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Would reputational damage be a bigger deterrent than a fine?

03 May 2016 by Henry Ker

Quick question: Panama Papers - read more

Following the publication of the Panama Papers we asked what the Governance and Compliance/Core community thought about the allegations of misconduct, tax avoidance/evasion and money laundering being reported in the media. Although there are some specific allegations of illegal activity, a lot of the situations reported are not illegal and are companies and individuals (perhaps over-enthusiastically) taking advantage of loopholes in the complex field of offshore finance to minimise their tax liabilities – a moral question rather than a legal one.

We asked whether the reputational damage, rather than a fine for misconduct, from a situation like this would be a bigger deterrent. A clear majority (61%) said it would, very few (5%) said ‘no’ and just over a third (34%) were unsure. We then asked whether a situation such as this can ever be truly regulated, or if it is a question of morality and up to companies to monitor.

Some argued that many companies involved had done nothing wrong: ‘tax accountants are employed to ensure that their companies are tax efficient. While there are loopholes in the law, companies will take advantage’ and another said: ‘...these companies/individuals haven’t broken the law. If we want to stop people/businesses utilising such offshore arrangements, the law needs to be changed/tightened up’.

One respondent built on this: ‘It’s about legally making the best money for the company and shareholders vs. morality. Unless it becomes illegal to have offshore funds, it will continue.’ Another added: ‘Perhaps a better test would be for companies to consider if the “event” was on the Sunday papers how would people react’.

Many believe that this issue can never be regulated, not least because ‘It can only be regulated if the same rules apply across all jurisdictions throughout the world’ − something that would be difficult to implement. Another respondent said that regulation is not the answer as we are ‘already are a nation drowning under regulatory change’. Many respondents therefore believe that it is an issue of ethics for the company to consider. One individual said: ‘companies need to question their activities and how they will be viewed by the general public’.

However, some questioned this view by saying that ‘morality can be subjective − it is up to regulation to dictate what is and is not acceptable’ and ‘morals can be different dependent on experience, person and countries’, yet another argued, ‘morality is so difficult to measure [as] it is linked to values’.

There is also strong sentiment that the court of public opinion is playing a huge role in this story. ‘Attitudes to all of this have changed dramatically very recently. What used to be OK is now criticised. Not money laundering or criminal activity which is clearly wrong, but some tax avoidance is treated as if it is evasion.’

Some said that new transparency protocols are the way to go: ‘transparent disclosure is the key to this, allowing national tax authorities to assess tax payable in each jurisdiction’. A respondent expanded on this: ‘The regulations being introduced under the PSC regime will tighten this area of law, but ... there is also a question of moral judgment that rests with those who chose to operate using off-shore companies and the degree to which they disclose their affairs to ascertain the tax due. For all those who will take a view of being as fair and just as possible, there are equally those who will take advantage of the anonymity that the existing systems provide ... for these people, it is justifiable to take legislation further.’

If you are a company secretary or governance professional at a leading UK business, and you would like to take part in or comment on future surveys, email team@core-partnership.co.uk

Conducted in association with The Core Partnership

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