Codenamed The Panama Papers, the documents, obtained by a German newspaper and reported around the world by the International Consortium of Investigative Journalists (ICIJ), exposed the internal operations of one of the world's leading firms in incorporation of offshore entities, Panama-headquartered Mossack Fonseca (MF).
The papers showed that Mossack Fonseca worked with more than 14,000 banks, law firms, company incorporators and other middlemen to set up companies, foundations and trusts for customers. According to data published by ICIJ, Hong Kong topped the list with more than 2,212 intermediaries, followed by the UK and Switzerland. Though India did not figure in the top 10, some of these intermediaries could be based here.
People familiar with the workings of these offshore vehicles said lawyers, consultants and wealth managers in each of the countries named played an important role in such offshore structures and transactions. "Without law firms, none of these can happen. They advise entrepreneurs where to open an account, how to route the money and when to take it out," said a former regulator familiar with such vehicles.
"Our own laws provide protection to such activity under client secrecy and confidentiality clauses. In fact, I know of people who keep their documents with their lawyers. Your premises can be raided, but not your lawyer's. Therefore, the safest place to keep these is your lawyers'," he added.
Several consultants and law firms, which till recently were offering expertise on "offshore funds", went quiet after the global expose on Monday. "We have been told to keep away (from the development)," said a senior executive with a Mumbai-based law firm. An expert from a consultancy initially offered comments but later withdrew these "after instructions from the top". Another major consultancy excused from participating in the story, saying senior partners were travelling abroad.
The expose could give fresh leads to investigation by authorities working to nab people involved in money laundering and tax evasion. However, Pallav Pradyumn Narang, partner in chartered accountancy firm Arkay & Arkay, said owning equity in a foreign company, particularly an offshore company in a low-tax or zero-tax country, does not in itself constitute a crime.
"These revelations have to be seen through the regulatory prism to examine whether these were declared in their returns or whether these have been made in compliance with the overseas direct investment regulations, as notified by the RBI," Narang added.
According to Girish Vanvari, head of tax, KPMG in India, the onus was on the offshore account-holder to explain the source of income of such assets. "Any failure to do so could attract penalty of 120 per cent of the value of taxes that are due." Under the provisions of the Income-Tax Act, the offshore account-holder is supposed to disclose the presence of such accounts as part of the ITR filing. Any non-disclosure could attract penalty of Rs 10 lakh. ICIJ will release the full list of companies and people concerned in early May.