If it’s not one thing, it’s another where global intrigue is concerned. And just when it seems that the media has had enough of one scandal, another one comes to take its place. This time, it’s called the “Panama Papers” and it began with a leak of enormous amounts of documents that shows how the rich and powerful use tax havens to hide their wealth.
This is the biggest leak in history, way beyond the data released by the Wikileaks organization back in 2010. To put things in context, if the amount of data released by Wikileaks was equivalent to the population of San Francisco, the amount of data released in the Panama Papers is the equivalent to the population of India. Phew!
Although there are legitimate ways of using tax havens, most of the data currently being exposed is about hiding the origin of the money, the true owners of money, and methods used to avoid paying tax on the money.
'So what is it all about? The firm that blew the lid on the secret undertakings of many international banks, individuals and organization is the law firm of Mossack Fonseca that began investigating 11.5 million files of its own clients and discovered how they were able to launder money, dodge sanctions and avoid taxes.
Dictators, Politicians, Diplomats
The files show links to 12 current or former heads of state, including dictators accused of cheating their own countries as well as more than 60 relatives, as well as associates of heads of state and other politicians.
Some names mentioned include the brother-in-law of China's President Xi Jinping; Ukraine President Petro Poroshenko; Argentina President Mauricio Macri; the late father of UK Prime Minister David Cameron and three of the four children of Pakistan's Prime Minister Nawaz Sharif. A suspected billion-dollar money laundering ring involving close associates of Russia's President, Vladimir Putin is also implicated in the papers.
Even football's world governing body, Fifa is touched by the scandal. And Iceland's Prime Minister, Sigmundur Gunnlaugsson, is now facing calls for his resignation after being accused of not declaring interest linked to his wife's wealth.
Tax Havens-How?
How do tax havens work? Although there are legitimate ways of using tax havens, most of the data currently being exposed is about hiding the origin of the money, the true owners of money, and methods used to avoid paying tax on the money. If, for example, a Dutch company wanted to evade paying taxes, it would set up a shell company with the outward appearance of being a legitimate business. But this empty shell does nothing but manage the money deposited in it while hiding who owns the money. An international drug dealer would use the same method to stash his illegally-procured money.
A shell company looks legit from the outside. Its staff is made up of lawyers, accountants or secondary workers who are simply paper pushers who sign documents and allow their names to appear on the letterhead. When the authorities look into the real ownership or controlling forces in the company they are told the management is, but it is all just a front. They are just actors hired to perform a scam. Shell companies are sometimes called "letterbox" companies, as they consist of little more than an address to post documents to.
Almost all tax havens are based in small island countries, referred to as ‘Offshore Financial Centers ’ where there is a great deal of banking secrecy and very low or non-existent taxes on financial transactions. There are many such countries or authorities around the world, including the British Virgin Islands, Macao, the Bahamas and Panama. Despite the fact that most of the financial services in these locations are perfectly legal, it is the implied secrecy that makes them very attractive to tax evaders and felons the world over.
Money Laundering
A popular illegal financial method which has been used for many years is money laundering. This involves cleaning "dirty" money so it can be used without arousing suspicion. A corrupt politician, for example, may find himself with a lot of loose cash and no way to spend it or hide it. He can set up a company in an Offshore Financial Centre where the money can be converted into bearer bonds owned by the shell company that no one knows about. For moving large amounts of money around easily, bearer shares and bonds are a perfect solution because it is so easy to deny their ownership. If the bond is kept at a lawyer's office on the Canary Islands, who is to know who owns it, or even that it exists at all? The US government stopped selling bearer bonds in 1982 for just this reason--they were just too easy for crooks to use.
The bonds sitting in the shell account on some innocuous island can sit there forever until the time it is cashed in and used. Hence, dirty money comes out clean.
The law offices of Mossack Fonseca are located in Panama but it is a worldwide organization. It offers services including the incorporation of companies in offshore jurisdictions such as the British Virgin Islands and administers offshore firms for a yearly fee and operates in tax havens including Switzerland, Cyprus and the British Virgin Islands, and in the British crown dependencies Guernsey, Jersey and the Isle of Man.
Although the firm has gone public with its allegations, it won’t discuss specific cases of suspected wrongdoing, citing client confidentiality. It robustly defends its conduct, however, saying that it cannot be blamed for failings by intermediaries, who include banks, law firms and accountants.
The fallout from the Panama Papers revelations is far from over.