On November 5, it was revealed that the shady world of shell companies, offshore tax shelters, and secret trusts is far more prevalent than previously thought. For companies that engage in these dealings, the coming days and beyond are not going to be without controversy.

Dubbed the “Paradise Papers,” the International Consortium of Investigative Journalists (ICIJ), German newspaper Süddeutsche Zeitung (the first media outlet to obtain the Panama Papers last year), and more than 381 journalists in 67 countries embarked on an effort of massive proportions to parse through 13.4 million leaked documents—emails, business agreements, bank statements, and more—some dating back 67 years. In comparison, the Panama Papers investigation involved 370 journalists in 80 countries, involving more than 11.5 million records dating back nearly 40 years.

Many of the Paradise Papers documents—nearly seven million—are internal files from the “offshore law firm” Appleby, which admitted to being hacked last year. The firm, founded in 1898, has branches in Bermuda, British Virgin Islands, the Cayman Islands, Guernsey, Hong Kong, the Isle of Man, Jersey, Mauritius, the Seychelles and Shanghai.

“At least 31,000 of the individual and corporate clients included in Appleby’s records are U.S. citizens or have U.S. addresses, more than from any other country,” the ICIJ stated. “Appleby also counted clients from the United Kingdom, China and Canada among its biggest sources of business.”

The leaked cache of documents further includes files from Asiaciti Trust, a family-owned trust company headquartered in Singapore. Together, the 13.4 million leaked documents reveal a secret world into how some of the world’s largest companies and wealthiest and most powerful people hide their money to evade taxes.

Concerning for the compliance community, leaked files from Appleby reveal private details of tax planning by nearly 100 global companies—including Apple, Nike, Uber, and many more. Companies entangled in the Paradise Papers are sure to be revealed in the coming days, as media outlets around the globe parse through these documents with a fine-tooth comb.

At first glance, at least 13 allies, major donors, and Cabinet members of U.S. President Donald Trump have been mentioned, including Commerce Secretary Wilbur Ross, who has stakes in a shipping company that has received more than $68 million in revenue since 2014 from a Russian energy company co-owned by the son-in-law of Russian President Vladimir Putin, according to ICIJ. Britain's Queen Elizabeth II is also mentioned. The leaked files further reveal financial details about high-profile corporate executives—among them, Microsoft co-founder Paul Allen and eBay founder Pierre Omidyar.

Who is Appleby?

According to the ICIJ, Appleby does not have the squeaky-clean reputation that it claims to have. “In contrast to Appleby’s public image, the files reveal a company that has provided services to risky clients from Iran, Russia and Libya, failed government audits that identified gaps in anti-money-laundering procedures and been fined in secret by the Bermuda financial regulator,” ICIJ stated. “Appleby did not reply to ICIJ’s detailed questions but released an online statement saying it had investigated ICIJ’s questions and is ‘satisfied that there is no evidence of any wrongdoing.’”

On its website, Appleby vehemently denied that it refused answering the ICIJ’s questions: “We responded to their questions and we requested that they show us the documents they have in their possession which belong to us,” the firm stated.

“We take client confidentiality extremely seriously, and we are disappointed that the media has chosen to use information which has emanated from material obtained illegally,” Appleby added. “This has very little to do with accurate and fair reporting, and everything to do with the pursuit of a political agenda. These journalists will not permit fairness and accuracy to get in the way of their political objectives.”

“Appleby has thoroughly and vigorously investigated the allegations, and we are satisfied that there is no evidence of any wrongdoing,” the firm added. “We are a law firm which advises clients on legitimate and lawful ways to conduct their business. We operate in jurisdictions which are regulated to the highest international standards. We do not tolerate illegal behavior, and we reiterate our commitment to responsible business conduct.”

From a compliance standpoint, Appleby stated that, “across all the jurisdictions in which we operate, we face an ever-increasing level of compliance obligations including in respect of anti-money laundering and anti-terrorist funding measures.  These compliance obligations are extremely complex and strict.”

“Our overriding objective is to have the procedures and policies to ensure that we have 100% compliance with these obligations,” the firm added. “This is a major undertaking.  Appleby invests a significant amount annually in compliance professionals and processes, not only to put in place the requisite procedures and policies but also to review constantly our current practices to see where there can be improvement.”

“The fact that weaknesses were found, candidly reported, addressed, and improved upon reflects the importance we attach to this area and our heavy investment in compliance professionals,” Appleby stated.

Fallout begins

The leaked documents have amplified the voices of those critical of the legality of tax havens. “While having an offshore entity is often legal, the built-in secrecy attracts money launderers, drug traffickers, kleptocrats, and others who want to operate in the shadows,” the ICIJ stated. “Offshore companies, often ‘shells’ with no employees or office space, are also used in complex tax-avoidance structures that drain billions from national treasuries.”

Transparency International has expressed similar concerns. “Clearly, financial oversight authorities and lawmakers must realize the system is broken,” Delia Ferreira Rubio, chair of Transparency International, said in a statement. “Complex, cross-border structures are being used to facilitate a wide range of secret activity, which could include corruption, fraud, and abusive tax schemes.”

Global Witness has also responded to the release of the documents. “This new leak demonstrates once again how it’s all too easy to use anonymous companies to game the system.” Mark Hays, anti-money laundering campaign leader at Global Witness, said in a statement.

According to Global Witness, the business deals outlined in the Paradise Papers underscore the importance of transparency measures—such as Beneficial Ownership Transparency—which it said, “would help prevent public officials and companies involved in potentially criminal or corrupt activities from using the offshore system to hide their dealings behind a veil of secrecy.”

The full impact of the Paradise Papers is only just beginning as more companies that are engaged in these shady dealings are catapulted into the public eye. Stay tuned.  There’s lots more to come.

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