What are they? The Pandora Papers are the 11.9 million leaked files from 14 global corporate services firms which set up around 29,0000 off-the-shelf companies and private trusts in not just obscure tax jurisdictions like the British Virgin Islands, Samoa, Cook Islands, Belize and Panama but also prominent countries like Singapore, new Zealand, etc. What do they reveal? These papers shed light on the offshore transactions, assets purchase, and complex multi-layered trusts set up by elites around the world in loosely regulated jurisdictions where the laws favor such businesses and are characterized by compact secrecy. The scrutiny of the papers have revealed that the trusts have been predominantly ordained to:
Hide their real identities and distance themselves from the offshore entities making it almost impossible for the tax vigilance access them
To safeguard and channelize their own investments and earnings in terms of cash, shareholdings, real estate, air crafts, yachts, etc. from creditors as well as enforcement.
What are trusts and offshore trusts? How do they operate? Trusts are fiduciary arrangements whereby the third party, known as the trustee, holds assets on behalf of individuals and organizations known as beneficiaries since they benefit from them. Trusts helps in estate planning and succession planning of large business families to consolidate their assets- financial investments, shareholding and real estate property. Offshore trusts are the ones set overseas, outside the jurisdiction of one’s country which offer remarkable secrecy and privacy due to the strategic locations they chosen for. So generally, the intention between setting up an offshore trust is generally to avoid huge taxations, and secondly, to conceal net worth from investors, creditors and enforcers. Further, it provides identity privacy in operations of business transactions allowing the trustees and beneficiaries to remain undercover while enjoying the profits. Are offshore trusts legal? What is the Indian Legal Scenario? Yes. Offshore trusts are legal. The Indian Trusts Act, 1882 gives legal basis to the concept of trusts. While Indian laws do not see trusts as a legal person/entity, they do recognize the trust as an obligation of the trustee to manage and use the assets in the trust for the benefit of the beneficiaries. India also recognizes off-shore trusts. What’s fishy when it’s legal? For commission of any crime, motive and intention, together clubbed as the Mens Rea, is integrally an important consideration. So a lot depends on the intention with which the trust has been set up, the details and background of the entities involved and the kind of operations the trust is merged in. Offshore trusts are highly susceptible to being used for illicit purposes, which arouses suspicion. Further, rather than the ownership, the cause of action often lies in the misuse of the ‘legal person’, i.e., the trust itself either through formation or the illegal purpose and intention of behind it. In such cases, the true beneficial owner should be prosecuted for money laundering or for misappropriation, corruption, tax evasion, sanction evasion or other predicate offenses. Modus operandi of the investigation: Groups involved: Politicians, bankers, Businessmen, heads of states and public administrative officials, celebrities, media house leads. Crimes involved: Funds siphoning, money laundering, tax fraud and evasion, shell companies, assets and property concealment, etc. Investigative strategies Involved:
Financial and Securities Due Diligence
Legal and administrative Investigations
Methodology: For over two years, the International Consortium of Investigative Journalists (ICIJ) coordinated and directed an investigation that expanded to include over 600 journalists from 117 nations and territories, unearthing 29000 owners with hiding 11.3 Trillion dollars (9.7 trillion euros). Reporters followed leads to diverse locations such as cliffside houses in California, a sugar farm in the Dominican Republic, a polluting factory in Italy, Dubai's high-rise skyscrapers, and Turkish hospital where staff claimed to have been mistreated. This data was shared with journalists in various formats. "More than half of the files (6.4 million) were text documents, including more than 4 million PDFs, some of which ran to more than 10,000 pages," the ICIJ said. The documents included passports, bank statements, tax declarations, company incorporation records, real estate contracts and due diligence questionnaires or about 4.1 million images and emails in the leak" Only 4 per cent of the files were structured with data organized in tables (spreadsheets, csv files and a few dbf files). Other records included slideshows and audio and video files. Technology used: To explore and analyze the information in the Pandora Papers, ICIJ identified files that contained beneficial ownership information by company and jurisdiction and structured it accordingly. Each provider’s data required a different process. In order to make sense of the more complex cases, the ICIJ used machine learning and other tools, "including the Fonduer and Scikit-learn software to identify and separate specific forms from longer documents". Some provider forms were handwritten requiring journalists to extract information manually, the ICIJ said. The ICIJ had to first locate and organize the files holding beneficial ownership information. Individual spreadsheets were merged into master spreadsheets. Where feasible, ICIJ employed programming languages like Python to automate data extraction and structure from PDF or document files. The ICIJ utilized machine learning and other technologies like Fonduer and Scikit-learn to detect and isolate particular forms from lengthier documents in more complicated situations. The Linkurious Enterprise investigation platform and ‘Neo4j’ graph database were able to enable the journalists quickly search, examine, and visualize this massive amount of data after filtering and organizing it. It allows analysts and investigators to swiftly comprehend all of the intricate direct and indirect relationships inside massive quantities of data by using a network analysis technique. The ICIJ used Linkurious during the Panama Papers, Paradise Papers, and FinCEN Files investigations, and has been a long-time user of the platform through the Linkurious for Good initiative. Using graph technology, it’s easy to understand corporate structures and who is the beneficial owner behind the behind a given company
Developments from India: Many elite Indian names have been popping up in the Pandora’s lists as more and more offshore transactions are being unearthed. Of the 300 plus Indian names, the offshore holdings of as many as 60 were corroborated and investigated. Two of the prominent ones from the list are:
Key allegations: Bankruptcy, Hidden assets. Batiste Unlimited, Radium Unlimited and Hui Investment Unlimited were three companies owned by him incorporated between 2007 –’08 in Jersey, and in BVI he owned another , i.e., Trans-Pacific holding Ltd, formed in 2009. Thus his web of offshore worth of Rs. 1.3 billion remained undisclosed while he was declared ‘bankrupt’ in India. All three of his companies reveal ultimate ownership and control in the hands of the Reliance Group. Further, three more companies named Lawrence Mutual, Richard Equity and German Equity ltd, have been found of possessing linkages with Anil Ambani, while being his ‘representative’. Some of the key transactions of these companies that were investigated include: Batiste and Radium, borrowed 500 million and 220 million respectively from ICICI to acquire preference shares in AAA Corporation Pvt. Ltd. an Anil Ambani linked Estate Company in Mumbai. Similarly, Trans-Atlantic which remained active till 2017, had entered into dealings involving the Reliance Innoventures by Anil Ambani. 2. Kiran Mazumdar Shaw Key allegation: Secretive ownership and shareholdings of companies, insider trading, executives with criminal backgrounds. John Mcculum Marshall Shaw, British –Indian and husband to Kiran Mazumdar Shaw owns trust named as Glentech International which also holds 19.76 percent shares in their main company Biocon. Further, their offshore trust, named as Deanstone trust is also principally financed by Glentect too which serves as it’s ‘settlor’. Deanstone also has as its ‘protector’ Kunal Kashyap (this person had already been penalised by an the order of the SEBI on his company Allergo Capital being accused of insider trading) The link between Kunal, Deanstone, Glentech and Biocon has already raised many vigilant eyebrows and awaits further suspicion. 3. Sachin Tendulkar Key allegations: None yet. This might be one of the most unexpected and striking additions to the list. The cricketer along with his wife and father owned Saas International in BVI that was liquidated after the Panama Papers leak. Investigation suggested that at the time of liquidation the value of its assets exceeded its liabilities, the final date of dissolution being 31 August 2016. Pursuant to the intimation mail by ICIJ, Tendulkar’s lawyer had firmly asserted the legitimacy of the company stating that such has been made out of the owner’s tax paid funds under the Liberalised Remittance Scheme (LRS). 4. Pramod Mittal Key allegations: Bankruptcy, cross-circular fund transfer for debt management, hidden assets, Steel baron Pramod Mittal who is sub-judice bankruptcy proceedings in UK since 2016 has also found to be engaged in multiple Individual Voluntary Arrangements (IVA)for mutual debt clearances. Has been accused of misrepresentation by being his own creditor and clearing debts to his own accounts while he offered to pay only 4.4 million out of the staggering debt of 2.5 Billion Euros (0.19%) to the actual creditors. The IVA was approved by 75% of Mittal’s creditors last October. Records investigated showed that two BVI based debtor companies that Mittal claimed to have owed money/assets to, the Direct Investment Limited and the Meadswell Estate Limited, belonged to a trust where Mittal himself was a beneficiary. UK’s Moorgate Industries, whose demand for 130 Billion euros was the key to Mittal’s bankruptcy, had alleged that Mittal’s family members appeared to be shareholders in some of the companies where he claimed to have owed money and many of these debts were thus cleared in bad faith. 5. Homi Rajvangshi Key allegations: Unlawful gains during government service, setting shell companies with questionable purpose and intent. Two Offshore Companies set up by ex-IRS Homi Rajvansh had been seized and sanctioned by the Swiss Office of Attorney General (OAG) launching criminal proceedings for their alleged involvement in money laundering. The two companies names Horsham Technologies Ltd. and Wairoa Industries Inc. Were set up by the Trident Trust in the British Virgin Islands (BVI), incorporated under the names of himself and his wide Alka Rajvansh. Incidentally, while being in service of the government of India, Rajvansh passed himself off as an independent commodity broker while setting up the BVI companies with residential address being accounted as Delhi’s Greater Kailash. However, the original documents and company records establish the purpose of the same being stated as ‘bankable assets’ and that it will be subsequently liquidated. The Swiss authorities had launched criminal proceedings, seized all evidence such as details of offshore companies, banking and asset details as well as imposed a communication ban even within the banks. The two swiss banks which held his correspondence addresses and his bank accounts, i.e., the Suisse Trust AF and the Clariden Leu Trust had both raised Suspicious Transaction Reports (SARS). It has been found that Rajvangshi even had criminal background as CBI proceedings on charges of money laundering and distribution of unlawful gains to private parties had been launched against him during service, which led to his ‘compulsory retirement’ by the government. Suggestive legislative/regulatory Remedies The Pandora Papers' identified networks are still mostly unknown, and the study thus far hasn't been able to discern between legal and criminal behavior.
Assessing the efficacy of their risk-based anti-financial crime systems, and deciding whether the high-risk transactions highlighted by the leaks would have been discovered, monitored, and, where appropriate, reported under the present processes.
Possessing a consolidated network of informers into business networks and interests, having a compact network of accessible database of company registries and beneficial ownership information domestically or in other jurisdictions is essential.
Through a geographic perspective, law enforcement should re-acquaint themselves with their client base: How many companies have set up shop in tax havens like South Dakota, Delaware, Las Vegas, and Wyoming? What domestic or foreign activities do their consumers engage in? Financial institutions should also reconsider their risk assessments for certain firms and trusts.
U.K: In 2018, the United Kingdom presented draft legislation to establish a registry for offshore corporations and their beneficial owners, which has yet to be passed by parliament. These papers emphasize the importance of speeding up this process in order to enhance ownership transparency in the UK property market and allow the public and private sectors to combat illegal behavior where it exists. Parallel to this, draft legislation has been presented but not enacted that would provide Companies House [the national company register] inquiry and verification capabilities.
36 nations agreed to improving their beneficial ownership framework at the 2016 London Anti-Corruption Summit, which is mostly private and not widely accessible to the business sector. Companies House, the United Kingdom's corporate register is one of the few publicly accessible beneficial-ownership registries in the world and, currently does not validate beneficial ownership information, rendering it mostly ineffective. The EU's Fifth Anti-Money Laundering Directive mandated that member states create public registries of beneficial ownership data by January 2020.
What is the stance of Indian Government on the issue? The government claims that following the Panama, HSBC and Paradise Papers leaks (another similar kind of financial probe ensued in ), on key entities such as HSBC bank, it had already enacted the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, with an aim to curb and penalize the same. Undisclosed assets of INR 20352 crore have been collectively unearthed from the Panama and paradise papers, and SIT and Task forces led by CBI, supreme Court Judges and experts are constantly on a lookout for more vigilance.