The Economist on the Panama Papers II: Regulate the Lawyers? How?

Mossack Fonseca

Top European powers join forces to clamp down on tax evasion Reuters

Canada plans additional push against tax evasion, in wake of Panama Papers Macleans

Putin Sees U.S., Goldman Sachs Behind Leak of Panama Papers Bloomberg

The Panama Papers and the Monster Stories of the Future New Yorker

The Economist on the Panama Papers II: Regulate the Lawyers? How?
A leader in the latest Economist contends that one lesson of the Panama Papers is the need to "regulate the law firms and other intermediaries that set up and husband offshore companies and trusts. They are supposed to know their clients, weeding out the dodgy ones. But too many are paid to act as buffers, offering an extra layer of protection against those who pry."

Regulate the lawyers? How? Implicit in the Economist's argument is the notion that lawyers function as gatekeepers. What does that mean you ask? As I have explained before:

A gatekeeper is someone—be it a person or entity—who, if they withhold their blessing, can prevent the corporation from effecting a desired transaction or from maintaining some desired status.

Often, a gatekeeper will be a reputational intermediary who provides certification services for investors. Auditors and rating agencies are good examples of this category. They have a lot of reputational capital. Indeed, it must be so, because their reputation is their stock in trade. Investors say “this must be a good investment, because it got a good rating from an agency I trust.”

In theory, they will not besmirch their reputation to benefit one client. Hence, they hold the gate between the corporation and the promised land of investor capital. Without the blessing conferred by the auditor’s letter or the rating agency’s evaluation, the corporation will have a more difficult time selling securities or remaining listed on a securities exchange.

Lawyers also are corporate gatekeepers, albeit of a different sort. To be sure, sometimes a very high profile general counsel or law firm partner might be able to give a client in trouble the benefit of the lawyer’s reputation for probity and upstanding ethics. Usually, however, we play a more behind the scenes role.

But while we may not function as reputational intermediaries, we too have a gatekeeping role. As counsel, we are well positioned to block the effectiveness of a defective registration statement or prevent the consummation of a transaction.

Most lawyers hate the idea that they should function as gatekeepers:

The relationship between lawyers and clients is often intensely personal. Former SEC Chairman Harvey Pitt went so far as to compare the lawyer-client relationship to that between priest and penitent in the confessional. Lawyers are zealously supposed to guard, defend and promote the interests of their clients. To do that, Pitt argued, clients must feel comfortable confiding in their lawyers. Efforts to turn lawyers from advocates into gatekeepers can infringe upon the willingness of clients to confide in their lawyers, and curtail their ability to receive the benefits that flow from an unfettered lawyer-client dialogue.

In my view, however, that argument pertains mainly to the lawyer representing a client in litigation. A lawyer acting in a transactional of advisory role faces a different dynamic with different incentives and concerns.

The mindset advocated by Chairman Pitt leads to fiascos like Enron:

I’ll quote Enron examiner Batson, who observed that Enron’s “attorneys saw their role in very narrow terms, as an implementer, not a counselor. That is, rather than conscientiously raising known issues for further analysis by a more senior officer or the Enron Board or refusing to participate in transactions that raised such issues, these lawyers seemed to focus only on how to address a narrow question or simply to implement a decision (or document a transaction).”

UK weaves an increasingly tangled web in response to Panama Papers  

     
Five EU nations agree tax crackdown in wake of Panama leak  

         

Struggles over shadow money today echo 19th century struggles over bank deposits

By Daniela Gabor, associate professor in economics at the University of the West of England, Bristol, and Jakob Vestergaard, senior researcher at the Danish Institute for International Studies. Originally published at the Institute for New Economic Thinkingwebsite

Money, James Buchan once noted, “is diabolically hard to write about.” It has been described as a promise to pay, a social relation, frozen desire, memory, and fiction. Less daunted, Hyman Minsky was interested by promises of unknown and changing properties.
Shadow money

Finance ministers: “hammer blow against tax evasion” – or a feather-swipe?  

 EC tax transparency proposal leaves most of world in the dark 
   The UK's position on sharing beneficial ownership data is totally hypocritical  
       Panama Papers leak ties Jose Manuel Soria to offshore interests in Jersey  
          Panama Papers: Tax Is Political, Not Personal
            World Bank and IMF chiefs: tax dodging is grave concern for global economy  
                How Offshore Tax Avoidance Can Be Stopped in London  
                   HMRC still not doing enough to tackle tax fraud, say MPs  
                       HMRC investigates just 35 wealthy tax evaders per year, report reveals  
                          UK House of Commons Committee of Public Accounts Report: Tackling tax fraud 
                             UK House of Common  Public Accounts committee: Correspondence from the Chief Executive and Executive Chair of HM Revenue and Customs relating to HMRC's leadership structure  
                                Voters views on tax fraud and benefit fraud  
                                   KPMG explains how BEPS is transforming international business 

 'If only ordinary citizens pay tax there will be a revolt': Panama Papers reaction 
      Would Westminster benefit from tax transparency?  
          Panama not to blame for scourge of offshore tax evasion, minister says  

Government Accountability Office, Most Large Profitable U.S. Corporations Paid Tax but Effective Tax Rates Differed Significantly from the Statutory Rate (GAO-16-363)