The news is currently dominated by the ‘Panama Papers’ – the massive leak of millions of banking documents detailing offshore investments by the wealthy. It’s a sexy, glamorous story and it will run and run. What seems to appeal to most of us, is ….who is behind this money trail controlled by faceless trusts and companies which have spun elaborate financial webs across the world? How much is involved and WHY?
No country seems to be left untouched and all those famous people you never somehow trusted have been named, predictably. Billions of dollars have passed through the hands of Panama law firm Mossack Fonseca’s clients and then been rolled on to other countries by all those people via faceless trusts and companies, controlled by still more faceless intermediaries (lawyers included) for reasons which just aren’t convincing. Good luck to them too. As with the hackers themselves, I personally think it’s more important to sleep at night.
Earlier this week, not long after news of the hefty leak broke –when, by then, the electronic documents totalled no less than 2.6 terabytes – I was contacted by a journalist from CNN Money, the financial arm of the legendary news network. She was interested in the divorce angle: to what extent do wealthy spouses make use of offshore investments to try and keep assets out of reach of their wives or husbands?
The resulting article appeared on CNN today. Entitled Panama Papers: How the rich try to hide assets from their exes, it cites Prest v Prest and Scot and Michelle Young, both cases which we have discussed extensively on this blog.
I explained to the journalist that under English law, both parties to a divorce have a duty to make “full and frank disclosure” of their assets, but this legal requirement does not of course always deter those who are truly determined to thwart their spouse.
As you might expect, wealthy divorcing spouses often disclose an interest in offshore trusts and companies in a divorce. They may have been set up years ago for entirely different reasons than divorce but it’s not uncommon to see movement adverse to the other spouse in offshore settlements and companies if a marriage is starting to go wrong. Technically the divorcing spouse may be able to mount a challenge under English law to entities which amount to a postnuptial settlement. They can in theory apply to vary such settlements to gain an interest for themselves or, at the very least, demonstrate that they are assets available to their spouse. But it’s tough to get an overall successful result. These entities aren’t set up to be transparent – that’s the very reason they’re there in the first place. So they’re certainly designed to try and withstand the scrutiny of an English family law court.
The value and size of the interest as declared by the spouse and the real value and interest may be two different things of course – and it can be very difficult to establish the latter. The expensively retained trustees and lawyers of those overseas interests will dig in their heels when faced with English court orders, giving away as little information as possible, claiming that it is not an asset of the spouse, that it is an entirely independent entity and the law in that particular territory or country does not require full cooperation. They will refuse point blank to join into the litigation – indeed they argue such cooperation could be a breach of that country’s own law.
They’re well used to it. There are some English lawyers who specialise in representing offshore entities and whilst of course, appearing to be as helpful and cooperative as they can be, they are restricted from giving away more than the barest minimum of information.
It’s not the fault of the divorcing party of course – it’s the entirely separate third party entity which is completely independent they insist. Even if, in real time, we all suspect that’s nonsense. In law however, its completely viable and in practice it tends to succeed. I’ve been in court when an offshore trustee has been represented by English lawyers simply “to be on hand to assist the court” and only by a process known to lawyers as “judicial encouragement” – i.e. the judge leaning hard on all parties before him -has it been possible to sort out a reasonable settlement. Trustees’ obligations onshore and offshore are very distinct and they have to take a view of a settlement as a whole, focusing on the benefit of all the beneficiaries involved, even if the suspicions of the other spouse are that it is nothing but a sham controlled by one of the divorcing spouses. Pragmatism is the order of the day – assuming there is a will on all sides to cooperate.
But there can be cases where even judicial encouragement does not work and if the trusts and companies offshore do refuse full co-operation or decline to obey an order, the unfortunate fact is that there may be very little the English family courts can do. Trying to enforce an order overseas is fraught with substantial cost and danger. Some countries will take the view that proceedings should have been started in their own country (even if in reality it wouldn’t have made much difference) and therefore won’t cooperate. Others are certainly not going to submit to the perceived impertinence of an English, entirely foreign court telling them what to do with an asset within their own jurisdiction. Other considerations will play a part too.
So much for disclosed offshore assets. They’re hard enough. On other occasions, devious divorcing spouses can deliberately and relatively easily pile all their assets into a maze of offshore companies and trusts, especially if they are themselves based offshore, and then fail to disclose these secret holdings at all, which can be very difficult, nigh on impossible to track down. You need more than suspicion in an English court, and the family courts in this country are limited in their investigative powers. They aren’t conducting a criminal investigation and won’t let a party behave like the FBI. In fact a party going over the line in conducting an investigation could find themselves in serious trouble and even be prosecuted.
Tearing off the veils and tracking down the truth can take a very long time and be very expensive, whatever the rights of the wronged spouse. It is not unusual, for example, to have assets in one country; a company nominally owning that asset in another country; a trust owning that company in a third country; the trustees resident in yet another country; the person who controls those assets in reality and who is being divorced living in still another country; and the divorce itself taking place in a further country. Even with all their powers, an English court is really going to have a tough time establishing the true level of wealth of these parties. And the poorer spouse is so often inhibited by the enormous cost of trying to track down those assets. Brick walls are nothing compared to companies and trusts in offshore tax havens.
Until now. It’s been great to read reports in the Panama papers of wealthy people giving specific orders to put assets beyond the reach of a spouse and then voila, it all being done. There it is in black and white – the evidence. It must feel like Christmas has come early to a few cheated spouses worldwide who now have those pieces of gold dust in their hands. Armed with such evidence, an English court could set aside the original order, order the payment of all legal costs to date, as well as a new financial order and the payment of more costs…and there’s even the possibility of a visit from the boys in blue. Perjury and tax evasion are criminal offences.
But overall, what long term effect, if any, will the Panama papers have? Some very wealthy people may think again, realising perhaps for the first time that overseas wealth protection vehicles overseas do come with certain risks. I doubt it. The very fact they take those risks with their money requires a certain type of character from the outset. They will become more determined than ever, creating new and even more complicated schemes to protect their assets from prying eyes and entitled spouses. I think for most people the vast web of companies and trusts will continue to be spun and the secrets will start to accumulate again. Not much will change in the end. I can’t imagine why it would.
Read the CNN article here.