment of the obligations to cooperate or notify in connection with third-country companies (taxpayers on the one hand, reporting entities on the other) and a broad interpretation of the prerequisites, which is in practice for precautionary reasons (in particular because of the liability risk according to § 72a AO), will lead to another flood of data for the tax authorities. This must be processed in addition to the information to be expected from the automatic exchange of information that is starting up.^[10]

Reaction at EU level to the Panama Leaks

After the publication of the Panama Papers, the 4th AML Directive, which had just come into force, was examined more closely. It became clear that the newly created transparency requirements were not sufficient.

At the European level, too, there was a quick reaction to the publication of the Panama Papers. As early as July 2016, the Commission presented its proposal to revise the existing Money Laundering Directive on the occasion of the Panama Papers revelations and the terrorist attacks^[11] that had taken place in Europe in the meantime. The proposal included stricter rules to prevent tax avoidance and money laundering which should further tighten the existing directive. For example, it called for public access to registers of beneficial owners and the expansion of information available to companies. In addition, there was also the proposal to interconnect the registers in order to improve cooperation between the member states.^[12] At the same time, the EU Commission published a communication in which it wanted to promote transparency in the tax area and combat the abusive use of tax practices.^[13]

Appeal for faster implementation

The Commission's proposals contained relevant approaches to improving the 4th AMLD. As the transposition deadline (26 June 2017) had not yet expired at the time of publication, the Commission called on the member states to take the proposed targeted amendments into account in their transposition and to bring it forward – if possible – to the end of 2016. The aim was to implement the urgently needed correction to the existing legal framework as quickly as possible.^[14]

Implementation of the transparency requirements of the 4th EU AML Directive in Germany

The fourth edition of the European Anti-Money Laundering Directive required, among other things, the introduction of business registers. They should list the true beneficial owners of companies and avoid letterbox companies run by straw men, that appeared in large numbers in the Panama Papers.^[15]

As of 26 June 2017, an electronically managed transaction register was created in Germany for the first time in the course of implementation. This was intended to prevent criminal actors from being able to hide behind corporate structures such as letterbox companies.^{^[16]} Germany introduced a backup register. Only legal entities under private law and registered partnerships that were not already listed in other subject registers had to register in the newly introduced backup register, otherwise the reporting fiction according to §20 section 2 of the German Anti-Money Laundering Act (GwG) applied.^[17] The register was not public, so that only persons with a "legitimate interest" were to be granted access. Consequently, the implementation did not fulfil the 10-point plan's demands for the time being.

Thus, the transparency register did not live up to its name, as company holdings in Germany remained mostly opaque. Although the Federal Republic introduced a register, it was already foreseeable at that time that a new reform would be necessary. Thus, Germany did not follow the Commission's call to bring implementation forward. Likewise, no reference to the Panama Papers or the Commission's proposal could be found in the explanatory memorandum^[18] – certainly not surprising from the EU's point of view. In the past 20 years, two EU infringement proceedings have been initiated against Germany for slow implementation of money laundering regulations. In 2014, the FATF threatened to treat Germany as a high-risk country in the future, among other things because of insufficient precautions against terrorist financing.^{^[19]} The FATF audit report also makes it clear that Germany was not in full compliance with FATF regulations regarding the fight against money laundering and terrorist financing as early as 2010.^[20]

5th EU AMLD: Changes at a glance

The tightening of the 4th AMLD planned by the EU Commission resulted in the 5th AMLD in May 2018.^[21] As an amending directive, it builds on the content of the 4th AMLD and tightens its regulations. Looking at the content of the directive, it becomes clear that the Commission's proposals have been integrated into a legal framework that has a binding effect. In retrospect, the Commission's appeal to take into account the specific changes it proposed in the implementation of the 4th AMLD shows for Germany that an appeal was not sufficient to induce member states to act. Only a directive was effective in obliging the member states to take action. The contents of the 5th AML Directive were, among other things, to further improve transparency with regard to the beneficial owner. This included the extension of access rights and the international networking of the transparency register.^[22]

Implementation in Germany

The 5th AML Directive entered into force in July 2018 and had to be transposed into national law by the member states by 10 January 2020. In the explanatory memorandum^[23] of the draft law, explicit reference was made for the first time to the Panama Papers.^[24] The introduction finally adjusted access to the transparency register. Now, all members of the public have the opportunity to inspect it; no longer only those who can provide proof of legitimate interest.^[25] This illustrates that with the implementation of the 5th AML Directive, the plans derived from the Panama Papers regarding the expansion of the transparency register have been legally implemented from a regulatory perspective.

The realisation of the originally required transparency and networking did not take place until August 2021. Through the implementation of Directives (EU) 2015/839 (Anti-Money Laundering Directive) and (EU) 2019/1153 (Financial Information Directive), the already introduced transparency register was converted into a full register. As a result, the so-called reporting fiction was abolished for the first time. Obliged legal entities pursuant to §20 Section 1 AMLA, legal persons under private law and registered partnerships as well as foundations without legal capacity pursuant to §21 AMLA must not only identify their beneficial owner but also explicitly report it to the transparency register due to the reporting fiction abolished by the German Transparency Register and Financial Information Act (TraFinG). Finally, a register network was created at EU level, which is intended to facilitate communication between the member states.^[26]

Conclusion

Germany's efforts in the fight against money laundering and terrorist financing have a lot of room for improvement. Although the finance minister at the time had already drawn up a 10-point plan in April following the publication of the Panama Papers, it was not fully implemented. This year's FATF audit of Germany will show us the current status of Germany with regard to the implementation of international standards in the fight against money laundering and terrorist financing in the final report. This is expected to be published in June 2022.

At the Anti-Corruption Summit in London on 12 May 2016, which took place after the publication of the Panama Leaks, 40 countries and six organisations came together to declare war on international corruption. Many countries took promising steps to fight corruption. Germany, on the other hand, did not want to introduce publicly accessible registers at that time.^[27]

Looking at Germany's action plan, it was already vulnerable at the time of publication, as it did not appear sufficient in terms of its feasibility or effectiveness. With regard to transparency, even the uniform Commission proposals did not move Germany to act more quickly. Until recently, Germany only implemented the minimum required at EU level.

Even though the implementation took five years (2016-2021), the goal was achieved. The transparency register is not only publicly accessible and filled with complete data sets, but also networked at EU level. How effective this implementation will be has not yet been conclusively clarified and will have to be further monitored (see also "From a Backup Register to a Full Register – Are the Alterations by the German Act TraFinG Enough?").

Ultimately, the legislator should also question whether more transparency alone will be sufficient, or whether the question of the raison d'être of nested corporate structures should be addressed in order to get to the root of the problem.

It remains exciting to see what consequences will be drawn from the Pandora Papers and what other revelations will follow in the future. It is clear that the Panama and Pandora Papers are only the tip of the iceberg. Even if there have been international successes in the fight against money laundering (such as the uncovering of the money laundering scandals of the Latvian ABLV Bank^[28] or the Spanish Banca Privada d'Andorra^[29]), it remains to be said that there is still a long and rocky road full of hurdles ahead of us to discover all abuses and close loopholes.

Whether the investigations of the Pandora Papers come to the conclusion that they are legal tax avoidance schemes or illegal tax evasion, money laundering, state looting (keyword "kleptocracy") or other offences, the courts will have to decide. However, the Panama Leaks show us that such revelations can provide an impulse for further development of the legal framework. And they confirm to us that we still have potential for improvement in the speed and effectiveness of implementation.

^[1] https://www.wiwo.de/politik/deutschland/steueroasen-millionen-zusaetzliche-steuern-durch-auswertung-der-panama-papers/26920234.html

^[2] Directive (EU) 2015/849

^{^[3]} https://www.taxjustice.net/wp-content/uploads/2017/11/MeinzerTrautvetter2017_Bilanz-Aktionsplan-Schäuble-1.pdf

^{^[4]} https://www.taxjustice.net/wp-content/uploads/2017/11/MeinzerTrautvetter2017_Bilanz-Aktionsplan-Schäuble-1.pdf

^{^[5]} Bilanz Plus (reguvis.de)

^[6] https://www.bundesfinanzministerium.de/Content/DE/Gesetzestexte/Gesetze_Gesetzesvorhaben/Abteilungen/Abteilung_IV/18_Legislaturperiode/Gesetze_Verordnungen/2017-06-24-Steuerumgehungsbekaempfungsgesetz/1-Referentenentwurf.pdf

^{^[7]} https://datenbank.nwb.de/Dokument/635732/

^[8] BT printed matter 18/11132, 15

^[9] https://wi-j.com/2018/02/22/das-steuerumgehungsbekaempfungsgesetz-neue-datenmassen-fuer-die-finanzverwaltung/

^{^[10]} https://wi-j.com/2018/02/22/das-steuerumgehungsbekaempfungsgesetz-neue-datenmassen-fuer-die-finanzverwaltung/

^[11] https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52016DC0050&from=EN

^[12] https://ec.europa.eu/commission/presscorner/detail/de/MEMO_16_2381