The parallel universe of some of the world’s wealthy and their bankers was exposed just over a week ago by a massive leak on its inner workings. The Panama Papers concerning more than 200,000 offshore companies continue to create enough waves internationally that the whistleblower on the Panamanian law firm Mossack Fonseca will, when identified, probably become known as the world’s leading “Information Patriot.”
For 30 years, the firm, employing 600 persons in 42 counties, has provided paperwork, signatures, and mailing addresses to breathe life into shell companies established in tax havens to shelter assets with maximum concealment. The 11.5 million documents are from just one law firm in one tax haven.
The documents were leaked to the German newspaper Süddeutsche Zeitung, which shared them with the International Consortium of Investigative Journalists; they have since been analyzed by 107 media entities in 78 countries. Some of the maneuvers were perfectly legal, but the whistle-blowing highlights the laundering of proceeds from illicit activities, most prominently drug and illegal weapons trafficking, money looted from treasuries by some political leaders, and other proceeds of corruption.
Taxes can be avoided aggressively in one jurisdiction by moving assets to another with zero-to-low tax rates and the means to hide owner identity. The Tax Justice Network, an advocacy group that argues that tax havens have exacerbated global poverty and income inequality by giving the corrupt and rich a place to stash assets, ranks Panama as only No. 13 on its Financial Secrecy Index.
The hidden recesses of offshore finance often stump tax authorities, law enforcement officials, and asset-tracers. By one estimate based on data from the World Bank, IMF, U.N., and central banks of 139 countries, between $21 trillion and $32 trillion is hidden in tax havens—more than the United States’ national debt.
They also reveal links to 72 current or former heads of state. The fallout to date has included the resignation of the prime minister of Iceland. The United Kingdom’s Prime Minister David Cameron has been severely embarrassed by the publicity given to his late father’s offshore trust. Britain is further implicated because more than half the companies set up for clients by Mossack Fonseca are registered in the British Virgin Islands.
The U.S. Justice Department announced a review to see if the documents point at corruption and other violations of American laws. President Obama added, “There is no doubt that the problem of global tax avoidance generally is a huge problem ... The problem is that a lot of this stuff is legal, not illegal ... Frankly, folks in America are taking advantage of the same stuff.” At the same time, he quite properly touted his new rules to prevent what is known as corporate inversions—when companies move overseas to avoid U.S. taxes.
The Mossack Fonseca website indicates that it has more offices in China than in any other nation. The documents reveal that family members of a minimum of eight current or former members of the Politburo Standing Committee, Beijing’s highest decision-making body, have set up offshore companies, leaving Chinese leader Xi Jinping’s vow to fight “armies of corruption” looking hypocritical at best. Nothing is now available, moreover, in the Chinese party-state media about the Panama Papers.
For Russia, we learn of a billion-dollar money laundering ring run by Bank Rossiya, which became subject to U.S. and E.U. sanctions after Russia annexed Crimea. A network of President Vladimir Putin’s cronies, including a cellist, have moved about $2 billion through a network of offshore companies. Putin dismisses it all as “Putinphobia.”
When the global financial crisis erupted in 2008, governments sought ways to recover some of the billions hidden from tax authorities in overseas havens. BBC Television’s Gavin Hewitt says “new politics” since has drawn tax evasion, inequality, money laundering, shell companies, and related issues into the political mainstream.
Volkswagen was shamed last year for placing software in their diesel vehicles in order to cheat emissions tests. Professor Henry Mintzberg of Canada’s McGill University explained that what happened at Volkswagen was part of a larger syndrome:
“Far more insidious, however, is the legal corruption, because it is so prevalent. Goldman Sachs allegedly manipulated the market for recycled aluminum so that it could siphon off $5 billion (U.S.) by moving ingots from one warehouse to another. What were they thinking? That’s easy: $5 billion. The company claimed to have broken no law. And that is precisely the problem: Our societies are being destroyed by this legal corruption.”
The emerging tsunami for better governance provoked by the Panama Papers might just succeed. If it does, the first target should be tax loopholes deliberately created to benefit favored corporations and/or individuals. The rule of law must return to replace rule by lawyer.
David Kilgour, a lawyer by profession, served in Canada’s House of Commons for almost 27 years. In Jean Chretien’s Cabinet, he was secretary of state (Africa and Latin America) and secretary of state (Asia-Pacific). He is the author of several books and co-author with David Matas of “Bloody Harvest: The Killing of Falun Gong for Their Organs.”
