Paradise Papers Part 2

Much shock initially sounded at the audacity of the Queen for investing £10 million in a Cayman fund, or that Apple had re-domiciled its profit centre to Jersey, or that the great and the good were once again shown to be protecting their wealth from revenues around the world via schemes devised, or at least sanctioned, by offshore lawyers.

However, after it became clear that there was little, if anything, approaching tax evasion revealed in the Paradise Papers, the only people apparently remaining shocked at the scale of the issue were the journalists who had broken the story. Most sensible people with more than a rudimentary grasp of the way the world works understand that a very significant proportion of the global economy exists in order to avoid tax, and those with the wealth to employ tax planners are clearly also those who benefit most. Note that while Appleby was providing advice to, inter alia, Apple, that advice was relatively limited and it was no doubt Apple’s onshore lawyers who devised a way of ensuring that Apple minimised its tax burden.

So what are the real lessons to come out of the Paradise Papers? In this author’s view, there are two: (1) data security should be a concern for everyone and will likely only become more important in the future; and (2) the very richest are never going to contribute in tax as much as others until some fundamental “spirit of the rules” change.

1. Data security

Appleby has made much of the fact that it does not consider the source of the Paradise Papers to be a leak, but rather a criminal hack. It thereby admits that it is not impervious to planned and professional attempts to steal digital data. It may not have military-grade data security (whatever that means), but as a law firm which deals in confidential data, its systems must have been designed to be as robust as possible. And yet, the hacker obtained the data. This is not to criticise Appleby. We are all likely to be hackable if targeted.

However, even if some totally impenetrable system did exist, this would not prevent a leak; an insider downloading and disseminating the data. What can be done in a firm the size of Appleby to ensure that everyone with access to its client data will not be persuaded to copy as much of it as possible and breach the clients’ confidence? There are sophisticated software systems that can monitor individual users’ use of the system, but a person determined to leak will find a way around this, or might in any event take his or her chances on the basis that the reward he or she might achieve will more than compensate for the penalty. The modern world makes this kind of activity easier. Thirty years ago, someone would have had to find physical files, and copy them, and then either leave the office with the copies, or fax them. Some files would have been in offices which that person had no business being in. Others would have been archived. Yet others would have had to be retrieved from a storage system the use of which itself would have generated suspicion. Nowadays, a disgruntled employee or weekend keyboard warrior could obtain a very significant portion of the data belonging to the employer or its clients in a matter of days all while apparently diligently working at improving the fortunes of the employer.

We have prioritised convenience over security. That is – of course – the norm, but it does not exonerate the professional service firms from which these sorts of information leaks/hacks originate.

As the clients named in the Paradise Papers were not participating in unlawful tax evasion, and Appleby was not assisting them in that pursuit, those clients can very legitimately feel aggrieved by the leak and may consider that they ought to take action against Appleby.

1. Tax reform

The existence of the tax avoidance industry is largely the product of the way in which tax laws are written. They tax certain defined assets, transactions, and structures. The tax avoidance industry seeks to position its customers outside of the ambit of those definitions. Naturally, accountants and lawyers thrive in the semantics.

One way of tackling the problem might be to remove the possibility of the definitions being manipulated, applying some basic principles rather than precise definitions in a so-called “spirit of the law” variation. Another might be the protection and reward for whistle-blowing. Yet another might be to make tax information publicly-available.

Clearly, the response to these issues will rest on the political appetite to do something about the way in which the tax rules can be avoided.