Making Sense of the Panama Papers

Cassidy-Panama-Papers-American-Names-1200What has emerged from the release of the Panama Papers, a phrase that now seems to overshadow WikiLeaks, Edward Snowden, and the Pentagon Papers in significance – paradoxically remains jarring and enigmatic. Despite following the largest data leak in world history basically since its flashpoint, I still have questions that only accompany the scandal’s latest developments; questions that will likely perpetuate as more information is revealed and more responsive action is taken. As I can certainly attest to, it is easy to get caught in further speculation given all the paper’s tumultuous ramifications: the resignations of leaders, the scandal and ignominy, the public outrage, the legal controversy. Instead of trying to create clarity in complexity, I look to address some preliminary questions. Specifically, how the release affects the legitimacy of world leaders and their anti-corruption programs – can we ever trust a world leader who insists on breaking corruption, money laundering, and tax evasion with such a disparity in wealth and power in our world today? Addressing the legality of tax havens and offshore companies, which remains a nebulous subject, I will address the current state of offshore finance and money flow – in light of the Panama Papers, should we now take a closer look and perhaps a different approach in enacting regulatory changes against these shell companies and tax havens? New questions will inevitably rise as the political fallout persists, but we are only in week two of the paper’s release, when I predict the aftershocks of the leak will continue to ripple, possibly for months – other questions will simply need to be addressed at a later time.

While you can find more in-depth contextual information here, all you really need to know contextually about the unprecedented leak’s source and dispersion is that over a year ago, an anonymous source contacted German newspaper Süddeutsche Zeitung (SZ), and secretly fed it internal documents from Mossack Fonseca, a Panamanian law firm reportedly known around the world as one of the largest sellers of anonymous offshore companies. Süddeutsche Zeitung decided to analyze the data in cooperation with the International Consortium of Investigative Journalists (ICIJ), and over the past year, the two groups researched the encrypted data with hundreds of journalists from media organizations in over 80 countries, including The Guardian and the BBC in England and Le Monde in France. When the privileged information was finally leaked a few weeks ago, it amounted to over 2.6 terabytes of data, including over 11.5 million encrypted documents, primarily comprised of e-mails, pdf files, photos, and excerpts of an internal Mossack Fonseca database covering a period from 1977 to the spring of 2016, which would provide data on over 214,500 companies spanning 21 offshore jurisdictions, and implicate a master list of criminals, celebrities, chief executives, and most disconcertingly, 140 politicians from more than 50 countries, including dictators, monarchs, presidents, and prime ministers, and their associates, ministers, and other elected officials.

In my eyes, the more necessary context involves how these shell companies are formed, how they benefit the Panamanian firm and their clients, the legality of these practices, and why certain countries like Panama are popular places to engage in the offshore filtration of assets, capital, and large quantities of money. Examining how Mossack Fonseca engages in offshore business dealings, the firm runs a well-structured business model, as explained by SZ: if a person wished to conceal money, whether through, for example, investments or assets, it would first turn to the firm through an intermediary, i.e. an accountant or tax lawyer. The firm, heeding the wishes of the client, would then assist in setting up an anonymous shell company, which can open bank accounts and manage money like any other company without holding significant assets or business operations, hence the “empty shell” moniker. For greater anonymity and effectiveness, the shell company can utilize the services of a nominated sham director, who does little more than sign paperwork for all transactions, allowing the real owner to remain anonymous and able to purchase shares and real estate, hide assets, transfer money, and make lucrative investments. Shell companies and tax havens coexist well because shell companies live off the anonymity and financial benefits that tax havens provide in far-flung, offshore jurisdictions. So why is Panama considered a tax haven? “Tax havens” are labels given to usually small, lesser-known island nations, where banking secrecy is emphasized and foreign individuals and companies are taxed at very low rates. Per reports, Panama only requests an annual franchise tax of $300 to the government, and does not require offshore companies to pay income tax on international transactions, sales tax, and other fees. Panama also assists in protecting their clients, as company owners’ names and personal information are not filed with any public government registry. Law firms like Mossack Fonseca are not required to keep records of any transactions, and if the records exist, companies are not required to disclose them to foreign governments and tax agencies.

While it is a small wonder that Mossack Fonseca is very well-known in offshore transaction circles and Panama currently has more than 350,000 international business companies registered, the third-largest number in the world, questions remain, even after Mossack Fonseca was exposed by the leaked papers, about the legality of shell companies and tax havens. Shortly after Mossack Fonseca was exposed, the firm accused the press of distorting the nature of its work, arguing that they had never been accused or charged with financial malfeasance and that “these reports rely on supposition and stereotypes, and play on the public’s lack of familiarity with the work of firms like ours.” To their point, people with little to no familiarity in the workings of shell companies, tax havens, and their intermediaries would likely associate Mossack Fonseca with criminal activity like money laundering, tax evasion, etc. People commonly associate anonymity and secrecy with illegal motives and concealment, but there certainly are legitimate reasons for using offshore shell companies, like hiding lucrative trade secrets, purchasing foreign property, or using untraceable money to help combat crime, terrorism, or warfare. The holding of money offshore is not inherently illegal, but becomes criminal if the shell company was determinedly created for criminal purposes, including tax evasion, money laundering, sanctions busting (the circumvention of economic sanctions), concealment of illegally-obtained assets, or funding criminal enterprises like weapons and drug trafficking or terrorism. With few available resources and little cooperation, it is hard to identify offshore companies, let alone prove any criminal wrongdoing – the stark lack of deterrent against shell companies provides further temptation to utilize them for criminal purposes. In 2014, offshore companies were accused of supplying jet fuel for the Syrian Air Force, a brigade now deemed responsible for bombing civilians and committing war crimes. As seen with the recently identified cronies of current African presidents Jacob Zuma and Robert Mugabe, rogue leaders sanctioned by the United Nations, European Union, and/or other nations have utilized gatekeepers and law firms to create shell companies, successfully maneuvering around these sanctions and continuing to launder money for criminal enterprises. As we will discuss later, these shell companies can corrupt world leaders and expose conflict of interests that further economic inequality, and indelibly hurt political legitimacy, fueling resentment and placing the country in political and economic strain.

By now, I would be surprised if you have not heard about the alleged “Gang of 12” – twelve current and former country leaders directly implicated in the Panama Papers, including Mauricio Macri, current president of Argentina, and Sigmundur Gunnlaugsson, former prime minister of Iceland, who resigned just days after leaked documents exposed his major conflict of interest during the 2008 financial crisis. The majority of the twelve world leaders explicitly implicated previously ruled in the Middle East, including the former prime ministers of Iraq, Jordan, and Qatar; other noteworthy names include King Salman, current head of Saudi Arabia, and current Ukrainian president Petro Poroshenko. Focus has now shifted, however, from the twelve named leaders to an intriguing cluster of names implicated more recently. The newer group includes major world leaders: British Prime Minister David Cameron, Chinese President Xi Jinping, Russian President Vladimir Putin, and Brazilian President Dilma Rousseff. Investigations are still ongoing and responses remain ambivalent: while Cameron directly addressed (and vehemently denied) the allegations, Putin and the Chinese Communist Party resolutely blamed the western media for the scandal and predictably felt more inclined to cover up the leak. What remains clear, however, is Cameron, Poroshenko, Rousseff, Jinping, and Macri all ran on platforms promoting transparency and were at least partially elected for specifically taking a hard stance against corruption. Citizens, particularly in Brazil and Argentina, where unstable levels of political turmoil have only been further stoked by the Panama Papers, are especially angry that their elected leaders could act so hypocritically and so fundamentally contrary to their campaign platforms, feeling greater skepticism that world leaders can cleanly act on their proclamations against corruption. Is their disillusionment founded, and how much legitimacy do these world leaders and their anti-corruption stances have in a world so dominated by economic inequality and the strong desire of the affluent to protect their wealth?

A recent article from The Atlantic explained that only the wealthy would logically use shell companies to protect capital, hide assets or evade taxes, observing how the profitability of these companies in avoiding taxes only works for individuals owning tens of millions in assets and earnings combined, since the tax savings could reach tens or even hundreds of millions of dollars. A recent Vox article cited economist Gabriel Zucman’s 2015 book, The Hidden Wealth of Nations, claiming that approximately eight percent of the world’s wealth, $7.5 trillion, is hidden in offshore tax havens worldwide, with over $6 trillion never taxed or properly declared to world governments. Those numbers pale in comparison when the percentage of wealth allocated from tax havens is divided by world region: more than twenty percent of Latin America’s financial wealth, thirty percent of Africa’s financial wealth, and fifty percent of Russia’s financial wealth is reportedly fixed in offshore tax havens. The world leaders implicated in the Panama Papers evidently display that the reliable security of tax havens and relative ease in creating shell companies, combined with our growing need to protect and concentrate wealth, makes it very hard to trust world leaders who claim that they will root out corruption. Until considerably greater deterrents are made against using tax havens and offshore companies, the entities will continue to provide the means to corrupt world leaders and contradict their political platforms, potentially creating a pernicious cycle of criminal behavior and inequality. When world leaders feel the need to use offshore companies to evade taxes and protect their wealth, they look to accumulate more wealth and remain at the top of the wealth distribution. Such unfair behavior tends to increase wealth inequality, as it becomes increasingly harder for the vast majority of the population to accumulate wealth, because the taxes that are evaded at the top have to be compensated with higher taxes for everyone else. Such a cycle only creates political and economic unrest with citizens becoming increasingly dissatisfied with the government and political establishment; particularly in developing countries where economic inequality is widespread, like Brazil and Argentina, riots, protests, and political turmoil can easily ensue.

Addressing my first question about political legitimacy and inequality relates to my second question about whether we need to take a closer look and different approach in dealing with these longstanding tax havens and shell companies. Based on the release of the Panama Papers and my answer to the previous question, the clear answer is yes, because tax evasion, money laundering, sanctions busting, and other criminal activity is simply damaging to politics and society, victimizing individuals, countries, and institutions in a myriad of ways. Making it harder for government officials and executives to squirrel away their money will probably not end graft and corruption, but in so many regions today, offshore finance stunts economic growth and perpetuates inequality and poverty; the widespread attention directed towards the leak provides the ideal time to take responsive action. While there is a greater consensus now in the need to address our lax regulations against tax havens and shell companies, finding effective solutions will undoubtedly be a much more tedious process. However, despite Cameron’s implication in the leaked documents, Britain, as well as a few smaller countries, have recently made strides in dealing with offshore tax avoidance with the use of coordinated programs. I think, building off some of Britain’s newer reforms like stiffer penalties against offshore companies, a new approach would include targeting the gatekeepers who make it so easy for those to hide assets, evade taxes, and launder money. To deter suspected intermediaries that play key roles in the efficacy of shell companies, central registers and databases open to law enforcement and the public, using information from the Panama Papers, need to be created against suspected law firms and accountants. Our new approach should use the Panama Papers as a key asset; besides using information from the documents to name suspected individuals and organizations, the documents need to impel political action through government agreement. Cameron plans to host a global anti-corruption summit next month, and disrupting offshore finance and tax havens should now become the focal topic. Cameron should use the Panama Papers to persuade other powerful states and their governments to take much harsher action, like enacting criminal penalties against individuals involved in offshore activity, not only in their own countries, but in their territories as well, like Britain with the Virgin Islands and China with Hong Kong.

While the release of the Panama Papers has incurred strong, conflicting emotions for some, in my view, like so many past information leaks, it should encourage beneficial reforms and results. As Edward Snowden showed Americans the flaws in our national security apparatus, the Panama Papers, with the promise of more jarring revelations, has effectively elucidated the mostly pernicious effects of offshore companies and tax havens. Individuals, especially those appointed to positions of power, should be publicly named and unabashedly ridiculed, as any instance of political and civic corruption is deserving of reproach. I hope, that when the reports and findings conclude, world leaders and international organizations will have no choice but to take drastic measures against offshore illicit finance. Despite getting caught in the media coverage and latest developments, I try to remember who the papers should benefit the most: the citizens. I personally find it oddly inspiring to see citizens protest or even engage in downright revolt against corrupt government; we saw the effects of Icelandic citizens protesting their disgraced prime minister, and changes seem to be on the horizon amidst the political turmoil in Brazil. The Panama Papers show, if nothing else, that the people deserve better: for citizens to be so concerned about the welfare of their country and so demanding for proper leadership, they should have cleaner, more considerate government, and ultimately, a more equitable society.

Ryan Niksa

Author: Ryan Niksa

Born and raised in the San Francisco Bay Area, Ryan Niksa is a freshman in the Elliott School, double majoring in International Affairs and Economics, and hoping to concentrate in Conflict Resolution. Ryan possesses a special interest in international criminal law, Chinese politics and foreign policy, transnational security, and Asian languages and cultures. In his free time, Ryan enjoys exploring Washington, D.C. with friends, reading up on current events, playing soccer, and rooting for his favorite American and European football teams, the Carolina Panthers and Arsenal F.C. He is also a proud member of the Pre-Law Student Association, and regularly writes articles for their blog, the GW Justice Journal.