The 'Panama Papers' Leak

These opportunities are not limited to entities with geographic links to Panama. The reference to Panama in this context is misleading: of the 213,136 companies themselves forming part of the data, just over 22% of them are actually Panamanian incorporations. The majority of the entities, just over 53%, were incorporated in the British Virgin Islands (BVI). Panama's companies legislation, which is derived from Delaware's equivalent legislation in 1927, is arguably no more a facilitator of financial secrecy than the legislation in force within various other Caribbean financial centers. The fact that the leaks arise from a source in Panama is part of the back story, but it does not constrain the resulting opportunities from manifesting themselves across the offshore and onshore financial world.

These asset tracing and seizure opportunities for creditors coincide with mounting international pressure and consensus in favor of financial transparency. The leak of the “Panama Papers” marks the single greatest leak of confidential information to date. There can be no doubt that the data leak was intentional. The volume of the data can be difficult for those outside of the IT industry to fathom: It consists of 2.6 terabytes, each terabyte consisting of 1 million bytes, of client information. Downloading that volume of data would take approximately 120 days using high-speed broadband connections, running at 24 hours per day. Further, the reference to a “leak” in this context is potentially misleading; in the absence of legal support, and regardless of public interest, it may be more appropriate to describe the disclosures as the theft and publication of client information. Yet the characterization, and arguably the acceptance of that characterization, of these leaks as a victory for transparency, is a strong indicator of the hardening of attitudes towards those seeking to evade financial scrutiny.

Recovering Assets

The recovery of assets arising out of sophisticated corporate entity structures has long been akin to a game of cat-and-mouse, often with good reason. For professionals in the financial services industry, these entity structures are commonplace and often serve legitimate commercial purposes. Yet public, political, and potentially judicial, acceptance for opaque corporate structures is waning in the post-Panama climate.

Regulators have responded to the public mood. Onshore service providers, including many law firms with long-established reputations, have already received regulatory requests for information detailing their involvement. Many jurisdictions that traditionally enable financial secrecy are shifting toward regimes requiring some form of beneficial ownership disclosure to regulatory authorities.

Legislators have followed suit. In April 2016, 40 countries, including the UK, Cayman Islands, Bermuda, Anguilla and India, agreed to share information regarding the beneficial ownership of corporate entities. Because of the constitutional relationship between the UK and the major Caribbean offshore jurisdictions (such as Bermuda, the BVI and Cayman), this will generate significant pressure for similar changes to be introduced in the offshore financial centers.

For example, the Cayman Islands' Confidential Information Disclosure Bill is intended to facilitate release of certain confidential information to regulatory and enforcement authorities. That bill could be passed as early as this year. Plans are also underway to require corporate service providers in the BVI to hold information on the beneficial ownership of corporate entities. Set to be introduced as early as 2017, corporate service providers in the BVI will be required to hold details of the names, addresses, dates of birth and passport numbers of BVI registered companies. That information is intended to assist information sharing with law enforcement bodies in the United Kingdom, but it may yet be judicially discoverable.

Impact on Creditors

When considering the impact of these measures, it is necessary to consider where specific information-gathering and custodial responsibilities lie and how that information is accessed. Currently, corporate service providers owe duties in connection with the collection and maintenance of beneficial ownership information, for use in response to regulatory requests. That maintenance of information via authorized providers outside jurisdictions such as the BVI is unlikely to succeed in the long term, not only in light of overseas pressure, but also as a result of local legislation initiatives. These new initiatives will impact the relationship between corporate services providers and introducers of work from outside the BVI, thereby transitioning out qualified intermediaries who are able to hold that information on the basis that it can be provided on demand. It is in this context that the potential leads for creditors provided by the Panama Papers are likely to be so significant.

With judicial support, creditors may be able to obtain discovery of information on beneficial ownership for the purpose of tracing and seizing assets through otherwise opaque structures. For the creditor who is fortunate to find relevant information from the leaked data, that information could, on its own, be sufficient enough to enable creditors to obtain court orders for asset identification, freezing and delivery. In this regard, the Panama leaks of 2016 have given creditors a new set of tools to locate and recover assets in a regulatory environment that favors transparency.

There is at least some evidence to suggest that courts are following this trend. In late April 2016, Mr. Justice Nugee of the High Court of England and Wales considered the potential for opaque and “labyrinthine” corporate structures to be abused by debtors:

Those who use offshore structures, especially complex structures involving nominees and fiduciaries, may do so for entirely proper and bona fide reasons, but the experience of those who practice and sit in these Courts is that such structures do lend themselves to being abused. It is notorious that the use of offshore trusts, and companies incorporated in jurisdictions which do not require detailed financial reporting, and the use of fiduciaries and nominees which enable the beneficial ownership of assets to be switched easily and without visibility, are aspects of a structure that enables those who wish to move assets around or to hide them to do so more easily.

Holyoake and Hotblack Holdings Limited v Candy and Candy and Ors [2016] EWHC 970 (Ch) at paragraph 27.

In this interim judgment, the English court determined that the use of a complex structure of onshore and offshore companies (some 140 live and dormant companies had been identified) and the ease with which assets could be moved beyond reach and without notice, warranted additional protection for the claimants (plaintiffs). As a consequence, the High Court granted a “notification injunction” requiring defendants to provide seven days notice in advance of any intended asset transaction or disposal. The scope of the notification order included assets valued in excess of '1 million that were beneficially owned by claimants, including those held by offshore companies. This creditor-friendly decision is consistent with international pressure that continues to mount in favor of financial transparency. Although it is not binding in other jurisdictions, it is likely to have some persuasive precedential value in English law-derived jurisdictions such as the Cayman Islands and the BVI.

Coupled with information sufficient to garner judicial support, creditors can seek pre- and post-judgment discovery both onshore and offshore. For example, new evidence could facilitate asset-tracing strategies such as motions for injunctive relief and freezing orders, pre-action discovery orders, and orders in support of freezing injunctions. Information obtained through the leaks could also be used to obtain injunctive relief and freezing orders. These can be obtained in appropriate jurisdictions, including the well-known English law-derived offshore jurisdictions, both on a domestic and world-wide basis. These orders can be obtained on an urgent basis and without notice to the debtor.

Conclusion

Astute financial industry professionals, particularly creditors and insolvency practitioners, can be expected to act swiftly in light of opportunities for identifying, tracking and recovering assets in the wake of the Panama Papers leaks. The collection of information on beneficial ownership of assets is a new requirement to be introduced in numerous offshore and onshore jurisdictions. This confidential, but potentially discoverable, information will enable creditors to rapidly identify assets and asset ownership in real time. Further, regulators, legislators and at least some members of the English judiciary appear to be losing patience with the structural opacity which, prior to the Panama leaks, enabled various high-profile figures to conceal their assets. Continuation along this creditor-friendly spectrum, away from banking and fiduciary confidentiality and toward information-sharing and disclosure, will yield lucrative gains for those positioned to seize these new opportunities.

Tim Prudhoe is a commercial litigator and trial advocate at Kobre & Kim, resident in the British Virgin Islands. He represents companies and individuals in cross-border insolvency matters. Anna Gilbert is a litigator at the firm.