PANAMA PAPERS:
Critical Lessons for Government, Corporate Leaders
Panama Papers:
Critical Lessons for Government, Corporate Leaders By Zafar I. Anjum, CFE, CIS, MICA, Int. Dip. (Fin. Crime), MBCI Group Chief Executive Officer Corporate Research and Investigations LLC
Contents Introduction...........................................................................................3
A Scandal Exposed................................................................................4
A Course of Action in Three Steps........................................................8
Conclusion.......................................................................................... 12
About CRI Group................................................................................. 14
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Panama Papers: Critical Lessons for Government, Corporate Leaders
Introduction The Panama Papers is a worldwide scandal. The leak of 11.5 million documents regarding attorney — client information from Mossack Fonseca, a Panamanian law firm, provides direct evidence of the widespread hiding of assets from the public eye. The scandal reaches far and wide, involving companies around the world and naming high-profile individuals, including current and former heads of state, corporate leaders, government officials, financial authorities and even celebrities. The central (and most concerning) revelation is the existence of more than 214,000 “offshore companies,� some of them characterized as shell corporations that were apparently used to facilitate illegal activities.1 The Panama Papers reveal a systematic failure in transparency, and raise the urgent need for reform. Specifically, governments worldwide must do a better job at preventing their own government figures and corporate leaders from sheltering and hiding gains and assets in businesses overseas. First of all, governments must dramatically increase their levels of transparency, and enforce new laws that require the identification of those who own companies registered in their country and territories. Secondly, organizations (including governmental organizations) should require extensive due diligence regarding existing and potential third-party partners to reveal any shell companies or illegal activity that might affect their own business and reputation. Finally, those caught breaking the law Nuix, Panama Papers: How Nuix Helped Uncover the Facts, 2016. Source: http://www.nuix.com/panama-papers-how-nuix-helped-uncover-facts, Accessed: 25.04.2016, par. 2. 1
Panama Papers: Critical Lessons for Government, Corporate Leaders
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through the hiding of assets and the use of shell companies must be sanctioned and/or punished. A global economic authority should be created, and international standards to these effects should be quickly defined and adopted by governments worldwide. The Panama Papers lifted the veil of secrecy that surrounded many international figures in their determined efforts to hide assets. What happens next will determine whether there is comprehensive and lasting change to a system that is too easily manipulated for unethical (and often illegal) personal gain.
A Scandal Exposed The Panama Papers are a set of confidential documents providing detailed information about hundreds of offshore companies listed by the Panamanian corporate service provider Mossack Fonseca. The leak of the documents sparked a worldwide scandal, exposing the identities of owners, shareholders and directors of several offshore companies who were involved in hiding assets through the use of offshore companies. The documents were first made available in 2015 through an anonymous source who provided them to German newspaper Süddeutsche Zeitung; in turn, reporters from the Süddeutsche Zeitung enlisted the help of the International Consortium of Investigative Journalists (ICIJ) to analyze and investigate the contents.2 The resultant fact-finding revealed that several wealthy individuals, F Obermaier, B Obermayer, V Wormer & W Jaschensky, ‘About the Panama Papers,’ (2016) Süddeutsche Zeitung. 2
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Panama Papers: Critical Lessons for Government, Corporate Leaders
including present and former heads of state, public office holders, corporate leaders and celebrities, were owners, controllers or ultimate beneficiaries of the offshore companies — also considered shell companies — detailed in the documents. While the companies themselves are legal in some cases and jurisdictions, the documents indicated that many of the individuals dealing with Mossack Fonseca in regards to the shell companies were doing so in bids to conduct illegal activities such as tax evasion, fraud, bribery and corruption. The problem of offshore banking to hide assets is a persistent one. Financial institutions including UBS and others in “bank secrecy jurisdictions” have routinely sold tax evasion services to wealthy individuals around the world.3 This comes in spite of government efforts to crackdown on the practice, as evidenced by the breadth of the problem exposed by the Panama Papers. Indeed, just last year it was reported that the U.S. government was “ramping up” efforts to crackdown on offshore tax evasion4, but difficulties persist in confronting an industry that not only requires secrecy, it actually thrives on it and sells it as part of the business model. Increasingly problematic is the fact that currency can actually be moved through offshore accounts and returned to its original location through “round-tripping,” a means of hiding the source of the funds. In Russia, for example, round-tripping has been used to disguise invest3 L Szarmach, ‘Piercing the Veil of Bank Secrecy? Assessing the United States’ Settlement in the Ubs Case,’ (2010) 43 Cornell International Law Journal 2, p.438.
4 R Alter, ‘Crackdown on Offshore Tax Evasion Not Slowing Down,’ New Jersey Law Journal, 2016. Source: http://www.mdmc-law.com/tasks/sites/mdmc/assets/ Image/Crackdown%20on%20Offshore%20Tax%20-%20Alter1.pdf Accessed: 25.04.2016, pp. 1-6.
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ment capital as being foreign in origin, granting a domestic investor access to tax or regulatory benefits that are usually reserved for foreign investors. 5 Perhaps unsurprisingly, Mossack Fonseca has denied any wrongdoing, and published a statement on its website defending the firm’s integrity. David Greene, writing in the New Law Journal, opined that even a scandal as widespread as the Panama Papers is unlikely to cause fundamental changes in tax avoidance. Greene writes: “Tax collection and avoidance have always run alongside one another. One loophole is closed and human ingenuity creates another. Application of the Rule of Law then provides an answer in law. Politics and morality might better address the issue of basic fairness that the law is less able to address namely that we should all contribute fairly to the society in which we live and from which we benefit.”6 So it is against this landscape that governments, banks and business leaders must decide what lessons will be taken, and actions rendered, in response to the massive document leak. It serves as no less than a black eye for countries that are urging transparency and reform to find, in several key cases, their own government leaders and other high-profile individuals among the list of those connected to seemingly unethical action. Take, for example: Sigmundur Davíð Gunnlaugsson. The Icelandic prime minister K Wilson, ‘The Role of Offshore Jurisdictions in Russia,’ (2015) 3 Russian Law Journal 2, p. 121. 5
D Greene, ‘Avoidance or evasion?’ New Law Journal, 14 April 2016. Source: http://www.newlawjournal.co.uk/nlj/content/avoidance-or-evasion, Accessed: 25.04.2016, par. 11. 6
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Panama Papers: Critical Lessons for Government, Corporate Leaders
resigned in the face of protests immediately following the release of the Panama Papers. The documents linked him to an offshore company, which allegedly had holdings in Iceland’s collapsed public banks. Though Gunnlaugsson denied wrongdoing, and his office suggested he was just “stepping aside for a time,” it was widely understand that he had tendered his resignation.7 José Manuel Soria. Spain’s acting Minister of Industry, Energy and Tourism was forced to resign his post after the Panama Papers revealed that he and his family had maintained ties to offshore tax havens during the past two decades, and he was identified as a director of a Bahamian firm in the documents. He initially denied wrongdoing, but then during his resignation, apologized for a “succession of mistakes.”8 Mauricio Macri. The President of Argentina is listed through the Panama Papers as head of a trading company based in the Bahamas. This was allegedly not disclosed during his tenure as Mayor of Buenos Aires. However, news reports have connected him to additional offshore holding companies. 9 7 T Hume, Z Robert & H Yan, ‘Iceland swears in new PM amid Panama Papers fallout,’ CNN.com, 7 April 2016. Source: http://www.cnn.com/2016/04/05/europe/ panama-papers-iceland-pm/index.html, Accessed: 1.05.2016.
V Sonawane, ‘Panama Papers: Spain’s Industry Minister José Manuel Soria Resigns Over Links to Offshore Account,’ International Business Times, 15 April 206. Source: http://www.ibtimes.com/panama-papers-spains-industry-minister-josemanuel-soria-resigns-over-links-offshore-2354344, Accessed: 1.05.2016 8
9 ‘Macri and His Father Linked to More Panama Papers Firms,’ teleSUR, 20 April 2016. Source: http://www.telesurtv.net/english/news/Macri-and-HisFather-Linked-to-More-Panama-Papers-Firms-20160420-0032.html, Accessed: 1.05.2016.
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Lionel Messi. According to the Panama Papers, the football superstar had a Panama company set up for him by Mossack Fonseca in 2012 called Mega Star Enterprises Inc., and he has denied the allegations of being connected to a shell company. Messi and his father are already involved in a case in Spain of alleged tax evasion due to offshore dealings.10 Also implicated are “close connections” to Russian President Vladimir Putin, as well as the King of Saudi Arabia, the President of Ukraine, the father of British Prime Minister David Cameron, the son of former Egyptian President Hosni Mubarak, Hollywood actor Jackie Chan, and Bollywood celebrities Amitabh Bachchan and his daughter-in-law Aishwarya Rai Bachchan, just to name a few. According to the ICIJ, the leaked papers implicate 140 politicians from more than 50 countries, not to mention celebrities, business leaders and figureheads.11
A Course of Action in Three Steps A global business environment that allows and even encourages the use of offshore businesses will not change until governments require a dramatic increase in levels of financial transparency. To make this successful, new laws are required (along with the enforcing of existing laws) that require the identification of those who own companies registered in their country and territories. ‘Big names implicated in Panama Papers offshore banking leak,’ CBC News, 4 April 2016. Source: http://www.cbc.ca/news/world/photos/panama-papersfamous-names-1.3519469, Accessed: 1.05.2016. 10
‘Panama Papers the Power Players’ (2016) ICIJ. Source: https://panamapapers. icij.org/the_power_players/, Accessed: 1.05.2016
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Panama Papers: Critical Lessons for Government, Corporate Leaders
The global organization Transparency International (TI) proposes the following measures, which should be endorsed by government leaders: • “Governments should establish central registries that publicly disclose beneficial ownership information. This will help law enforcement, journalists, and governments to do their job and help investors and citizens know who is behind the companies they invest in or buy from. • “Governments should support the initiative of Transparency International and other partners in creating a Global Public Beneficial Ownership Registry, which can be populated by individual government-held beneficial ownership information.”12 In fact, it is information-sharing that has been one of the key hurdles in combating such use of offshore shell companies and money laundering on the whole. Governments don’t work in tandem to communicate what (limited) information they might have on business controllers in overseas jurisdictions. Initiatives in this regard have come up short, as evidence by the reams of information in the Panama Papers. The United States, for example, touts crackdowns and efforts towards tracing illicit money moving overseas, yet some critics assert that the U.S. has become a “tax haven” in itself due to a lack of information-sharing. As Ana Swanson writes in the Washington ‘3 steps to stop secret companies,’ (2016) Transparency International. Source: http://www.transparency.org/news/feature/3_steps_to_stop_secret_companies, Accessed: 1.05.2016, par 6-7. 12
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Post, “Offshore isn’t so much a destination anymore as ‘a set of capabilities,’ which include ensuring secrecy, minimizing taxes, managing assets, and providing clients security and access to their wealth from anywhere in the world, James Henry, a senior adviser to the Tax Justice Network and former chief economist of McKinsey & Co, wrote in a 2012 report. The Tax Justice Network ranks the U.S. third in terms of the secrecy and scale of its offshore industry, behind Switzerland and Hong Kong but ahead of the Cayman Islands and Luxembourg.” In fact, the U.S. opted out of new global disclosure standards that are forcing anonymous companies to reveal their real owners around the world. “Compared with other developed countries, and even traditional offshore destinations such as Switzerland and the British Virgin Islands, the U.S. now appears to be among the most lenient and secure destinations for the fortunes of the global rich.”13 Secondly, organizations (including governmental organizations) should require extensive due diligence regarding existing and potential third-party partners to reveal any shell companies or illegal activity that might affect their own business and reputation. This should be enforced by government-required certification that any company, whether domestic or foreign, be transparent about who ultimately controls the business. As TI notes, this “would also help to put additional pressure on companies to be more transparent in order to qualify for lucrative government contracts.” Specifically: 13 A Swanson, ‘How the U.S. became one of the world’s biggest tax havens,’ The Washington Post, 5 April 2016. Source: https://www.washingtonpost.com/news/ wonk/wp/2016/04/05/how-the-u-s-became-one-of-the-worlds-biggest-tax-havens/, Accessed: 2.05.2016, par 8.
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Panama Papers: Critical Lessons for Government, Corporate Leaders
• “Governments should fully comply with international standards to require professionals in law and accountancy, real estate, as well as company formation agents and bankers to have in place anti-money laundering procedures and report suspicions of money laundering. • “Governments should establish more effective oversight and sanctions for these sectors. Professional bodies should withdraw professional licenses from those implicated in wrongdoing.”14 Finally, those individuals and organizations caught flouting the law through hidden assets and the use of shell companies must be punished. An international standard to this effect should be quickly defined and adopted by governments worldwide. Before the release of the Panama Papers, such movement to that type of consensus was largely unthinkable. But the scandal has touched every economic market, it affects countries in nearly every worldwide region, and thus should serve as a wake-up call. A global economic authority should then be formed to set international standards on the use of offshore companies for tax avoidance and tax evasion, and prescribe punishments and sanctions for those who violate the standards. International law and regulations on money laundering should be applied here, with guidance from the Financial Industry Regulatory Authority (FINRA), Financial Action Task Force (FATF), The European Federation of Accountants (FEE) and other leading regulatory bodies worldwide.
‘3 steps to stop secret companies,’ (2016) Transparency International. Source: http://www.transparency.org/news/feature/3_steps_to_stop_secret_companies, Accessed: 1.05.2016, par 8-9. 14
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Conclusion The deception and lack of transparency exposed by the Panama Papers have shaken the trust that people hold in their world leaders. The idea of hidden wealth, usually for nefarious purposes, creates a perception of lawlessness and privilege when heads of state, high-seated corporate executives, banks and celebrities are named in connection with webs of offshore businesses and shell companies. Without the leak of the Mossack Fonseca documents, would anyone have been the wiser? It is not likely. It is for this reason that action needs to be taken now, while news regarding the Panama Papers still rules the headlines and is a matter of public discourse. Transparency should be the governing rule, and the end point: New laws and regulations must be introduced that require the identification of those who own companies registered in their country and territories. Secondly, extensive due diligence must be required (and checked) regarding existing and potential third-party partners to reveal any shell companies or illegal activity that might affect their own business and reputation. Finally, a global economic authority should be created to enforce the previous two measures, and also recommend sanctions or punishment for those who are caught hiding assets and using shell companies must be punished. International standards to these effects should be quickly defined and adopted by governments worldwide, or else the lessons of the Panama Papers will go unlearned and unheeded.
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Panama Papers: Critical Lessons for Government, Corporate Leaders
References Nuix, Panama Papers: How Nuix Helped Uncover the Facts, 2016. Source: http://www.nuix.com/panama-papers-how-nuix-helped-uncover-facts, Accessed: 25.04.2016, par. 2. F Obermaier, B Obermayer, V Wormer & W Jaschensky, ‘About the Panama Papers,’ (2016) Süddeutsche Zeitung. L Szarmach, ‘Piercing the Veil of Bank Secrecy? Assessing the United States’ Settlement in the Ubs Case,’ (2010) 43 Cornell International Law Journal 2, p.438. R Alter, ‘Crackdown on Offshore Tax Evasion Not Slowing Down,’ New Jersey Law Journal, 2016. Source: http://www.mdmc-law.com/tasks/sites/mdmc/assets/ Image/Crackdown%20on%20Offshore%20Tax%20-%20Alter1.pdf Accessed: 25.04.2016, pp. 1-6. K Wilson, ‘The Role of Offshore Jurisdictions in Russia,’ (2015) 3 Russian Law Journal 2, p. 121. D Greene, ‘Avoidance or evasion?’ New Law Journal, 14 April 2016. Source: http://www.newlawjournal.co.uk/nlj/content/avoidance-or-evasion, Accessed: 25.04.2016, par. 11. T Hume, Z Robert & H Yan, ‘Iceland swears in new PM amid Panama Papers fallout,’ CNN.com, 7 April 2016. Source: http://www.cnn.com/2016/04/05/europe/ panama-papers-iceland-pm/index.html, Accessed: 1.05.2016. V Sonawane, ‘Panama Papers: Spain’s Industry Minister José Manuel Soria Resigns Over Links to Offshore Account,’ International Business Times, 15 April 206. Source: http://www.ibtimes.com/panama-papers-spains-industry-minister-josemanuel-soria-resigns-over-links-offshore-2354344, Accessed: 1.05.2016 ‘Macri and His Father Linked to More Panama Papers Firms,’ teleSUR, 20 April 2016. Source: http://www.telesurtv.net/english/news/Macri-and-HisFather-Linked-to-More-Panama-Papers-Firms-20160420-0032.html, Accessed: 1.05.2016. ‘Big names implicated in Panama Papers offshore banking leak,’ CBC News, 4 April 2016. Source: http://www.cbc.ca/news/world/photos/panama-papersfamous-names-1.3519469, Accessed: 1.05.2016. ‘Panama Papers the Power Players’ (2016) ICIJ. Source: https://panamapapers. icij.org/the_power_players/, Accessed: 1.05.2016 ‘3 steps to stop secret companies,’ (2016) Transparency International. Source: http://www.transparency.org/news/feature/3_steps_to_stop_secret_companies, Accessed: 1.05.2016, par 6-7. A Swanson, ‘How the U.S. became one of the world’s biggest tax havens,’ The Washington Post, 5 April 2016. Source: https://www.washingtonpost.com/news/ wonk/wp/2016/04/05/how-the-u-s-became-one-of-the-worlds-biggest-tax-havens/, Accessed: 2.05.2016, par 8. ‘3 steps to stop secret companies,’ (2016) Transparency International. Source: http://www.transparency.org/news/feature/3_steps_to_stop_secret_companies, Accessed: 1.05.2016, par 8-9.
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