As you probably are aware by now, the largest data leak in history has shed a limelight on how the rich and powerful use tax havens to conceal their wealth. The "Panama Papers" leak consists of 11.5 million files (2.6TB of data) from one of the world's most secretive companies, Mossack Fonseca, a law firm based in Panama.
What are the Panama Papers?
Data was first obtained from an anonymous source by one of Germany's leading newspapers Süddeutsche Zeitung (SZ), who then shared the files with the International Consortium of Investigative Journalists (ICIJ). The leak has been labeled “Panama Papers” by the ICIJ, who originally published the documents. The leaked 11.5 million files is from the database of the fourth largest offshore law firm, Mossack Fonseca.
The Panama Papers is the largest data leak in history which contains more documents than that of the Wikileaks (2010), Offshore secrets (2013), Luxembourg tax files (2014) and HSBC files (2015) combined. The files and records have been internally reviewed by a team of 370 journalists from 76 countries.
What do the Panama Papers reveal?
The Panama Papers consists of information over a 38 year span, from 1977 to 2015 and identifies nearly 15,600 paper companies, set up to keep their financial affairs secret. The huge leak of data is centred around the infinite ways the rich can take advantage of secretive offshore tax regimes. They show how Mossack Fonseca has continually helped their clients launder money, dodge various sanctions and evade tax by selling anonymous offshore companies around the world.
Who are Mossack Fonseca?
In 1977, Ramón Fonseca merged his small Panama law firm with another local company, run by Jürgen Mossack. Today, Mossack Fonseca is considered to be one of the biggest wholesalers of offshore secrecy in the world. In total, Mossack Fonseca has more than 500 employees in over 40 worldwide offices, including multiple offices in China, Switzerland and USA. The Panama based firm specialises in commercial law, trust services, investor advisory and international structures.
Who is involved?
The Panama Papers lists a range of government officials, celebrities, sport figures, business directors amongst others as involved in the offshore dealings with Mossack Fonseca. Some of the most high-profile names include:
- Ukraine's President, Petro Poroshenko
- Argentina’s President, Mauricio Macro
- Iceland’s Prime Minister Sigmundur Gunnlaugsson
- The brother-in-law of China's President Xi Jinping
- The late father of UK Prime Minister David Cameron
- Three (Out of four) children of Pakistan’s Prime Minister Nawaz Sharif
- FIFA ethics committee key member, Juan Pedro Damiani
- Ex Prime minister of Iraq, Ayad Allawi
- Former President of Sudan, Ahmad Ali al-Mirghani.
The leaked files also reveal a suspected billion-dollar money laundering ring, which involves close associates of Russia’s President Vladimir Putin. The leak also reveals that more than 500 banks have registered nearly 15,600 shell companies with Mossack Fonseca.
Although the ICIJ stated that this is only a partial list, we can expect them to release the full list of companies and individuals as early as May.
What are the reasons for doing business offshore (that is outside your country) ?
First of all there are perfectly legal reasons a company may go offshore. These include: to avoid currency restrictions, or placing your money offshore in an attempt to defend your assets from criminal raids and often to prepare a business acquisition without competitors becoming aware of it. However, businesses and individuals regularly take advantage of anonymous company structures in an attempt to avoid paying taxes or to even launder money from illegal income streams or businesses.
Panama, along with Switzerland, British Virgin Islands and many more, are tax havens whereby taxes are heavily reduced / not imposed and operate a secretive financial system.
How do tax havens work?
A tax haven is the name given to a country where foreign companies and individuals are taxed at an extremely low rate or even nonexistent rates. Although tax haven are still used by individuals in authentic ways, the majority of tax havens are used as a form of hiding the owners of money, the origins of money and to avoid paying tax on the money.
Tax havens make use of shell companies, which may look like a legitimate business, but really does nothing but manage money and hide the true owners of that money. Shell company management could be made up of lawyers, accountants or even building maintenance staff, who just sign their name on a document which allows their name to appear on the letterhead. An authority looking to uncover who owns the company money, will be told management does. In other words, someone is paying to hide their money from authorities.
What happens next?
The Panama Papers leak has prompted a worldwide investigation by police and tax authorities. Global banks, such as HSBC, Deutsche Bank, UBS and many more all, of which are known to have worked with Mossack Fonseca have all said they will co-operate with any form of investigation. Do you think that the Panama Papers will have an impact on the global banking industry?
Mossack Fonseca stated, “Our firm has never been accused or charged in connection with criminal wrongdoing. If we detect suspicious activity or misconduct, we are quick to report it to the authorities.”
With the expected release of more data, we should see an increasing crackdown on tax evaders within the upcoming months. The impact of the leaks is not just restricted to businesses. Prime Minister Gunnlaugsson, who is named in the leaks, caused significant protest in Iceland which may lead to his resignation (not confirmed at the point of writing the post).
And this is just the tip of the iceberg. Just as the Snowden and Wikileaks papers have been analyzed and published piece by piece, we can expect many more revelations and scandals to come out over the upcoming weeks and months.
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