Global Independent Analytics

A Quick Guide to the Panama Papers

A massive document leak reveals a global web of corruption and tax avoidance

Matthew Yglesias for VOX reports: Mossack Fonseca is not a household name, but the Panamanian law firm has long been well known to the global financial and political elite, and thanks to a massive 2.6 terabyte leak of its confidential papers to the International Consortium of Investigative Journalists it's about to become much better known. A huge team of hundreds of journalists is pouring over the documents they are calling the Panama Papers.

Although the firm’s operations are distinct, the main specialty is to help foreigners settle their assets in a tax haven while concealing the owners’ identities. The company was founded in 1977 and since then has expanded enough to work with several tax havens all around the world including the Bahamas and the British Virgin Islands and has opened more than 40 offices worldwide.

What the company did more, it successfully protected the wealthiest and most influential individuals and organizations of the world from taxation and in many cases divorce or bankruptcy settlement. What is more, the political elite of the world intentionally did not pay attention to an unraveling episode of undermining the global tax system.

So, what does a shell company do and why all that shade? Although one of the reasons a person or a company wants to hide its assets is corporate security, the primary cause is privacy. And privacy plays its illegitimate role here. Basically, no one can get a hold of your money if no one knows where you keep it. This way, if an actor, artist or politician wants to buy a house without his name ending up in fiscal papers or to get taxed by the government, he might want to use a shell company. Moreover, the money, made illegally, is best stored out of the sight of the authorities or the media.

The Panama Papers leakage is so far the largest release of secret financial data: the overall amount of documents equals 2.6 terabytes. Among those involved are British PM David Cameron, Iceland’s PM Davíð Gunnlaugsson, Ukrainian President Petro Poroshenko, Pakistani President Nawaz Sharif and 130 more politicians from more than 50 countries, Indian actress Aishwarya Rai, famous football player Lionel Messi along with several FIFA officials. Even more names are being revealed as an investigation continues.

It was estimated that at least $7.6 trillion was stored in offshore tax havens. This amount equals to 8% of all the world’s financial wealth and is steadily increasing. Much of that sum is alleged to come from new contracts with China and other developing nations.

Yglesias discourses on why does not anyone do anything about this: “There's a big difference between tax evasion — illegally refusing to pay taxes that you owe, and then taking advantage of secret accounts to try to hide the money and get away with it — and tax avoidance, which is hiring clever people to help you find and exploit legal loopholes to minimize your tax bill.

Incorporating your hedge fund in a country with no corporate income tax even though all your fund's employees and investors live in the United States is perfectly legal. So is, in most cases, setting up a Panamanian shell company to own and manage most of your family's fortune.

Tax avoidance is an inevitable feature of any tax system, but the reason this particular form of avoidance grows and grows without bounds is that powerful politicians in powerful countries have chosen to let it happen. As the global economy has become more and more deeply integrated, powerful countries have created economic "rules of the road" that foreign countries and multinational corporations must follow in order to gain lucrative market access.

Establishing some kind of minimum global standard of taxation of corporate and investment income hasn't been done because it hasn't been a political priority. In the United States, in particular, the Republican Party fights quite hard for the view that high levels of taxation on rich people and investment income are economically ruinous so there isn't the kind of institutional mobilization that exists around drug trafficking or possible terrorism financing.”

The Panama Papers leak is significant mainly because the accident finally drew attention to the fact that undercover corruption may not be hidden anymore, once everyone now knows what the stakes are and who are the culprits.

EXPERT OPINION

Pedro Marin

Ukrainian  President  Poroshenko, Argentinean President Mauricio Macri, and even the President of Brazil’s Chamber of Deputies Eduardo Cunha, who’s a key figure in Brazilian politics nowadays - all appear in the Panama Papers- all of them supposedly linked directly to illegal activities. Still, newspapers all over the World (including the Brazilian media) chose Russian President Vladimir Putin’s portrait  to be featured below the headline on the Panama Papers, even though the only thing that the Panama Papers reveal is that Putin has terrible friendships, as he wasn’t linked to any corruption or bribery scheme at all.

The Panama Papers leak is useful, but to ignore the interests surrounding it is to be naive. It’s a great thing that Wikileaks didn’t swallow it right away. After all, it’s like the popular saying: He who pays the piper calls the tune.

Read more

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