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As a student, I wrote the article in 2016 during the height of the controversy as a way of informing myself of the complex issues surrounding the ‘Panama Papers’. I hope that the article below will still be a good and informative read although it was written about a year ago. As always, the article might not be 100% accurate and you are encouraged to try and read more about the topic yourself.
You’ve probably heard about the biggest data leak in history by now. The data that was leaked has been named the ‘Panama Papers’. Its name due to the fact that Mossack Fonseca, the firm at the centre of this controversy, is a Panamanian law firm.
If you’re anything like me, you would probably struggle a little in attempting to wrap your head around all the complex jargon that is being used by various sites in explaining and reporting about the ‘Panama Papers’. I find it surprising how the leakage of all this information is meant to inform the public and yet, it is something that I don’t think a layman would be able to understand upon reading the “guides” available online.
However, there are two facts that you should have at least been able to have observe from reading about the ‘Panama Papers’. They are:
Lots of powerful people are involved or are at least somehow connected to these leaked documents.
A high possibility that crimes have been committed. I shall leave the judgment on whether it has truly been committed or not with the relevant authorities although I have no doubt that we will have some decisions regarding this matter very soon (if not already).
Before continuing to discuss the crimes that could possibly be committed by the many parties that are connected to the leaked documents, we shall proceed to lay the foundations by explaining certain things that I feel require clarification and explanation to a certain degree.
To whom was the information leaked to? (Background)
An anonymous source contacted Süddeutsche Zeitung (SZ), a German subscription daily newspaper, before sending over encrypted internal documents from Mossack Fonseca to SZ. The documents soon added up to about 11.5 million documents which was about 2.6 terabyte in size.
as provided by Süddeutsche Zeitung
The sheer amount of these documents caused SZ to seek the help of the International Consortium of Investigative Journalist (ICIJ), who had previously worked together with SZ on past projects such as the Offshore Leaks, Lux Leaks, and Swiss Leaks eventually resulting in around 400 journalists (as claimed by SZ) working on research for the ‘Panama Papers’.
The extensive research process and system used to navigate through the documents are detailed here by SZ. In summary:
System
Leaked document came in folders for each company
Each folder contained e-mails, contracts, transcripts, and scanned documents
Data indexed using Nuix
Transformed data into machine-readable and easy to search files
Lists of important politicians, international criminals, and well-known professional athletes, among others were compiled.
The digital processing made it possible to then search the leak for the names on these lists.
Research
Questions asked for each name: what is this person’s role in the network of companies? Where does the money come from? Where is it going? Is this structure legal?
Tracked proxies to heads of state, important officials, and millionaires.
After explaining the background of the ‘Panama Papers’, the next important thing to address is the company itself, Mossack Fonseca.
The company in the centre of the controversy
Despite the impression that one might have from reading the statement by SZ, Mossack Fonseca is not a Panamanian law firm that is solely aimed at providing offshore shell companies.
The Mossack Fonseca Group is a leading global company which provides legal and trust services. As stated on their website, the group is the first ISO 9001 certified law firm in the Republic of Panama and under the group is also the Mossfon Trust Corporation.
However, their area of expertise that has resulted in controversy over the past few days is in incorporating companies and providing registered agent services.
What do you mean by incorporating companies and providing registered agent services?
Incorporation of companies
It’s first important to distinguish between a company and a corporation.
A company is any entity that engages in business and can be a proprietorship, partnership or corporation.
A corporation is a business entity that legally exists separately from its owner(s).
The owners of a corporation are shareholders.The incorporation of a company involves the legal process of creating a corporation which includes, but is not limited to, a private company limited by shares or a public limited company. Mossack Fonseca as a law firm helps to facilitate this legal process for their clients.
Registered agent services
There are different requirements in different jurisdictions in order to incorporate a company and one of the most common requirement is the need for a registered agent.
A registered agent acts as the state's means to communicate with a corporation in that particular jurisdiction.
Among the functions of the registered agent is to provide a legal address within that jurisdiction where there are persons available during normal business hours to facilitate legal service of process being served in the event of a legal action or lawsuit.
Mossack Fonseca which provides services in...
Belize, The Netherlands, Costa Rica, United Kingdom, Malta, Hong Kong, Cyprus, British Virgin Islands, Bahamas, Panama, British Anguilla, Seychelles, Samoa, Nevada, and Wyoming (USA)....
have the capability of acting as registered agents for the companies that they have incorporated within those jurisdictions mentioned above, some of them which are tax havens.
The controversy
The act of incorporating companies and providing registered agent services are not the source of the recent outrage and controversy. It is fairly common for these services to be provided.Instead the area of practice that has become the centre of controversy surrounding the ‘Panama Papers’ revolve around the incorporation of offshore shell corporations, a service provided by Mossack Fonseca at various tax havens around the world for its clients, which although not illegal, has raised a few eyebrows.
What are tax havens and shell corporations?
Tax havens
A tax haven is a state, country, or territory where, on a national level, certain taxes are imposed at a very low rate or not at all. Tax havens may also refer to countries that have a system of financial secrecy in place.
Shell corporations
A shell corporation is a corporation without active business operations or significant assets.
Shell corporations are not necessarily illegal or illegitimate, and may have legitimate business purposes. These shell corporations can be used to purchase shares, property, etc. Shell corporations are usually incorporated in tax havens for some purpose of tax avoidance which is mostly legal.
But wait- if it is legal for businesses to use shell corporations for tax avoidance in most situations, how would we be able to show that a crime was committed by the individuals or companies linked to the ‘Panama Papers’?
The answer lies in the difference between tax avoidance and tax evasion.
Tax avoidance is in most situations legal and involves steps taken to minimise your tax bill by exploiting legal loopholes while tax evasion is illegal and often includes taxpayers deliberately lying about the true state of their affairs to the tax authorities such as dishonest tax reporting and could result in jail time.
Tax avoidance can be compared to bending the law while tax evasion can be compared to breaking it.
However, it is also important to note that not all methods of tax avoidance are considered acceptable. For example, if Her Majesty’s Revenue and Customs (HMRC) disagrees with how you have reduced your tax bill it can demand you to pay extra tax back plus the interest and penalties.
Shell corporations have a high potential of being misused especially when it is incorporated in tax havens where a system of financial secrecy is in place. The use of shell corporations coupled with a system of financial secrecy results in a high level of anonymity for the shareholders of a shell corporation. The anonymity that is granted often ends up tempting many individuals or companies to transfer their funds into the account of a shell corporation incorporated at a tax haven for the illegal purposes of tax evasion and money laundering as they will have a high chance of keeping their money hidden and reap the benefit of low taxes (or no taxes in certain jurisdictions).
As detailed in the interactive game by the ICIJ, there are various possible illegal uses of offshore shell corporations by businessmen, politicians and celebrities.
In the case of certain political leaders such as the former Iceland Prime Minister, Sigmundur Gunnlaugsson, who recently stepped down after the leak, there is an added dimension of asset declaration.
Sigmundur Gunnlaugsson
Asset declaration is an important tool in holding politicians and civil servants accountable to the citizens who elect them. The United Nations Convention against Corruption (UNCAC), which has been ratified by 166 countries, requires a legal framework for asset declarations of government officials. The inability of a politician such as Sigmundur Gunnlaugsson who failed to declare his offshore assets is a very serious matter and as the previous days have shown as the citizens of Iceland gathered to protest, it is potentially fatal to a politician’s career.
Thousand protesting in front of the Icelandic Parliament in Reykjavic, Iceland, on April 4, 2016.
Isn’t there a duty for firms such as Mossack Fonseca to avoid providing such services to high risk individuals to avoid exploitation of offshore shell corporations?
An explanation from Mossack Fonseca themselves about the extent of Mossack Fonseca’s duties and how it has apparently been fulfilled is available here in their response to allegations by SZ.
In summary, Mossack Fonseca is subject to various Know Your Client (KYC) and Anti Money Laundering (AML) regulations in the various jurisdictions that it operates in. Due to this, Mossack Fonseca has various ongoing due diligence procedures (an investigation of a business or person) before and after agreeing to work with their clients.
If a potential client is found to have a negative result (for example being convicted or listed by a sanctioning body which basically functions as a watchdog), Mossack Fonseca as it claims, will refuse to provide service to the potential client. If a negative result turns up after updates from sanction lists or due diligence procedures during the provision of services to a client, Mossack Fonseca is obliged to discontinue services with the said client although as explained in their statement, resigning their services such as registered agent services do require a certain amount of time.
Most of Mossack Fonseca’s clients in turn are also often subject to their own domestic KYC or AML regulations when dealing with their own clients.
As for a Politically Exposed Person (PEP)
which is an individual who is or has been entrusted with a prominent function or an individual who is a relative or known associate of such an individual,
Mossack Fonseca claims to have “duly established policies and procedures to identify and handle those cases where individuals either qualify as PEPs or are related to them” although according to international KYC policies, PEPs do not have to be rejected.
Why the ‘Panama Papers’ matter
We are not fully informed of the extent of some of Mossack Fonseca’s due diligence processes.
Therefore, when the ‘Panama papers’ were leaked and it was known that Mossack Fonseca are providing services linked to a staggering amount of companies or people on the sanctions list, convicted criminals, or PEPS, it highlighted a very fundamental problem either in the due diligence processes of this Panamanian law firm or in the effectiveness of the KYC or AML regulations that they are obliged to follow. Either the system regulating tax avoidance and preventing tax evasion itself is flawed or Mossack Fonseca is involved in more than they are letting on. Perhaps even both.
Perhaps it is even attributable solely to the carelessness of Mossack Fonseca.
However, is this carelessness justified by the suffering of citizens who might be subjected to even greater tax burden and poor provision of public goods and services? In Uganda where $300 million dollars of tax could benefit its citizens that live less than $1.25 a day, it raises a fundamental question regarding systems that allow for such successful attempts at tax avoidance and tax evasion. More of the Ugandan story here.
Patients at Mulago Hospital in Kampala, Uganda (Picture: AFP/Getty Images) Read more: http://metro.co.uk/2016/04/04/these-are-some-of-the-victims-of-the-panama-papers-5793702/#ixzz456PF9kGm
It is arguable that Uganda has one of the lowest tax to GDP ratio in the world and that $300 million of dollars would not have benefited the citizens of Uganda as much as our first impression would suggest upon hearing the amount of money involved but as estimated by Berkeley economist Gabriel Zucman, governments lose up to $200 billion a year to tax evasion and the picture suddenly becomes much larger.
Some may argue that taxes might become obsolete in the face of bad governance but it is undeniable that a decrease in tax evasion will no doubt help to improve the resources available for a government to use. Regardless of whether the said government is good or bad at utilising these resources, a country would be better off preventing the loss of available resources to them rather than allowing it to happen as this prevention might help to offset poor utilisation of these resources.
The fact that Mossack Fonseca continued providing services to sanctioned companies that are alleged to have funded fuel for the Syrian air force who no doubt had laid countless of air strikes on civilians in the ongoing civil war should convince you why the leak matters. The money that Mossack Fonseca help these sanctioned companies to save has a high chance of being indirectly used to fund these airstrikes.
“But surely, it does not matter as funds will be obtained elsewhere to fund fuel for the Syrian Air Force anyway.”
The statement above is correct in saying that funds might still be obtained elsewhere but it is wrong in claiming that it does not matter.
Smoke billows after air strikes by regime forces on the town of Douma (Picture: AFP/Getty Images) Read more: http://metro.co.uk/2016/04/04/these-are-some-of-the-victims-of-the-panama-papers-5793702/#ixzz456ZbQENS
Money is important in war. We are not informed of how much money Mossack Fonseca has helped these companies to save and these companies are only alleged to be involved but any action is better than an inaction and any amount of funds we can stop from being used is vital and the fact that these companies were sanctioned should have alerted Mossack Fonseca.
In the coming days, the crimes of those linked to the ‘Panama Papers’ will be further exposed and the relevant authorities will proceed to take action where necessary. Celebrities and politicians involved will be subject to great scrutiny. With so many names involved, one can’t help but ponder how events will unfold in the upcoming months. However, one thing is for certain. Change is necessary.
As pointed out by Barack Obama, tax avoidance itself can be a global problem. Regardless of how many people are held accountable for their actions, if the system is not corrected and if better regulation is not enforced in a way that is more effective, the ‘Panama Papers’ will merely be reflective of the symptoms of a much bigger disease that continues to spread.
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