The Fonseca saga

Friday, 22 April 2016 00:00 -     - {{hitsCtrl.values.hits}}

If those who have done a Fonseca are not charged, because they have not committed an offence, then having done a Fonseca will become a prestigious social symbol: having foreign companies and foreign bank accounts! What could be more prestigious? It will be vastly superior to having the largest Benz or an apartment in Paris. Wives of those who haven’t may well ask their husbands: “Why didn’t you do a Fonseca?”6

Many moons ago I said in an article in this paper that those who took mega bribes had a simple solution to prevent being caught. The solution was to set up a company in an offshore tax haven. This could be done through any of the top legal firms that operate in these countries. They will provide the directors.

Those paying a bribe will be asked to remit money to this company. I said that no Government will be able to find the beneficial owner of this money.

At the time I wrote this, the names of directors or those who had beneficial interests in offshore companies had never been revealed… Now IT hackers have lifted the veil. The unbelievable has happened. Many wealthy people around the world are rushing for tranquilisers. Long periods of full board accommodation in a prison are never an attractive proposition.


Is ‘doing a Fonseca’ illegal?

In the UK it is not illegal. Anybody can have a company anywhere outside the UK. However if the person is tax resident in the UK they must declare the offshore income to the tax man. However money laundering, which is converting dirty money into clean money, will be addressed at two points.

A person can remit money from their UK bank account to any place abroad. So they could send funds to say Panama or Jersey or British Virgin Islands and get a firm of lawyers to incorporate a company and issue shares for the funds remitted. But, the UK bank has to be satisfied that it is your money. This is to ensure that there is no money laundering.

A person cannot accumulate funds by selling heroin on the street and deposit this money into one’s bank account and then send the money to start an offshore company. The bank will ask questions about the source of funds before crediting your account.

Similarly the taxman has to be satisfied that the off shore company funds/assets that generates income is yours. Therefore you cannot have a million pound bribe sent to a offshore company as the taxman will look at the balance sheet and query the source of the inflow of a million pounds.


The solution that is no more

The solution to collecting dirty money like bribes and not paying tax on income was simple for many years. It was “do not tell the tax man that you have an offshore company and do not declare your income for tax”.

Many people have used this happy solution for many years and also slept well at night, because the details of off shore accounts and companies have never emerged in the common domain until the leak of the Panama files.


The difference

The UK banks will ask questions about the source of funds you credit to your bank account. The offshore Banks do not ask such silly questions, as they know that a person is having an offshore company or account to avoid the need to answer such questions.

There is no offshore taxman as these are tax free havens. So no questions from a tax man about the source of new funds injected in to the company to increase its capital base. These practices will continue. The offshore facilities will not stop. The problems if any will arise with the authorities in the country in which one is resident. 


Sri Lankans with companies/accounts in Panama or any other off shore destination

The Sri Lankan authorities should explicitly clarify the rules that govern offshore accounts. Until then we can speculate on what we believe is the correct position!

I believe there is nothing wrong in a resident Sri Lankan incorporating a company abroad, if they do two things. Declare both the source of funds to start the company and the profits received to the Inland Revenue, and pay tax. Then an offshore company can be perfectly legal.

Some funds have to be sent to start a company. The source of funds will have to be explained to the authorities. As long as there is a legal source of funds there should be no problem.

If a person had been working abroad, and has a NRFC account I believe they could send money without any problem from this account. A sibling or child working abroad can also send funds as a gift. It would also be possible to obtain Exchange Control approval if the purpose is within the rules that permit remittance of funds.

Having an offshore company in not a problem. It becomes a problem only when illegal sources of funds are remitted to such companies.


Reputation of the country

Information in the common global domain that Sri Lankans are ‘doing Fonsecas’ can damage the reputation of the country, and needs to be handled carefully. The general assumption is that there is always some illegal motive for having companies or accounts in offshore tax havens. 

It is assumed that it is to evade tax or to money launder or to conceal funds obtained in an illegal manner. If one did not want to do any of these things the question that hangs in the air is” why have an offshore company”, as all legitimate banking activities can be done in onshore banks.

Foreign investment tends to stay away from countries with widespread corruption and with no serious political will to eliminate corruption. We must not allow the Fonseca saga to take us in this direction. 

Sri Lanka should assure the world that it will probe the Fonseca companies to ascertain whether there has been money laundering or illegal funds going into these companies and if so, that it will to take firm action.  

(The writer has done this that and the other, here and abroad, including being a main Board Director of CDC PLC UK, a billion pound investment fund.)

Recent columns