Solicitor-client privilege could be next victim of the Panama Papers

Tuesday, March 27, 2018 

Mossack Fonseca, the law firm at the heart of the Panama Papers scandal, is closing its doors at the end of March. But its legacy, a full-frontal attack on lawyers, looms large.

It’s a matter of optics. So far, there’s scant evidence of criminal activity by lawyers in relation to the Panama Papers. That, of course, wouldn’t surprise anyone in a profession whose knee-jerk reaction, and properly so for the most part, is that tax avoidance is not tax evasion.

The trouble is that truth and accuracy are often at odds with optics. And the optics are terrible. So much so that the European Parliament’s recommendations relating to the scandal single out lawyers as perhaps the main ogres in the piece.

Here’s what the U.K.’s Law Society Gazette had to say about it.

“The European Parliament rarely addresses recommendations specifically to lawyers. The outcome, therefore, is a rare and interesting reflection on what elected representatives from 28 different countries, in political groups ranging from left to right, think of our profession at the moment.”

The recommendations take the form of a thinly veiled attack on solicitor-client privilege, one of the concepts most sacred to the profession, and perhaps its ultimate guardian angel. To be sure, privilege is hardly as sacred to the powers-that-be in Europe, where in-house counsel can’t even claim privilege, as it is to Canadians, whose courts have cast the world’s widest net in protecting confidential communications between lawyers and clients.

Most specifically, the EP’s recommendations, approved in December:

  • Urge governments to “issue guidance” on the “interpretation and application” of legal privilege;
  • Suggest the profession take “further steps” to ensure privilege does not impede adequate reporting of “suspicious transactions or other potentially illegal activities”;
  • Recommend that lawyers involved in “activity that fall outside their specific duties of defence, legal representation or legal advice” should “in some cases” be required to report “certain information”; and
  • Would hold lawyers legally responsible for designing not only “tax evasion” schemes but also “aggressive tax plans punishable by law”.

Believe it or not, the final recommendations aren’t nearly as bad as the originals, which spoke of governmental supervision of the profession and featured even vaguer language on the scope of privilege. To some, that’s surprising, given that the Paradise Papers scandal, featuring leaks from international offshore law firm Appleby, emerged during the course of the EU’s inquiry leading to the recommendations.

To be sure, the European Parliament’s recommendations are not binding on individual nations or EU institutions. The weather forecast isn’t binding either, but that doesn’t mean tsunamis don’t happen. And — please forgive the pun — they can come in waves.

In our scenario, the first wave would be the demise of Mossack Fonseca. The second wave sees the demise, or at least the diminution, of Appleby, whose website boasts offices in “key offshore jurisdictions”, including Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Mauritius and the Seychelles.

At press time, Appleby seemed safe enough. But then it took almost two years for Mossack to shut down. We’re barely six months into the Appleby leak. And somewhere, sometime, somebody’s going to make hay of the fact that Appleby was convicted in 2002 of destroying documents relating to the Enron collapse.

If Appleby goes, we’ll see the third wave of Panama Papers fallout putting the future of other firms in the “offshore magic circle” at risk. These firms, including Ogier, Mourant Ozannes, Walkers and Maples and Calder, focus on moving money to “low-risk” countries.

“There will be some concern the heavens will come down on [these firms],” said Jonathan Riley, head of tax at Grant Thornton, in an interview with the Financial Times. “There will be collateral damage for the offshore centres.”

So if the offshore firms lose their relevance, who’s going to take the flak for tax avoidance going forward? None other than the mainstream firms, I say.

That’s why we should be watching what happens to the fate of the solicitor-client privilege. Lawyers’ lack of popularity, after all, isn’t confined to the EU. Indeed, the Paradise Papers disclosed that more than 3,000 Canadians, including three former prime ministers, had links to Appleby.

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