The Panama Papers

Commentary by Gabriella ATKINS

Last week witnessed a leak unprecedented in size and scale. 11.5m files were obtained from one of the most secretive offshore law firms, Mossack Fonesca, by the German newspaper Suddeutsche Zeitung. Seuddeutsche Zeitung shared the information with the International Consortium of Investigative Journalists (ICIJ) which then worked with journalists and media organisations across the world to analyse the documents over the course of the past year.

What’s inside?

Whilst it is currently not possible to read the documents themselves, information released indicates that the files show how Mossack Fonesca’s clients avoid tax, participate in money laundering and avoid sanctions.

Who’s inside?

DronepicrCC BY 3.0.jpg
Aerial view of Panama City’s financial district – by Dronepicr, licensed under CC BY 3.0

So far, twelve national leaders are implicated in the documents, amongst 143 politicians, family members and close associates from across the globe. Most notably, the Russian president Vladimir Putin is connected to a $2billion dollar trail and his best friend, Sergei Roldugin, is at the centre of a scheme hiding money from Russian state banks in offshore accounts.

Iceland’s prime minister, Sigmundur David Gunnlaugsson, has resigned over his involvement, and David Cameron is finding himself in increasingly hot waters after it emerged that his father avoided tax by offshore methods in the Bahamas.

Fifa is also feeling the burn, with a key member of its ethics committee, Uruguyan lawyer Juan Pedro Damiani, owning a firm providing advice for at least seven offshore companies linked to a former vice-president arrested last May as part of the corruption inquiry.

Banks such as HSBC, Credit Suisse, UBS, Coutts and Rothschild are amongst over 500 who have registered shell companies with Mossack Fonesca.

There will arguably only be more revelations to come from the 11.5m files taken from Mossack Fonesca’s database.

What is Mossack Fonesca?

Panama_papers_sz_chat
A conversation between Süddeutsche Zeitung and the anonymous source – Public domain

Mossack Fonesca is a Panamanian law firm with an international wingspan. With franchises in over 42 countries, it is the fourth largest offshore law firm. The firm offers a range of services for clients, including incorporating companies in offshore jurisdictions, administering offshore firms, and wealth management. In light of the revelations, Mossack Fonesca has denied to comment specifically on any issues, citing client confidentiality, but maintains that none of its activities are illegal and neither has it ever been charged with a criminal offence.

So what is it doing?

Under criticism at the moment is the firm’s provision of setting up offshore funds for wealthy clients in tax havens. This is by no means a criminal offence and can be enacted legitimately – the issue is that the process is largely the same whether you are a wealthy businessman, political leader, dictator or international drug dealer. Dodging tax is one thing, but transferring large quantities of illicitly gained wealth is quite another.

So how does it work?

There are a number of key methods through which tax havens can be used.

Firstly, a shell company is set up to provide the façade of a legitimate business. However, this company will be made up of a number of individuals who exist just to sign documents and provide authority. In reality the company will only exist as a place to store money.

Preferably, you want to set your shell company up in a tax haven or offshore financial centre. Often small islands such as the British Virgin Islands and Panama – here there will be a high degree of banking secrecy combined with the perfect level of very low taxation.

Perhaps a little money laundering is required. This process is essentially where dirty money (money gained from illegal or shady dealings) is washed clean. Simply transfer to an offshore financial centre which will exchange it into bearer bonds (essentially very large monetary notes) registered in a shell company, and voila you have clean money that cannot be traced back to how it was illegally earned.

So why are so many UK institutions involved?

tom morries CC BY-SA 3.0
Protesters outside Downing Street, calling for Prime Minister David Cameron to resign – by Tom Morris, licensed under CC BY-SA 3.0

Clearly the above process requires a network of individuals – from accountants and bankers to lawyers – to facilitate the transaction. Mossack Fonesca tends not to deal with company directors and wealthy individuals themselves, but instead with their intermediaries, i.e. their accountants, lawyers and banks. In Europe, the highest concentration of these intermediaries lies in the financial centres of the UK, Switzerland, Jersey and Luxembourg.

Unfortunately for David Cameron, he’s taking the hit whilst law firms, accountancy firms and banks are all remaining eerily silent about their involvement… they can hide behind the veil that their actions are legally sanctioned with little moral repercussions, whilst the Prime Minister is forced to answer for the business decisions of his father.

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