If you’re swimming offshore, be careful you don’t get caught when the tide goes out. That’s the advice being learned fast by some clients of Mossack Fonseca, who used the secretive services of Panama-based law firm to facilitate everything from bribery, arms deals and tax evasion, to financial fraud and drug trafficking.
The leak of 11 million documents held by Mossack Fonseca to the International Consortium of Investigative Journalists (ICIJ) reveals how the rich and powerful are using tax havens to hide their wealth. Heads of state, politicians, friends of politicians and other wealthy individuals are all in the firing line of this corruption scandal. And as has been widely reported, regulatory authorities across the world will now pour over the papers for signs of malpractice—and potentially prosecution.
There are several important themes arising from the ‘Panama Papers’ that caught my attention.
The first is the sheer scale of the Mossack Fonseca leak: it is the largest in history and dwarfs by some margin the Wikileaks data released in 2010. In all, two terabytes of data spanning 40 years of transactions and the details of 214,000 entities, including companies, trusts and foundations. And according to the BBC, if the amount of data released by Wikileaks was equal to the population of San Francisco, the amount of data released in the Panama Papers is the equivalent to the population of India.
From a compliance perspective, one of the most worrying disclosures is that Mossack Fonseca is among the world’s top creators of shell companies, with branches in London, Beijing, Miami and more than 40 other cities worldwide. According to the ICIJ, shell companies that have the outward appearance of being legitimate businesses, but are just empty shells, were used by world leaders, politicians their cronies and affluent individuals to hide money. What does this tell us? Shell companies are not only being used for tax evasion, but may have also helped government officials conceal their interests in bribe payments.
Our old friend FIFA is never far away from the corruption spotlight, as is the case here too. The documents allegedly reveal that a key member of FIFA’s ethics committee, Uruguayan lawyer Juan Pedro Damiani, and his firm provided legal assistance for multiple offshore companies linked to a former FIFA vice-president arrested last year as part of the U.S. inquiry into football corruption. In all, four of the FIFA officials indicted in the U.S. used offshore companies created by Mossack Fonsecca. Revelations like this provide telling insight into how organizations are attempting to hide their corruption behind an almost impenetrable spider’s web of illicit networks.
Next, we also learn that Mossack Fonseca worked with 33 individuals or companies who have been placed under sanctions by the U.S. Treasury, including companies based in Iran, Syria, Zimbabwe and North Korea. One had links to North Korea's nuclear weapons program. Their companies were harboured by the Seychelles, the British Virgin Islands, Panama and other jurisdictions. Hard evidence that these jurisdictions will now be in the international regulatory authorities’ cross-hairs.
Financial institutions remain exposed to corruption
The leak also demonstrates that financial Institutions remain particularly vulnerable to being a conduit for criminals’ misuse of the global financial system. HSBC and Credit Suisse, for example, were named by the ICIJ among the banks that allegedly helped set up complex structures that make it hard for tax collectors and investigators to track the flow of money from one place to another. Both deny the allegations.
It’s not all bad news though. In recent years, many jurisdictions have opened their affairs to wider regulatory scrutiny, including Switzerland, Luxembourg and the Channel Islands. The ‘Panama Papers’ will likely lead to Panama and other jurisdictions such as the British Virgin Islands being forced to (or willingly) adopt similar transparency into the beneficial ownership of entities. This will make it harder for terrorists, corrupt politicians, money launderers and tax evaders to find a haven in their jurisdiction.
Comments from British Prime Minister David Cameron and others following the ‘Panama Papers’ leak also appear to reflect a change in the political and public mood, at a time of enduring austerity. The UK has been among the leaders in identifying beneficial ownership, and in the wake of the Mossack Fonsecca leak, Cameron has promised to end “tax secrecy” in the UK and has described some offshore schemes that allow people to minimize their tax rates as “not morally acceptable”.
In June, for example, the British government will introduce a new central register that identifies the beneficial or “significant” owners of UK companies. And the major international summit to discuss offshore issues taking place in London in May is likely to concentrate on closing more loopholes to corruption, money laundering and other financial malpractice.
Drawing everything together, the ‘Panama Papers’ episode teaches organizations a fundamental and important lesson. It is imperative that companies entering into business relationships with third parties and bidding on procurement projects know the background to the entities and beneficial owners behind these businesses. The same holds true for financial institutions who must meet ‘Know Your Customer’ requirements.
Not having that visibility opens the door to dealing with shell companies for terrorists, corrupt politicians, money launderers and tax evaders.