The Panama Papers Problem: Global Financial Institutions Face Increasing Liability for Clients’ Tax Evasion

Offshore tax havens and nominee entities such as private investment companies (corporate entities often established offshore that act as account holders in lieu of the individuals who beneficially own the assets) pose significant regulatory and compliance risks to international financial institutions. Regulatory authorities around the world, including the U.S. Department of Justice, intensified their investigations into offshore tax havens after the April 3, 2016 publication of names associated with the Panamanian law firm Mossack Fonseca, widely known as the “Panama Papers,” and the firestorm of public outcry. While the Panama Papers leak prompted media attention, the swift response by regulatory authorities is just the latest of the steadily increasing initiatives by prosecutors to ramp up their enforcement efforts to identify and root out offshore entities worldwide that may facilitate tax evasion. Though these investigations primarily target individuals evading taxes, statutory regimes such as the U.S. Foreign Account Tax Compliance Act (“FATCA”) and retrospective investigative efforts by international enforcement agencies increasingly ensnare financial institutions as unwitting accomplices to account holders’ misdeeds. More importantly, the latest enforcement trends shift the burden of proving that account holders are not evading taxes onto the financial institutions themselves, lest the institutions face lengthy, costly, and reputation damaging formal investigations.