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
poring over the documents they are calling the Panama Papers.
The firm's operations are diverse and international in
scope, but they originate in a single specialty — helping foreigners set up
Panamanian shell companies to hold financial assets while obscuring the
identities of their real owners. Since its founding in 1977, it's expanded its
interests outside of Panama to include more than 40 offices worldwide, helping
a global client base work with shell companies not just in Panama but also the
Bahamas, the British Virgin Islands, and other notorious tax havens around the
world.
The
documents provide details on some shocking acts of corruption in Russia, hint
at scandalous goings-on in a range of developing nations, and may prompt a
political crisis in Iceland.
But
they also offer the most granular look ever at a banal reality that's long been
hiding in plain sight. Even as the world's wealthiest and most powerful nations
have engaged in increasingly complex and intensive efforts at international
cooperation to smooth the wheels of global commerce, they have willfully chosen
to allow the wealthiest members of Western society to shield their financial
assets from taxation (and in many cases divorce or bankruptcy settlement) by
taking advantage of shell companies and tax havens.
If
Panama or the Cayman Islands were acting to undermine the integrity of the
global pharmaceutical patent system, the United States would stop them. But the
political elite of powerful Western nations have not acted to stop
relatively puny Caribbean nations from undermining the integrity of the global
tax system — largely because Western economic elites don't want them to.
What do the Panama Papers show?
As you would imagine, there is quite a lot in the 2.6 terabytes. Here are a few of the highlights the team found, with links to the full stories where you can read the details:
- Vladimir Putin's inner circle appears to control about $2 billion worth of offshore assets.
- The prime minister of Iceland secretly owned the debt of failed Icelandic bankswhile he was involved in political negotiations over their fate.
- The family of Pakistan's prime minister owns millions of dollars' worth of real estate via offshore accounts.
- Ukrainian President Petro Poroshenko pledged to sell his Ukrainian business interests during his campaign, but appears instead to have transferred them to an offshore company he controls.
What's
a shell company? Why would someone want one?
Sometimes a
person or a well-known company or institution wants to buy things or own assets
in a way that obscures who the real buyer is.
The typical
reason for this is a kind of routine corporate secrecy. Apple, for example,
appears to have created a shell company called Sixty Eight
Research that journalists believe to be a front for its interest in
building a car. Since Apple happens to be the most covered company on the
planet, this hasn't been incredible effective — and when Sixty Eight
Research staff showed up at an auto industry conference, everybody noticed.
But in
general, companies don't like to tip their hand to what they are doing, and the
use of shell companies to undertake not-ready-for-public-announcement projects
can be a useful tool.
Shell
companies are often used for simple privacy reasons. Real estate transactions,
for example, are generally a matter of public record. So an athlete, actor, or
other celebrity who wants to buy a house without
his name and address ending up in the papers might want to pay a lawyer to
set up a shell company to do the purchasing.
Okay, but
how about the shady stuff?
As is
generally the case in life, secrecy can have illegitimate purposes as well.
This is particularly true for shell companies set up in international centers
of banking secrecy that offer a level of anonymity and obscurity that goes
beyond simply making it hard to look up the real owner's name online.
Your soon-to-be-ex-wife cannot seize half of the
money in an account that she and her lawyers don't know exists and can't prove
that you own, for example. Nor can your creditors seize such an account in a
bankruptcy proceeding. Nor can the government levy estate taxes on it when you
die and pass it on to your kids. In all those circumstances, a Panamanian
company that you secretly control and that holds stocks, bonds, and other
financial assets on your behalf could be the ideal vehicle.
By the same
token, if you have made a bunch of money illegally (taking bribes, trafficking
drugs, etc.) you need to do something with the money that won't attract the
attention of the authorities or the media. A secret offshore shell company is
perfect. Not only does it help you avoid scrutiny in real time, but if you are
found out its assets can't be taken from you if you have to flee the
jurisdiction or even serve jail time.
But even though various criminal
money-laundering schemes are the sexiest possible use of shell companies, the
day-to-day tax dodging is what really pays the bills. As a manager of offshore
bank accounts told me years ago, "People think of banking secrecy as all
about terrorists and drug smugglers, but the truth is there are a lot of rich
people who don't want to pay taxes." And the system persists because there
are a lot of politicians in the West who don't particularly want to make them.
