Panama Papers: Beyond Legal

Guillermo Herrera, JHU:

In 2015, an anonymous source began providing the German newspaper Süddeutsche Zeitung with confidential documents from Mossack Fonseca, the fourth largest offshore law firm based in Panama. As the files accumulated, Süddeutsche Zeitung chose to share the leak with the International Consortium of Investigative Journalists (ICIJ). By the time the data peaked at 2.6 terabytes, a coordinated effort involving around 400 journalists from more than 100 media organizations in over 80 countries had formed. The “Panama Papers,” as they are officially referred to, represent the largest file leak in history, far surpassing WikiLeaks’ 2010 release of 1.7 gigabytes of secret documents. Among the 14,000 clients involved are high profile, international politicians, businessmen, and even celebrities. Since going public on April 3, the Panama Papers have sparked an international outcry as people grapple with the leak’s significance. At the heart of this scandal is a central question: what actions should be taken in response to the discoveries made from the Panama Papers?

In order to be in a position to answer this, one must first consider what classifies offshore banking and its controversial legality. Fundamentally, offshore banking allows individuals or companies to hide money through the use of shell companies. Shell companies are legal entities that are considered hollow or empty because they only exist to manage the money inside them and conceal the identity of the money’s owner. Lawyers and accountants, in turn, oversee shell companies and serve as the fake owners of the stored funds.

These institutions are created in offshore financial centers known as tax havens that offer high banking anonymity and low financial transaction taxes. Tax havens tend to be small island territories like Hong Kong and the Cayman Islands, but also include states like Panama and Switzerland. To understand offshore finance’s prominence, consider that in 2012, the Tax Justice Network estimated that $21 to $32 trillion was hidden in tax havens, which did not include criminal transaction (like from fraud and trafficking).

Surprisingly, another country that has become a leading tax haven is none other than the United States. In light of the U.S.’ resistance towards global disclosure standards, several states—namely Delaware, Nevada, and Wyoming—have become hotspots for offshore banking and compelled clients to move their accounts away from traditional players like Switzerland and the Cayman Islands.  The Panama Papers revealed connections to over 1,000 shell companies in the U.S. “How ironic—no, how perverse—that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour,” commented Peter A. Cotorceanu, an attorney at Anaford AG, in a legal journal.

Indeed, the U.S. maintains an oddly contradicting stance towards offshore banking. In 2010, the U.S. passed the Foreign Account Tax Compliance Act (Fatca) to crack down on American tax dodgers by requiring, under the threat of harsh penalties, financial firms to disclose U.S. foreign accounts and submit them to the IRS. The Organization for Economic Cooperation, inspired by Fatca, soon thereafter introduced stricter regulations to help countries uproot tax avoidance. The United States is one of the few countries that rejected the OECD’s invitation to sign them, though. Worse still, Fatca has hardly dented American tax avoidance because the U.S. is perfectly suitable as an alternative tax haven.

Although society and the media often demonize offshore banking, it can serve several legitimate purposes. For example, shell corporations can facilitate asset transfers and increase investment diversification by taking advantage of less stringent finance regulations. They can also protect trade secrets from competitors (particularly beneficial to startups) or prevent a company’s brand from being tarnished by association with another, poorly reputed company that it interacts with. Offshore finance can even protect personnel from kidnappers or busybodies by shrouding financial ties.

However, this information should not undermine the illicit, problematic functions that shell companies enable. Tax evasion is the most common issue associated with offshore finance. From 2000 to 2010, the United States government alone lost over three trillion dollars due to tax evasion according to the Demos think tank. Other facilitated criminal activities include fraud, trafficking, and terrorism. In addition, it is important to consider that offshore banking is decidedly more complex than the black-white legal dimension. The gray question of whether it is ethical for powerful elites to enjoy special privileges looms critically here, and the Panama Papers have boldly flared it.

The former Icelandic Prime Minister Sigmundur Davíð Gunnlaugsson, one of 140 politicians mentioned within the 11.5 million leaked files, is a prime example. Back in 2008 when the Great Recession hit, Iceland’s banking sector collapsed on an unprecedented scale, producing a severe economic contraction and leaving the government in desperate need of a bailout. Gunnlaugsson quickly rose to fame as a nationalistic champion by fiercely contesting the terms of an international bailout agreement. As a result, he won a seat in parliament in 2009 and soon thereafter secured the premiership in 2013.

The Panama Papers exposed him as a deep hypocrite, however. It turns out that his wife hid millions of dollars in a shell company, which he initially owned jointly with her when it was created in 2007, that became a major creditor to Iceland’s major banks after they collapsed during the recession. In other words, his wife is owed money by the same banks that his government had partial authority over and is among the same creditors he swore to fight. Understandably, the people erupted in protest to demand his resignation, which he submitted a day later. Gunnlaugsson’s actions were within legal boundaries, but his sheer level of betrayal and deceit exceeded what the people could tolerate, which captures how the controversy surrounding offshore banking extends well beyond explicitly illegal actions.

Worse still, Gunnlaugsson is but one case within a flurry of similarly intricate, secretive situations unveiled by the Panama Papers. Ukrainian President Petro Poroshenko, for instance, created a shell company in 2014 in the midst of an intensifying civil security crisis and despite his promise to “wipe the state clean.” Over two billion dollars have been shuffled through banks and offshore funds within a secret network run by Putin’s associates and possibly Putin himself. British banker Nigel Cowie claims to have been unaware that a shell company he set up was being used by the North Korean regime to trade arms and develop its nuclear weapons program. Even Argentine soccer superstar, Lionel Messi, who is already being accused of tax evasion, was revealed to have a 50 percent stake in a shell company setup by Mossack Fonseca. Countless individuals are taking advantage of this covert system to conduct apprehensible, sometimes criminal, activities.

And Mossack Fonseca has helped a lot of them do it.

Mossack Fonseca has consistently denied any legal wrongdoing since the Panama Papers leaked. “We are responsible members of the global financial and business community,” claimed the firm in its official response. “For 40 years Mossack Fonseca has operated beyond reproach and… has never been accused or charged in connection with criminal wrongdoing.” The firm’s strategy has largely consisted of silence, referral to the legal code, and backlash at the media for supposedly exaggerative coverage.

Never mind the fact that Mossack Fonseca is based in Panama, a country with high financial secrecy that has become notoriously hardline against international transparency initiatives. Never mind the fact that Mossack Fonseca cannot claim to “not offer solutions whose purpose is to hide unlawful acts” when it simultaneously preaches a lack of liability over the companies it creates. Never mind the fact that Mossack Fonseca, as the ICIJ has shown, worked with global banks to help rich, powerful clients hide questionable assets with little verification.

Even if Mossack Fonseca and its clients are not involved in criminal activity as defined by the law, they are not free of repudiation and criticism. Indeed, the technical legality surrounding most of these controversial cases is the problem. Shell companies are a potent reminder of the neglect, greed, deception, and inequality that pervade the world. They also highlight the great iniquity in power relations between the elite and the rest of society. This is especially damning when many politicians entrusted with defending their people have a personal, selfish stake. Supporters of reform meet fierce opposition in those powerful individuals who benefit from and perpetuate the status quo. Furthermore, gains from offshore banking are largely exclusive to a select few and accrued at the expense of society as a whole. This disproportionate, uneven system consequently intensifies already deep socioeconomic divides.

To conclude, the Panama Papers are irrefutably emblematic of journalistic efficacy, passion, and cooperation. Their combined efforts have casted a brilliant light on a concealed network that otherwise would be drumming along in secret. On a deeper level, though, these documents are yet another example of power, exploitation, and corruption performed under the hands of world leaders, and the rich and powerful. As discoveries continue to come to light throughout this unprecedented scandal, people will ultimately have to choose either apathy or action. Will the Panama Papers be remembered as an instance of impactful journalism or as the impetus to greater change?





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