Panama leaks may trigger tighter global regulation

Analysis

On April 3, the International Consortium of Investigative Journalists (ICIJ) released a cache of documents from Mossack Fonseca, a global law firm based in Panama.

The 11.5 million records date back to 1977 and pertain to clients from over 200 countries and territories, including 140 politicians and public officials and twelve current and former world leaders.

The records pertain to the activities of only one law firm and it is difficult to judge what share of the 'market' for such services they constitute. The documents highlight how tax avoidance is an everyday practice for a vast swathe of the global economy and for some members of the global elite.

Multiple motivations

There are several reasons why individuals might wish to use offshore services to hide money:

Tax avoidance

Many individuals and companies seek to arrange their business activities and the legal footprint of those activities to achieve 'tax optimisation'. This is legal, but it often involves manipulation of accounting for different aspects of company activities (see INTERNATIONAL: G20 countries to adopt new tax accord - October 22, 2015).

Tax evasion

Organisations or individuals deliberately misrepresenting the state of their affairs so as to avoid paying taxes is an illegal activity. This involves dishonest reporting of ownership, wealth, income, profits and capital gains (see GREECE: Tax evasion reflects, deepens social divides - October 28, 2010).

Proceeds of corruption

Where political leaders engage in corruption in their home countries, they may seek to launder the proceeds using offshore companies. This makes it more difficult to trace their crimes and allows them to spend the money (see INTERNATIONAL:Anti-corruption cooperation will rise - February 24, 2016).

Proceeds of crime

Organised crime groups, including drugs traffickers, human traffickers and arms smugglers, need to find ways to hide the proceeds of their activities. The documents detail cases including armed robbery, drugs trafficking and investment fraud (see ARGENTINA: Drugs and crime gain new priority - February 11, 2016).

Financing terrorism

The documents include the names of people and companies blacklisted by the US government because of evidence that they were involved in the activities of terrorist organisations, such as Hezbollah (see ISRAEL/LEBANON: Conflict risks sudden escalation - January 22, 2015).

Sanctions busting

Individuals and companies sometimes wish to trade secretly because their activities are under sanctions, imposed by individual countries or multilateral bodies in response to the activities of certain political regimes (eg, Russia's annexation of Crimea, government violence against civilians in Syria, nuclear programmes in North Korea and Iran and political repression in Zimbabwe) (see TURKEY: Russian sanctions will hold back GDP growth - April 4, 2016).

At least 22 individuals and 24 companies named on US and EU sanctions blacklists were connected to companies on the books of Mossack Fonseca, either as shareholders, directors or beneficiaries.

Intermediaries

The leak will shine the light on the role of a number of professional services firms that facilitate the hiding of assets:

Law firms

Law firms such as Mossack Fonseca will come under greater scrutiny for their role in facilitating these practices. In a written response to the ICIJ, Mossack Fonseca has stated that it "does not foster or promote illegal acts".

The documents uncovered evidence about some practices that appear questionable, such as the backdating of documents. This practice was so commonplace that there was a set fee of 8.75 dollars for each month further back in time that a document was backdated.

Tax accountants

Tax accountants often provide explicit advice on how to avoid taxation. This is regarded as unethical, but is not in itself illegal.

Banks

Banks often fail to act on their obligations to inform the authorities of suspicious activity.

More than 500 banks and their subsidiaries are listed in the Mossack Fonseca files as having registered shell companies. They include major players such as HSBC, UBS, Coutts and Societe Generale.

Estate agents

Estate agents are implicated since many individuals, particularly high-ranking public officials and politicians that have accumulated wealth through corruption in their home countries, seek to invest the proceeds in real estate. London is a key target destination, as are Paris, Geneva and New York (see INTERNATIONAL: High house prices may be systemic risk - January 28, 2016).

Other institutions that receive money laundered in this way may also come under scrutiny. For instance, corrupt political leaders often seek to educate their children in UK and Swiss schools, suggesting that some elite fee-paying schools may come under greater pressure to examine the source of fees or risk reputational damage.

Global ramifications

The extent of the offshore industry is partly a function of the globalisation of the world economy. Given the ease with which money can flow across borders, it is straightforward for individuals and corporations to choose where they are regulated or to avoid tax liability and other regulations in one country by legally constituting their activities in another jurisdiction.

The leak may thus prompt the emergence of greater global regulation. The global institutional architecture around anti-money laundering has been in place for several years, relying on the Financial Action Task Force for monitoring and promoting the implementation of the rule (see INTERNATIONAL: Money laundering policy rethink ahead - July 16, 2015).

In a few countries such as Germany, the United States and the United Kingdom, the law-enforcement authorities devote significant resources to this kind of crime. However, the secrecy of transactions makes it difficult to gather evidence.

For money laundering investigations, they often rely on legal assistance and cooperation from the jurisdictions where the 'predicate offence', the initial corruption or crime, is committed. This can be problematic where the offenders constitute part of the governing elite and are able to quash cooperation.

Finally, the leak is the first time that investigative journalists have cooperated on such a vast and global scale. This indicates the emergence of a global governance function among this part of civil society. It sets a precedent for other global civil society movements to follow.