Panama and the 1%: Shell Games, Taxes, and International Law

By B. Lana Guggenheim

The Panama Papers, as the information leak from a law firm operating in Panama has been dubbed, is the largest information leak in history, clocking in at 11.5 million files, about 2.6 terabytes of data, which is most likely the bulk of law firm Mossack Fonseca’s database, if not its entirety. The well-known Wikileaks cache comparably is much smaller, but is still substantial at 718,000 documents. This event has blown open the operating procedures of offshore tax havens, money saving schemes for the extremely rich, and their less than savory ties to many families, government officials, and rogue regimes all over the world.

Though the story broke only days ago, Mossack Fonseca has been setting up shell companies to shelter funds for decades, and journalists have been poring over the data for months before they released the story. While an anonymous source tipped off the German newspaper Süddeutsche Zeitung, the data they received soon outpaced their ability to process, and they reached out to the International Consortium of Investigative Journalists, consisting of a team of over 400 journalists in over 100 countries, to help. Even so, going through this much data took months.

The results have been immediate and dramatic. Already on Tuesday, the Prime Minister of Iceland, Sigmundur David Gunnlaugsson, tendered his resignation due to he and his wife having been among the many clients who parked their cash in a Panama shell business, Wintris. Considering the scars from the country’s recent financial collapse and painful rebound, there was little tolerance from Iceland residents for their premier's secret money stash, and one tied to the failing investment banks from 2008 at that - which meant there was an enormous and undisclosed conflict of interest. More than $2 billion has been traced to Vladimir Putin and his associates in Russia, and Ukrainian premier Petro Poroshenko, sole shareholder of Prime Asset Partners Limited (PAPL), has come under fire for similar reasons. The candy magnate promised to sell his business when he took office, but Mossack Fonseca set PAPL up as a shell company based in the British Virgin Islands in August 2014, at the time of Russia’s bloodiest attacks on Ukraine, thus saving him millions of dollars in Ukrainian taxes and prompting some to wonder if his priorities were the country he leads or the finances he promised to liquidate. High ranking families in China’s Communist Party are under the lens as well for quietly squirreling their wealth away, and the US and UK don’t have their hands clean either, one client being the late father of British Prime Minister David Cameron. Even Nawaz Sharif, Prime Minister of Pakistan, is under fire, as is the monarch of Saudi Arabia, King Salman bin Abdulaziz bin Abdulrahman Al Saud, and even two cousins of Syrian dictator Bashar al-Assad, Rami and Hafez Makhlouf, among many others all around the world, and in various positions of power.

But how does it all work? One commenter on Reddit charmingly described the issue behind the Panama Papers as people stashing their piggy banks in someone else’s house to hide their savings from their moms, and while some were simply seeking privacy, others were hiding stolen money and engaging in other illegal and unethical activities (you can see it illustrated here.) The reality is slightly more complicated - in order to hide their funds, corporations create new bank accounts and new business ventures based in countries that have low tax rates and/or do not tax on income earned abroad. Such havens include the Cayman Islands, the British Virgin Islands, Luxembourg, Ireland, Panama, and yes, the United States, which is in fact one of the biggest tax havens for foreign money. Ironically enough, the United States holds other countries to a standard of transparency that it does not itself follow, as the USA did not sign on to OECD standards, though Panama did, though with conditions. Because these accounts are held under different names, their origin is hard to trace, and because these countries do not disclose the information to the corporations countries’ of origin, it is easy to avoid disclosing the true extent of one’s assets and thus avoid taxation on it. Banks often seek out relevant law firms, like Mossack Fonseca, on behalf of their clients to complete these services. (Mossack Fonseca created about 200,000 of these offshore entities.) The law firms charge a fee to set shell companies up and maintain this legal fiction, but this fee is often significantly less than the home tax rate rich individuals and corporations are looking to avoid by engaging in this practice. And a legal fiction it is: one building can be home to thousands of companies and accounts that are little more than a mailbox with a gilded name plaque, with no rooms or employees to speak of. But it’s one that allows many to dodge the tax man in a way that beggars belief.

The entire situation is a tangled web of how the top tiers of international finance are open to the rich, but not the average citizen. The offshore banking industry intersects with criminals, terrorists, corporations, and your average billionaire, and often enough, it’s legal - though not always. Academics estimate that about $7.6 trillion is held in overseas tax havens, costing governments a minimum of $200 billion a year in lost tax revenues. Tax havens are an ugly, but integral part of the global banking system. However, not everyone involved in offshore banking is a thieving criminal. Some folks place funds in tax havens totally illegally, but for reasons most of us would support, such as in defiance of authoritarian governments seeking to crack down and restrict potential actors that would upset their monopoly on power.

Mossack Fonseca offices in Panama City. From elcambur.com.ve

Much of Mossack Fonseca’s work isn’t for humanitarian or anti-authoritarian reasons, however. Though the two men behind the firm, Ramon Fonseca and Jurgen Mossack, insist they are the wronged party for having been hacked into and their privacy violated - and they have a valid point - they say that their business is like “selling cars”; they are not responsible if people use their products to do wrong. Still, a number of their clients are involved in some shady business. And while technically their law firm violates no Panamanian laws, among their clients are those placed under international sanctions, and those who have earned their funds through extralegal means. Some of these companies were based in Iran, Zimbabwe, and North Korea, including DCB Finance, which had links to North Korea’s nuclear weapons program. Even in cases when they were not yet sanctioned when Mossack Fonseca helped set up their shell companies, the firm continued to act as a proxy for them after sanctions were put in place. In the case of DCB Finance, Mossack Fonseca continued relations with them until contacted by the British Virgin Islands authorities in 2010 inquiring about a different North Korean company, after which Mossack Fonseca resigned as agents for DCB Finance. They also set up a shell company that hid the millions gained from the infamous 1983 Brink’s-Mat heist at London’s Heathrow Airport, dubbed “the crime of the century.” The company in question, Feberion, was set up a mere 16 months after the crime for the London-based money launderer Gordon Parry, who went to jail in 1992 for his role in the aforementioned robbery, and Jurgen Mossack was aware that Feberion was involved in laundering money from the heist, though the law firm later denied this when pressed. And yet, they only ended relations with Feberion as late as 1995.

The pressure is on, not just for this law firm, but for the various global tax havens to engage in greater transparency and close these legal loopholes. But international banking is likely to face some fallout as well. Banks have already faced an uptick in scrutiny, and are likely to be faced with more, as well as additional regulation and even fines. Untangling the industry’s many offshore entities would also be expensive and traumatic, and would make repairing any reputations difficult, even for banks that claim they weren’t involved in such activities in the first place. Some banks have already begun to overhaul their internal structures. HSBC sold their Panama bank in 2013, and Credit Suisse sold its Gibraltar and Monaco private-banking operations. Some tax havens are also becoming more transparent, as the OECD’s original blacklist of “uncooperative havens” has significantly dropped over the past decade, though Panama, Liechtenstein, and Barbados were still named as such on an EU list last year. Closing all these tax loopholes is going to be a long, messy process, and it is likely that inventive accountants will find new areas to exploit for future clients. But one lesson everyone can learn, from tax accountants to lawyers, is that cybersecurity will be an increasingly significant factor. Leaks this big only happen if someone scrapes the entirety of a database, a security breach that is the stuff of nightmares.

Cited Sources and Further Reading

Beauchamp, Zack. "The Panama Papers Revealed Lots of Shady Stuff. But Some Shell Corporations Aren't so Bad." Vox. Vox, 05 Apr. 2016. Web. 06 Apr. 2016.

Bilton, Richard. "Panama Papers: Mossack Fonseca Leak Reveals Elite's Tax Havens - BBC News." BBC News. BBC, 04 Apr. 2016. Web. 06 Apr. 2016.

Chang, Alvin, and Javier Zarracina. "The Panama Papers Leak, Explained with an Adorable Comic about Piggy Banks." Vox. Vox, 04 Apr. 2016. Web. 06 Apr. 2016.

Clark, Nicola. "How a Cryptic Message, ‘Interested in Data?,’ Led to the Panama Papers." The New York Times. The New York Times, 05 Apr. 2016. Web. 06 Apr. 2016.

Cox, Simon. "Panama Papers: Mossack Fonseca 'helped Firms Subject to Sanctions' - BBC News." BBC News. BBC, 04 Apr. 2016. Web. 06 Apr. 2016.

Díaz-Struck, Emilia, Et Al. "Panama Papers: Who's Who?" The Irish Times. The Irish Times, 04 Apr. 2016. Web. 06 Apr. 2016.

Drucker, Jesse. "Panama Has Company as Bank-Secrecy Holdout, as U.S. Offers Haven." Bloomberg.com. Bloomberg, 05 Apr. 2016. Web. 06 Apr. 2016.

Fitzgerald, Alison, and Marina Walker Guevera. "New Leak Reveals Luxembourg Tax Deals for Disney, Koch Brothers Empire." International Consortium of Investigative Journalists. International Consortium of Investigative Journalists, 09 Dec. 2014. Web. 06 Apr. 2016.

Gardner, Matthew. "Panama Papers and America's Problem." CNN. Cable News Network, 05 Apr. 2016. Web. 06 Apr. 2016.

Garside, Juliette, Holly Watt, and David Pegg. "The Panama Papers: How the World's Rich and Famous Hide Their Money Offshore." The Guardian. Guardian News and Media, 03 Apr. 2016. Web. 06 Apr. 2016.

Golshan, Tara. "The 8 Most Important Things to Read to Understand the Panama Papers Document Leak." Vox. Vox, 04 Apr. 2016. Web. 06 Apr. 2016.

Karmanau, Yuras. "Ukrainian President Under Fire Over Panama Papers." US News. Associated Press, 04 Apr. 2016. Web. 6 Apr. 2016.

Kroll, Louisa. "Panama Papers Fallout: Iceland's PM Resigns, Ukraine's President Pressured, Billionaire Responds." Forbes. Forbes Magazine, 5 Apr. 2016. Web. 06 Apr. 2016.

Maven, Duncan, and Lionel Laurent. "Banks Have a Panama Problem." Bloomberg.com. Bloomberg, 04 Apr. 2016. Web. 06 Apr. 2016.

Mullen, Jethro. "Panama Papers: Rich and Powerful Respond to Claims They Hid Billions Offshore." CNNMoney. Cable News Network, 04 Apr. 2016. Web. 06 Apr. 2016.

Nelson, Libby, and Zack Beauchamp. "How the Panama Papers Brought down Iceland's Prime Minister." Vox. Vox, 05 Apr. 2016. Web. 06 Apr. 2016.

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"Panama Papers: How Did Panama Become a Tax Haven? - BBC News." BBC News. BBC, 05 Apr. 2016. Web. 06 Apr. 2016.

Politi, Daniel. "The Latest From the Panama Papers: Details From the Largest Leak in History." Slate. Slate.com, 05 Apr. 2016. Web. 06 Apr. 2016.

Ryle, Gerard, Will Fitzgibbon, Mar Cabra, Rigoberto Carvajal, Marina Walker Guevera, Martha M. Hamilton, and Tom Stites. "Banking Giant HSBC Sheltered Murky Cash Linked to Dictators and Arms Dealers." International Consortium of Investigative Journalists. International Consortium of Investigative Journalists, 08 Feb. 2015. Web. 06 Apr. 2016.

Schmidt, Blake. "Panama Papers: A Conversation with Jurgen Mossack and Ramon Fonseca." The Sydney Morning Herald. The Sydney Morning Herald, 05 Apr. 2016. Web. 6 Apr. 2016.

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Wayne, Leslie, Kelly Carr, Marina Walker Guevera, Mar Cabra, and Michael Hudson. "Leaked Documents Expose Global Companies' Secret Tax Deals in Luxembourg." International Consortium of Investigative Journalists. International Consortium of Investigative Journalists, 5 Nov. 2014. Web. 06 Apr. 2016.