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Bahamas Leak: The Panama Papers little brother


Have you heard of the Bahamas Leak? Yeh, I guessed not. Although paltry in size to the now well-known Panama Papers, on September 21, 2016 the International Consortium of Investigative Journalists (“ICIJ”) released nearly 1.3 million documents on Bahamian companies, trusts, and foundations. Now simply known as the Bahamas Leak, this information included company names and directors. In some cases, names of owners were also obtained. The Leak does not discriminate. Canadians, Brits, Indians, Chinese, Americans, and Pakistanis were just some of the nationalities of owners, directors, or shareholders divulged. Government officials and their family members, convicted criminals, average citizens, and wealthy business professionals are also among the people included in this latest leak.

In jurisdictions (such as The Bahamas) with incorporation laws that do not require the beneficial owner of a company, trust, or foundation be disclosed, these entities may be established with stand-in directors. These stand-ins are directors on paper only and have no say in how the entity is operated. The owners of these entities are not required to be disclosed. In the end, it is impossible to know who controls and ultimately benefits from the entity. Here is a simplified example of how this process can work in order to launder ill-gotten gains:

Bob is a drug dealer. He is the kind that makes millions of dollars a year, not your average street dealer. His business is cash-based. The problem is he can’t deposit his millions into a bank account with the bank asking a lot of questions and having to file a plethora of reports to the government to divulge the large cash transactions. Bob wants to use his drug profits to buy a really nice mountain retreat. Bob can’t walk into a closing with a sack full of cash to pay the property seller. Instead, Bob incorporates a company in The Bahamas and opens a Bahamian bank account. He lists a hired Bahamian straw director as the sole director of the new company and the signor on the bank account. Bob is the sole owner of the Bahamian company. Bob uses a virtual currency to send the drug cash to his straw director to deposit into the Bahamian bank account. When it comes time to close on the mountain retreat, the Bahamian company transfers funds, the new company owns the nice mountain retreat, and Bob has his vacation home without authorities knowing he owns it.

What does this latest leak of documents mean? Firstly, it means that the Bahamian Registrar General Department is going to have tax authorities from numerous countries knocking on its door. More importantly, the Bahamian government needs to sort through how it can avoid being blacklisted as a tax haven for tax dodgers. The lack of beneficial ownership transparency coupled with the lack of income taxes lands The Bahamas on the radar of numerous countries. The EU has already penciled The Bahamas onto its blacklist for failing to have transparency, exchange of information, and fair tax competition. Although being on this official un-official list means nothing now, the EU plans to make an official list of blacklisted tax havens by the end of 2017. Making it on the list will directly result in economic sanctions and financial penalties while indirectly resulting in a staggering loss to the Bahamian economy.

Behind tourism, the financial and banking services sector is the second largest industry in The Bahamas. The country’s banks hold nearly $220 billion in its proverbial vault. That is over 25 times its GDP and by some estimates the country with the largest offshore cash reserves. Although the country’s financial officials are still attending conferences for offshore service providers and on international business, the Bahamian government has expressed its concerns about possible blacklisting and has publicly stated it intends to cooperate with the EU while continuing to maintain and enforce its privacy laws. “The Bahamas does not tolerate ‘dirty money’,” the Bahamian Financial Services Minister said. “The Bahamas has a long history of honoring its international obligations including cooperating with international authorities with respect to legally conducted investigations and/or asset recovery initiatives when received through the proper channels.”

The Bahamas status as a secretive tax jurisdiction remains intake for now. Time will tell if international pressure will cause a change in its ways making its secrecy domination go the way-side with the likes of the British Virgin Islands and the tiny Pacific country of Niue.