What are the Panama papers and why do they matter?

Within a day of the first article appearing, the worldwide fallout from a massive leak of financial documents, dubbed “The Panama Papers”, was already huge, with several countries announcing that they would investigate suspected tax evasion and other wrongdoing. 

The journalists who have been combing through the trove allege that around 140 political figures, including Russia’s President, Vladimir Putin, and his Chinese counterpart, Xi Jinping, have links to the holders of the offshore accounts through family members, friends or associates. More revelations are expected. The furore will only grow. 

On April 3, 2016, a group of investigative journalists from 78 countries began publishing stories exposing the hidden wealth of national leaders, state officials, celebrities and others, based on emails and other documents from the database of a Panamanian law firm, Mossack Fonseca. 

These files date back several decades, but the most recent are only a few months old. They contain details of secretive offshore structures used by Mossack’s clients. The British Virgin Islands is the most popular domicile for their anonymous shell companies, with Panama in second place.

Mossack’s role

Mossack is at the centre of a huge tax and money-laundering scandal, now coming to light thanks to the so-called “Panama papers”. What exactly are these papers and why do they matter?

According to the Economist magazine, companies such as Mossack specialise in helping foreigners hide wealth. Clients may want to keep money away from soon-to-be ex-wives, dodge sanctions, launder money or evade taxes. 

The main tools for doing so are anonymous shell companies (which exist only on paper) and offshore accounts in tax havens (which often come with perks such as banking secrecy and low to no taxes). These structures obscure the identity of the true owner of money parked in or routed through jurisdictions such as Panama.

The magazine reported that Mossack has responded to the leak by pointing out that it has never been charged with wrongdoing and insisting it conducts thorough due diligence on those with whom it does business.

As much as $2 billion of loans and investments has flowed through offshore entities linked to friends and associates of Mr Putin, according to the ICIJ’s reporting.  A spokesman for Mr Putin said on April 4 that there was nothing much new in the reporting on the Panama files, and the claims were an example of “Putinophobia”.

Iceland’s Prime Minister, Sigmundur David Gunnlaugsson, has resigned after the files showed that he transferred his half share in an offshore company to his wife for the token sum of $1. He has denied allegations that the vehicle was used to hide a large investment in Icelandic banks. Mr Gunnlaugsson says he is being subjected to a “witch-hunt”.

Several countries, including Sweden, France and Australia, have already opened investigations. Australia’s tax authority is reportedly probing more than 800 clients of Mossack Fonseca.

More astonishing than their methods, which are well known, was the scale of activity and the people involved. The 2.6 terabytes of data are thought to contain information about 214,500 companies in 21 offshore jurisdictions and name over 14,000 middlemen (such as banks and law firms) with whom the law firm has allegedly worked. 

Illegal acts

After the initial naming and shaming, it will become clearer in the coming weeks who was using these structures for dodgy reasons.

While examples of the offshore industry enabling dictators, terrorists and drug cartels will (rightly) capture much of the attention, it would be a shame if other miscreants escape. The global industry of service providers, which sell financial secrecy to those who can afford it, have in some cases done more than just feast on poorly designed tax policies. 

The Panama documents suggest that some actively looked the other way when faced with a less-than-clean client.

An estimated eight per cent  of the world’s wealth ($7.6 trillion according to Gabriel Zucman, an economist) is stuffed away in offshore accounts, most of it done perfectly legally, as a raft of public relations people hasten to say as their clients’ names are flung around in the press.

But legal or not, the newspapers taking aim at Mossack and the like will strike a chord. They are in tune with contemporary sentiment: the fundamental disconnect between global elites and the rest, for whom taxes are as certain as death.

More broadly, the revelations will inject some urgency into a global anti-corruption summit, which is to be held in London in May. The British Prime Minister, David Cameron, rightly sees murky ownership of offshore shell companies as facilitating financial malfeasance. 

He has pushed through reforms that will make Britain the first big economy to open a public register that reveals the ultimate beneficial ownership of such outfits later this year. Unfortunately, the idea has been slow to catch on. 

The Panama leak shows that lax or complicit gatekeepers — the law firms, corporate service providers and accountants that set up and oversee offshore companies — are another big problem.

For those hoping for change, the good news is that, as the public mood towards offshore financial shenanigans dims, more and more employees of financial firms and law firms seem willing to slip hard drives packed with data pointing to dodgy goings-on to the media or other watchdogs. 

Doing so may break the law, but the justification is that it sometimes takes an illegal act to expose an illegal act. Leaks may be the most powerful weapon in the war on financial secrecy.