Before this week, Panama was mostly associated with the Panama Canal and as a stopover for international flights to South America. This has changed with the publication of the Panama Papers.
The 2.4 terabytes worth of data leaked from local law firm Mossack Fonseca reach back to the 1970s and document tax evasion and avoidance on a scale that has never been seen before.
There are some Americans who used Mossack Fonseca’s services to hide assets in an offshore account, like Chicago-based financial coach and author Marianna Olszewski or Florida-based billionaire Igor Olenicoff, but most of the 11 million documents show the activities of foreigners. One of the most prominent users is Iceland’s Prime Minister Sigmundur David Gunlaugsson, who has stepped aside from his official duties without resigning.
The United States has gone to great length to catch its citizens (who have to pay U.S. taxes no matter where they live) hiding assets overseas, by passing the Foreign Account Tax Compliance Act (Facta), which requires U.S. citizens to report assets overseas. Using strong-arm tactics, it has managed to convince former tax havens like Switzerland to do away with its bank secrecy and report this data. Other countries like Luxembourg and the Cayman Islands have also complied.
What the United States hasn’t done is sign onto an agreement to exchange tax data between over 100 signatory countries. In other words, the United States gets information through FACTA but doesn’t have to supply information to other countries. This has effectively made the United States one of the world’s biggest tax havens.
According to the Tax Justice Network, the United States ranks third on a “Financial Secrecy Index” just behind Switzerland and Hong Kong but far higher than Panama, at 13th. Of course, the citizens of California and the State of New York never heard of low taxes or bank secrecy, but the customers of four smaller states undoubtedly have: Delaware, Wyoming, South Dakota, and Nevada. The Mossack Fonseca leak details of 214,000 shell-companies. According to a New York Times report, just one building in Wilmington housed 285,000.
Downtown Wilmington and the Christina River in Delaware on Dec. 8, 2006. Tim Kiser/CC BY-SA
Federal taxes and regulations still apply, but all four states have strict bank secrecy laws. In Nevada, a private company needs no statutory capital, doesn’t need to prepare or file financial statements, or keep any kind of receipts.
Since the other tax havens are tax havens no more, numerous wealth managers and offshore specialists have settled in these four U.S. states. Swiss wealth manager Cisa Trust as well as one of the biggest provider of offshore accounts, Trident Trust, have settled in South Dakota.
The Swiss Rothschild Bank opened a new office in Reno in 2013. And why wouldn’t it, after all Nevada is also home of Apple Inc’s in-house hedge fund Braeburn Capital, which manages Apple’s $200 billion in offshore cash without any regulatory supervision or need to disclose data about holdings. No state capital gains tax either.
According to Bloomberg, Rothschild had this to say about the United States as a tax haven in a presentation given in San Francisco. The United States “is effectively the biggest tax haven in the world.” And these words were deleted from a draft version: “[It lacks] the resources to enforce foreign tax laws and has little appetite to do so.”
So a lot of foreign money is flowing into the United States now, knowing that compliance with U.S. regulation will shield it from having to do reporting at home. And for many, even U.S. Federal taxes on capital gains are much better than those in other countries and may not apply if you aren’t a United States citizen and don’t reside in the United States. But even if: Warren Buffett only pays a little more than 17 percent in taxes and he doesn’t even reside in one of the four tax havens.
