Since their release in early April, the Panama Papers have been making waves. German newspaper Süddeutsche Zeitung reportedly obtained these confidential records from an anonymous source and then shared them with the International Consortium of Investigative Journalists. The ICIJ then distributed the information to a range of its international partners, including the BBC and the Guardian. These documents basically detail the ways in which members of the global elite, including prominent politicians, are able to take advantage of offshore tax regimes.
The Panama Papers have set off a firestorm of controversy and debate, making it hard to discern fact from fiction. So, here is what you should know about them.
The Panama Papers are the biggest leak the world has seen. The Panama Papers encompass a staggering 11.5 million files totaling 2.6 terabytes of information from Mossack Fonseca, one of the world’s biggest offshore law firms. That makes it even bigger than the 2010 WikiLeaks and the 2013 Edward Snowden leaks. A database of all of Mossack Fonesca’s clients recently went live, including some 200,000 company names from across the world.
Mossack Fonesca hasn’t necessarily done anything illegal. Based in Panama, Mossack Fonesca is an offshore law firm that also incorporates companies in offshore jurisdictions, such as in the British Virgin Islands. The company itself offers an array of services, including offshore firm administration and wealth management. It operates in a number of tax havens, including in Cyprus and Switzerland. Several of the firm’s clients have been accused of wrongdoing, but as the firm operates with a number of intermediaries between the firm and the client, the onus of responsibility isn’t necessarily on Mossack Fonesca. As the firm explained, “Our firm, like many firms, provides worldwide registered agent services for our professional clients (e.g., lawyers, banks, and trusts) who are intermediaries. It is well established that many countries (e.g. UK, USA) have trust laws that permit a person or enterprise to represent a third party in a fiduciary capacity, which is 100% legal and serves an important purpose in global commerce.”
It’s up to the Panamanian government to determine whether Mossack Fonesca has broken the law. As previously explained, much of what takes place in offshore structures is perfectly legal. If there has been some kind of breach, that’s the responsibility of the Panamanian government to decide. However, it’s unlikely that the firm will be taken to court or subject to any kind of penalties.
Not everyone who uses an offshore structure is a “crook.” It’s true that the Panama Papers have shed some light on some shady dealings. For example, the documents have provided evidence that Vladimir Putin has set up an elaborate scheme in which money from Russian state banks is hidden offshore. Some of that state money mysteriously showed up at a ski resort where Putin’s daughter got married in 2013, suggesting less than savory dealings. However, it should be noted that not everyone who makes use of these offshore structures — most of which are legal — is a crook. As previously mentioned, there are valid reasons to set up an offshore company, and offshore structures can be advantageous in terms of estate planning and wealth management.
The Panama Papers have ignited a global debate about tax havens. Currently, most people can legally put money in offshore tax havens. However, the Panama Papers have shed new light on this contentious topic, and many, including prominent economists, are pushing for a change. In an open letter to world leaders, 350 economists, including French economist Thomas Piketty and American economist Jeffrey Sachs, argued, “The secrecy provided by tax havens fuels corruption and undermines countries’ ability to collect their fair share of taxes.” They pointed out that “while all countries are hit by tax dodging, poor countries are proportionately the biggest losers.” It remains unclear whether world leaders will take action to change offshore tax structures, but the Panama Papers have certainly fueled the debate.
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