There has been a lot written about the Panama papers since the story first broke. A few people have asked me how I think it could play out. Hence the idea for this blog post.

I am not going to attempt to explain the papers, or the international response to them. That has been amply covered by others, including the mainstream media.1

As the mainstream media have noted, using an offshore company is not itself illegal. If:

  • the funds held in an offshore entity’s bank accounts are lawfully derived; and
  • income that has been sent to the offshore entity has been declared to the Commissioner of Taxation; and
  • importantly, the Commissioner of Taxation has been informed of the existence of foreign assets with a total value of AU$50,000 or more. This is a standard question on every income tax return. Providing a false answer is an offence. The specific offence created by s 8K of the Taxation Administration Act 1953 (Cth) is punishable only by fine. However offences in sections 134.2 and 135 of the Criminal Code (Cth) are punishable by imprisonment, and may trigger the operation of the Proceeds of Crime Act 2002 (Cth) referred to below,

then an Australian taxpayer has little to fear from Australian authorities as a result of the release of the Panama Papers.

It is a matter of public record that I was involved in long running Proceeds of Crime litigation between the Commonwealth DPP, the AFP and an Australian company by the name of Redbay Investments Pty Ltd. It has recently been made public that Mossack Fonseca played a significant role in that case.2 Nothing I have seen in the last month about the firm particularly surprises me.

Historically, many of the jurisdictions Mossack Fonseca operates in have been reluctant to provide much in the way of cooperation to foreign (including Australian) authorities.

The approach that Australian authorities will likely take (assuming they get access to the papers) is I suggest fairly predictable.

So what is happening in Australia? How does it affect Australian citizens/residents? How does it affect non-residents who may have assets in Australia? Those are the questions I address below.

What is likely happening in Australia at the moment?

The main source quoted in Australia has been Australian Taxation Office (ATO) Chair Mr Chris Jordan. He gave evidence to the Senate Economics References Committee in relation to its inquiry into Corporate tax avoidance. The full transcript of his evidence is available on the Senate Committee’s website.

Although that Senate Committee inquiry has now lapsed as a result of the calling of the Federal election the ATO’s investigations are almost certainly ongoing.

Just as significantly, there are undoubtedly investigations ongoing in other federal law enforcement agencies, most notably the Australian Federal Police, the Australian Crime Commission and AUSTRAC.3

One can assume that the database, made public by The International Consortium of Investigative Journalists (ICIJ) on 9 May 2016, is being trawled over by Australian authorities already. Having explored the database briefly for myself:

  • I notice that it appears to list a number of Australian addresses with no individual linked.
  • It will sometimes show that an Australian residential address is linked to a particular company; but there will be little information about the company, other than its date and jurisdiction of incorporation.
  • I imagine Australian authorities may seek to cross reference who was residing at a given address on the date a company was incorporated. Certainly if they limit their text searches of the database to individuals of interest they will often come up with nothing.
  • The ATO and law enforcement have ready access not only to the electoral roll, but can also ascertain in whose name the power, gas, water and phone lines were connected.
  • If I were them I would be focusing as much attention on addresses as on individuals.

In due time, the source of the leaked Panama Papers (“John Doe”) may release further data to law enforcement. He has said:

ICIJ and its partner publications have rightly stated that they will not provide them to law enforcement agencies. I, however, would be willing to cooperate with law enforcement to the extent that I am able.4

If John Doe does not follow through, I anticipate that law enforcement in some jurisdictions (and I do not rule out the possibility of Australian agencies targeting the ABC) will attempt to force media outlets that have the data to hand it over.

If that eventuates, it is obviously likely to provide further leads for law enforcement to follow up. Indeed it just may contain enough evidence to commence proceedings of the type discussed below. That said without someone to authenticate the leaked documents criminal prosecution at least may prove difficult.

What powers do the Australian authorities have, and how might they be used?

The Commissioner of Taxation can raise assessments, or amended assessments, against Australian taxpayers in relation to income that he suspects the person derived. The Commissioner can deem money held for a person’s benefit to be income. So for instance if the ATO ultimately establish that Mossack Fonseca assisted a person to incorporate a company, and the company holds bank accounts, the Commissioner might treat the funds in them as income.

Once the Commissioner raises an assessment, the onus is on the taxpayer not only to prove that the assessment is wrong, but to prove what the correct assessment is.

The ATO’s ability to recover tax outstanding under an assessment is broad. However it is not unlimited. The ATO can apply to a Supreme or Federal Court for an asset preservation order (freezing order). Such applications are made without notice to the taxpayer.

The ATO can issue garnishee notices, compelling a person who owes money to the taxpayer to pay the debt to the ATO in reduction of the taxpayer’s debt, rather than to the taxpayer.

The major limitations (that are of present relevance) to the ATO’s ability to recover what it considers to be outstanding tax are:

  • in the areas of international cooperation. Many countries will not provide assistance to recover assets from a taxpayer.
  • in the area of property that is held through a complex structure.

Each of these limitations is potentially overcome by the Proceeds of Crime Act 2002 (Cth).

That Act allows the Australian Federal Police to apply (without notice) to a Supreme Court for restraining orders that in effect freeze assets on the basis of a suspicion (which is a very low standard of proof) that there has been some tax fraud or money laundering offence committed. Some countries will then recognise a request made by the Australian Government under the Mutual Assistance in Criminal Matters Act 1987 (Cth) to give effect to that order over an offshore account. Many countries will also allow their own compulsive powers (such as search warrants by their domestic Police) to be used in furtherance of the underlying Australian investigation.

The Proceeds of Crime Act 2002 also allows the Australian Federal Police to pursue assets that are said to be under the “effective control” of a person who is alleged to have engaged in a fraud or money laundering offence. Effective control is a powerful concept that pierces not only the corporate veil, but all legal and equitable concepts of property interests. Effective control is extensively defined, but is ultimately a question of fact. Property may be under the effective control of multiple people. Arguably no volume of trust deeds or layers of corporations can prevent a Court from finding that property is effectively controlled by a person if history shows that the person has effectively been in control of the property.

In addition to the above, Australian residents who stand to benefit from offshore accounts held through offshore companies and trusts, may also face additional action.

If the taxpayer is in Australia, the ATO can issue a departure prohibition order, preventing a person from leaving Australia whilst an outstanding assessment remains unpaid. This can be an effective way of preventing a person who is in Australia, but whose wealth is offshore, from enjoying their wealth until they have resolved their dispute with the ATO.

Many taxpayers who are under the microscope will face the prospect of compulsory audit interviews with ATO investigators. Some taxpayers may also face the prospect of being compulsorily examined by the Australian Crime Commission.

Ultimately, anyone in Australian also faces the prospect of being criminally charged, either with tax fraud contrary to Division 135 Criminal Code (Cth), or alternatively Money Laundering under Division 400 of the Criminal Code (Cth). The fraud offences carry up to 10 years imprisonment. The money laundering offences up to 25 years.

There is a prospect, I do not say it is particularly likely, that anyone outside Australia could be extradited to Australia to face such charges. Money laundering charges are the most likely to be the subject of an extradition request.

The above does not constitute legal advice.

  1. See for instance the ABC News websites’s dedicated page ABC News explanation of the Panama Papers. See also the interactive on the Sydney Morning Herald website. Finally see the 4 Corners episode on the topic. []
  2. Australian Financial Review, 4 April 2016. []
  3. The role of AUSTRAC, as Australia’s Financial Intelligence Unit (FIU), will be behind the scenes, crunching data for other agencies. []
  4. The Revolution Will Be Digitized, 6 May 2016 []