The Panama Papers: Nefarious Revelations of Tax Havens
Raul Del Cid, Dartmouth Business Journal
Süddeutsche Zeitung, the International Consortium of Investigative Journalists, and other worldwide news agencies recently reported an enormous leak from a Panama-based law firm, Mossack Fonseca. This unprecedented leak unveils a mere link in the chain in the global network of exploitative, offshore tax empires. According to a 2016 report from The Guardian, Mossack Fonseca is the fourth largest offshore law firm that administers over 200,000 offshore shell companies managing expenses of wealthy individuals in at least 80 regions all over the world. After one year of examination, the 1.5 million document leak (containing 2.6 Terabytes of internal data) reveals transactions dating back to the late 1980s and exposes a convoluted trail of transactions that legitimized waves of terrorism in the Middle East, facilitated a global network of child-sex slavery and even empowered despots worldwide.
This exposure has compelled both supporters and adversaries of the offshore banking industry to challenge the legitimacy of arcane offshore structures that conceal avenues for illegitimate acts.
Origins of The Offshore Banking Industry and Legitimate Uses
The origins of the offshore banking industry trace back to Switzerland’s declaration of neutrality in 1815, which also prompted the state’s rise as a budding tax haven. During a time of economic turmoil and political strife, the well off recognized the need to secure their wealth and found that Swiss Banks satiated their demand. Today, proponents of the offshore banking industry continue to champion its ability to secure the wealth of elites from the greedy hands of insolvent government officials.
Offshore tax havens are structured in such a way that anonymity is prioritized through measures that obscure the identity of the actual beneficiary; this is possible because offshore shell companies, or subsidiaries that only function to exchange capital, are commonly used by emerging companies to skirt domestic taxes and raise funds for operation. Some offshore jurisdictions also allow for shell companies to purchase other shell companies, a common practice that creates a complex web of subsidiaries — rendering the ultimate beneficiary’s identity obscure. These measures are not illegal and can prove to be advantageous; their money is practically untraceable.
Untraceable capital is advantageous for several reasons. In The Casey Research International May 2013 report on offshore companies, Nick Giambruno argues that circumventing domestic restrictions on capital allow clients to benefit from offshore currency diversification and in turn more purchasing power, access to foreign medical-care options and access to sounder, foreign banking options. However, unchecked capital also paves the way for unchecked abuses.
The Offshore Banking Industry and Illegitimate Use
For centuries, wealthy individuals have developed an extensive network of shell companies so that vast sums of their wealth cannot be adequately repatriated for taxation. In a 2016 The Guardian report, United States economist Gabriel Zucman posits that eight percent of the world’s wealth is stashed in tax havens, resulting in the loss of approximately $200 billion a year in global tax revenues — only 20 percent of it is accounted for on tax returns. In other words, offshore entities provide the global elite with archaic privileges that unfairly exonerate them from tax avoidance and evasion. Every taxpayer that does not have access to offshore tax havens must bear the enormous tax burden, as large amounts of wealth remain hidden. In essence, the offshore banking industry codifies a tax avoidance scheme that shelters and rewards the well-off at the cost of worldwide economic inequality and widespread government deficits, especially for developing countries. Tax evasion at such a large scale stifles economic and social development, as vast amounts of wealth — that should have been collected via taxation — are siphoned away from public services in developing countries.
Moreover, the bureaucratic cavalry of attorneys, accountants and bankers heightens a wealthy individual’s sense of security, so much that he is emboldened to carry out reprehensible acts with the laundered money. According to the 2016 ICIJ report on the Panama Papers, offshore subsidiaries effectively secured capital through a secret web of transactions for terrorist organizations in the Middle East and North Africa, acquaintances of Syrian dictator Bashar al-Assad as well as 33 individuals blacklisted by the U.S. for their ties to Mexican drug lords. Hidden wealth of such actors financed violent bombing-campaigns in Syria, secured underage human trafficking in Russia and expanded North Korea’s Nuclear Weapons program. Tax havens, while advantageous for a few, validate a world of lawlessness and corruption absent of legitimate ramifications. Not only do tax havens empower unsavory actors, but they also enable such actors to carry out insidious acts on those they already financially exploit.
Panama Papers: Current Backlash of Offshore Industry
From Iceland to Chile, the Panama Papers’ exposure of corrupt government officials resulted in a worldwide outcry for transparency. Consequently, citizens all over the world have called for the resignation of heads of states, such as the prime ministers of Iceland and Pakistan. Those planning to remain in office, however, have responded to the public with possible changes in policy for offshore structures that would increase compliance with transparent measures of international financial institutions, notably through the Organisation for Economic Co-operation and Development (OECD) and Transparency International. According to the OECD 2014 report on transparency, the G20 mandated disclosure standards in over 100 worldwide jurisdictions requesting governments to collect and share detailed accounts of their financial institutions on an annual basis. Moreover, as BBC’s 2016 article reports, Panama’s non-compliance with these standards have prompted the UK, Germany, France, Italy and Spain to comply with transparent measures of sharing financial data and to draw up an international blacklist of non-compliant jurisdictions.
Those willing to flee from exposed offshore companies view this as an opportunity to flock to safer tax havens — some of which are actually located in the U.S. According to a 2016 Bloomberg Business report, several foreign trust companies, such as those in Switzerland, are migrating to U.S. jurisdictions, such as Reno, Nevada because the U.S. is not obligated to follow international tax standards of transparency.
So long as offshore companies continue to deceive transparent standards that are supposed to hold them accountable, international financial institutions supported by world leaders will continue to strive for reform or for the complete eradication of the offshore banking industry. The Panama Papers leak acts as a catalyst to a global movement intending to stop tax-haven abuse and to fairly tax trillions in unfairly hidden wealth.