A few weeks ago, the new Steven Soderbergh movie The Laundromat was released on Netflix. Based on the Panama Papers scandal, when millions of documents from law firm Mossack Fonseca, one of the world’s leading off-shore financial services companies, were leaked to the public, the film tries to entertain and to pontificate in all things offshore.

Sporting scores of world-class actors like Meryl Streep, Gery Oldman and Antonio Banderas, Soderbergh attempts to illustrate the harmfulness of off-shore-paper-shuffling on the basis of a few drastic examples, including an insurance scam, drug trafficking and the murder of the UK lawyer Neil Woodford in China, onetime consigliere of the corrupt Chinese governor Bo Xilai.

The film was perhaps not a cineaste masterpiece, but offered some truly comical detail as when film-heroine Ellen Martin (played by Meryl Streep) calls a janitor in Fonseca’s offices the most powerful woman on earth, as she acted as the CEO of 25,000 corporations simultaneously. For Soderbergh there is no legitimate offshore business. For him, all companies set up in tax-free jurisdictions on the basis of full anonymity only serve the purpose of tax dodging, money laundering and corruption.

We in Malta can only half-heartedly agree. We certainly wonder what other purpose an offshore company can serve when our very own government ministers own them. On the other hand, based on our tax sovereignty, we are happy to profit from individuals and corporations by offering them shelter from their taxman at home – hopefully distinguishing between legitimate privacy and criminal anonymity by thoroughly screening who we assist and in which activities. We expect lawyers, accountants and bankers who provide trust services to act beyond doubt.

We Maltese understand that we earn a living from fiduciary services and tax domiciliation, and can do so because the world is not ready to tax people and companies in tandem. Diverse tax systems make the settlement of family offices, fund businesses and wealth management in tax harbours not only desirable, but also justifiable. Nothing is taxed until beneficiaries in various jurisdictions enjoy income or capital gains which they have to tax themselves then and there.

Investment firms, asset managers and insurance companies put their managed assets in tax havens not to launder money, engage in scams, or assist in tax evasion. They want to simplify matters. They want to focus on wealth creation, not to engage in administering taxes or rebates for millions of their small-scale investors who reside in very different tax landscapes, or to partake in discussions how their own business is viewed in countless jurisdictions all over the world and over time.

When minimum formalities are not respected and good practice is flouted, the legal façade of what represents a company and its residency will become porous

For someone who is not a lawyer, the concept of a corporation is mystifying. A corporation is a legal subject, and as such subject to regulations from consumer protection to bankruptcy laws, from capital requirements to contractual obligations.

A company consists of an address, a business purpose, minimum capital requirements, acting agents and owners. It should be clear that any interaction with a corporation is essentially not different to dealing with a physical person. The problem pointed out in Soderbergh’s film is that all these requirements are a matter of degree.

Is an address shared with tens of thousands of other businesses in a nondescript flat really a business address? Does an office which has no employees, no phone and just a post box really constitute the headquarters of a company? Is a cleaner who cannot read but nevertheless signs thousands of corporate papers a day really an acting agent?

Is a fancy-sounding BVI company holding all shares in a company really the legal owner of a company, or is it the anonymous beneficiary hiding behind trust declarations?

Is a nominal share capital of 100 euro, which nobody ever paid in, sufficient? Such arrangements are certainly odious, but legally watertight, as long as all formal requirements are fulfilled, no matter how absurd they may seem.

Things will start to unravel when formally defined, minimum requirements are not fulfilled, or the people setting up shell companies and administering them act grossly careless or fraudulent. Issuing unlimited authority to hidden beneficiaries while acting as the official, legally responsible company front is a case in point.

This happened to me when I was short-changed by a well-reputed Cypriot trust company, ‘a leading corporate, fiduciary and fund administrator'.

As I have reported a few months ago, I had in person given a loan to a Russian businessman who was fully serviced by these Cypriot trustees. The Russian never bothered to repay even a fraction of the principal he owed me and got away with it with the help of the Cypriots, which obligingly concealed his assets by transferring them to another company managed by themselves.

The BVI company which had formally been the recipient of my loan, the Cypriot companies owning the Russian’s industrial assets pledged to me, the shareholders of these companies, the acting directors of these companies, the bank accounts set up in the name of these companies, the powers of attorney, the yearly fig-leaf accounts: all provided by the Cypriot trustees.

When I wanted my money back, they walled on the Russian’s behalf. Funnily enough, it was their managing director who had signed all relevant papers and contracts, not just a janitor who might plead ignorance.

He was acting on behalf of each company involved as director, often as the shareholder representative too and as depositary, and it was he who had happily signed my loan contract and who had pledged to me all sureties and issued all trust declarations issued in my favour. By all means and appearances he was the boss in all dealings with me.

“We, the undersigned… do hereby and solemnly and sincerely make the following declaration and undertakings: That the said shares are the lawful property of Dr Andreas Weitzer (hereinafter referred to as the Owner) and that we hold the said shares and all dividends and other rights of whatsoever nature accrued or to accrue upon the shares in trust of the Owner… and will faithfully carry out such wishes and instructions as the Owner may direct…” signed ‘the managing director’ - my perceived guarantor!”

When my loan turned sour, he transferred all assets of the Russian to another Cypriot company beyond my reach – quite without my consent as “owner”. He refused to even hand over the physical shares of the now worthless companies I was supposed to own according to his trust declaration as quoted above.

Not surprisingly any meaningful explanation of what had happened was refused citing “client confidentiality” – never mind that I was supposed to be a client myself. The Cypriot on-shore companies involved did not even produce balance statements for many years. Accounts should have have explained how I was defrauded and how the law was violated in favour of someone who had just paid better, if with my money.

When minimum formalities are not respected and good practice is flouted, the legal façade of what represents a company and its residency will become porous.

We retail investors may face financial consequences as tax authorities all over the world will be in a position to attack such arrangements, on-shore and off-shore.

Because paper companies are either real, then their trustee directors and trustee owners are legally responsible for what they are doing. Or they are a fake, and all the clients of trust companies – the anonymous beneficial owners – are deceived and cheated.

To apply utmost care in formal detail, in execution and compliance is therefore of paramount importance for our own fiduciary business in Malta, if we want to keep it alive. The emperor’s new clothes have to consist of at least a thong, or he’s naked.

Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.


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