Now it’s the head of HSBC, Mr. Gulliver, who it turns out had placed his bonuses in a Panamanian company to keep the size of his money bags hidden from prying eyes from within HSBC.
The Panamanian company angle is interesting. They were popular with certain bankers around 2005 and a few years after that. The big driver was the EU Savings Directive (EUSD), which subjected EU residents to a 15 % withholding tax on interest income (it increased incrementally now, in 2015, it’s at 35%)
The thing about the EUSD was that it only affected private citizens, you know, as in walking, breathing human beings. Companies, on the other hand, were out of scope.
Incidentally, the implementation of the EUSD was a time of divergence within the industry. There were old school private bankers who thought it would continue to be business as usual and then there were private bankers (a camp I belonged to) who felt that times were changing and there was a clear strong trend towards transparency and tax compliance that would change the offshore private banking industry. It was the old school private bankers who saw moving client assets into a corporate structure as a solution to minimise the EUSD tax.
But why a Panamanian company?
The answer is a simple one. It was easy to set up. Panamanian companies where basically shelf companies. You filled a few papers, signed them, sent them off on their merry way and then you received some papers in return from Panama making you the El Jefe of your very own Panamanian company. Then you simply moved your assets in to your Panamanian company’s account and you were done. No EU withholding tax. Magnifico!
(To see the EU withholding tax in action see the cartoon above)
Fast forward 10 years to today and now we see how that is working out: The reputational damage is immense and the “solution” of a Panamanian company has proved to be a burden to those who have them.
I would like to stress here (that it is my understanding) that the use of Panamanian companies as a way to circumvent the EUSD decreased around 2008 when the industry as a whole started to tighten their compliance procedures and came to understand that transparency and real tax compliance was something that was slowly but surely coming in to the offshore banking industry.
I keep stressing it and I will continue to stress it, although not a popular (or profitable) sentiment amongst the media: The private banking industry of 2015 is very different to what it was a decade ago.