Panama Papers: It's not a crime to do business offshore

Glance at the headlines this week, though, and you might think all the world’s wealthy are lying tax cheats. Never mind that most rich people don’t have assets offshore. We’ve only seen a fraction of the stories from the 11.5 million documents leaked from the vaults of a Panamanian law firm, but the popular remedy is clear: hang the rich, shut down offshore financial centres, and, if you’re an imperialist like Jeremy Corbyn, colonise them too.

So here’s a truth that no politician will dare whisper: much offshore financial activity is legitimate and, in many cases, vital to the smooth operation of global business.

This is a view held not just by fabulously wealthy tycoons. It is a view held by Daniel Reeves, a former US tax investigator. And by Jason Sharman, an academic co-author of a huge study of secret shell companies. And by Dan Wise, a lawyer who helps individuals chase down money that has been illegally squirrelled away in the British Virgin Islands (BVI).

So who are the legitimate users of offshore companies? Often, they are people or businesses that want to conduct international transactions like buying a company in a country with a shaky legal system. Domiciling your company in the BVI gives you the security of English law. Allocating capital between the branches of an international business is another practice that might use offshore companies, similarly, the purchase of a holiday home in Panama, or the registration of a ship in the Marshall Islands. And yes, the legal avoidance of taxes is among these legitimate activities.

There is a good reason to defend these practices: without them, conducting business internationally would be a lot less efficient. Offshore centres facilitate the movement of capital and lower barriers to trade and investment. This is why, presumably, the owner of The Guardian has made use of them. And why Liberty House, the company that might save Britain’s steel industry, has offices in offshore hubs such as Dubai and Hong Kong.

There is no doubt that offshore centres, especially the ones with lax regulations, are also used by criminals. And we should be outraged by the crimes revealed in the Panama papers. Believers in capitalism should be particularly angry about the criminals, corrupt officials, terrorists, despots and tax evaders, as well as lax law enforcement, precisely because they erode public confidence in business.

Governments should go after these criminals. They should not be able to conduct business in secrecy. Countries and offshore centres should collect and check accurate information about who owns what assets. Doing so might push criminals into less regulated jurisdictions, but at least that makes their lives harder.

Ownership information should be easily accessible to tax and criminal authorities in democratic countries and to civil complainants. It should not, as some campaigners advocate, be public. Some people need to keep their affairs private. An entrepreneur in an oppressive country, for example, an investor who doesn’t want to give away her strategy, or a stalked celebrity: all have good reasons for privacy – but not secrecy.

David Cameron, despite the row over his father’s tax affairs, has been among those world leaders pushing hardest for changes. There have been significant, though not yet sufficient, improvements in regulations.

The Government is pressuring British overseas territories, such as the BVI, to improve record keeping. Already, the BVI is among the most regulated offshore centres and requires company ownership to be recorded and shared with authorities in 19 jurisdictions, including the UK, if requested. Enforcement has been patchy but is improving. Others should be made to follow suit. 

Onshore jurisdictions are no better. In Nevada, Delaware and Wyoming, companies don’t even have to record who their owners are, making them legal black holes. Application of such rules elsewhere, including the UK, is variable. Campaigners are right to push governments to tackle this.

But the debate about tax avoidance is not the same as a campaign against criminals. Legally avoiding taxes by following the advice of an accountant is no less moral than taking cash in hand, and yet we get much angrier about one than the other. This reveals a deep-seated bigotry: that the poor are less capable of behaving morally, so we shouldn’t judge them when they fail. 

What utter rubbish. The problem of tax avoidance, as President Obama said on Tuesday, is that “the laws are so poorly designed”. They were designed for an age before globalisation. So fix the laws and punish those who break them. Don’t go after people whose only crime is to be wealthy.