Panama Papers Explained: Why Blame Extends Far Beyond The Nation’s Shores


ANALYSIS: A massive international investigation has shone a spotlight on tax avoidance and money laundering. By exposing a dodgy law firm in Panama, it provokes bigger questions about the role of banks, as well as nations such as Australia, in allowing the super-rich to flout tax and transparency, writes Ben Eltham.

As leaks go, the Panama Papers are a gusher. One of the largest investigations in journalistic history has uncovered sensitive documents from the secretive Panamanian law firm Mossack Fonseca. The leak has exposed a rogue’s gallery of world leaders, known criminals and international sports stars. All of them wanted the services of one of the world’s most notorious law firms in one of world’s least trustworthy financial jurisdictions. Why?

The answer is secrecy. Panama has one of the most opaque financial secrecy regimes in the world. The central American state has no information sharing treaties with other nations, no tax treaties, and only shares information by court order. As a result, if you want to hide your financial details from the tax man in your country of origin, Panama is an ideal jurisdiction to set up a shell company.

What is a shell company? It’s pretty simple really: as this handy explainer from Triple J’s Hack program details, a shell company is simply a container, a legal entity that in turn holds the ownership of real-world cash and assets. Typically a shell company exists only “on paper”, that is, as a file in a filing cabinet, perhaps in the infamous Ugland House in the Cayman Islands.

You can of course register a shell company in any normal economy: you might want to create one in Australia to hold ultimate ownership of a range of other companies and stocks. But the advantage of a shell company in a secrecy haven like Panama or the British Virgin Islands is that no-one need know of its existence, or the things that it owns.

For instance, let’s say you want to hold a large amount of cash anonymously – cash that you don’t want local authorities finding out about. A Panamanian shell company can easily accommodate that. In the words of one Panamanian offshore finance company, “to tighten the privacy up one needs to use an anonymous offshore corporation, an offshore trust, or an offshore foundation like the Panama Private Interest Foundation.” Seeing as these financial entities often have no ownership records, and the government of Panama continues to refuse to hand them over, it is essentially impossible for overseas authorities to track money that disappears into the Panamanian swamp.

“When it comes to money laundering, we offer full service: rinse, wash, and dry,” Miguel Antonio Bernal, a prominent local lawyer and political analyst told Vice’s Ken Silverstein in 2014. “You can go to any law firm in the city, from the smallest to the biggest, and open up a shell company with no questions asked.”

The Mossack Fonseca haul offers us a detailed view of the secrecy sausage factory, showing how anonymity is created and maintained. Clients are able to route their transactions through a range of intermediaries into shell companies that they ultimately control.

Let’s say the money originates in a not-quite-legitimate business somewhere in Australia. A client could use Mossack Fonseca to route cash through a shell company in the British Virgin Islands. These shell companies are typically legally controlled by sham nominees from Panama. Or the Virgin Island shells could in turn be controlled by other shells, for instance in Cyprus, Panama or the Cayman Islands. In this way, money can be sent through a series of intermediaries in such a way that it becomes essentially untraceable.

As the various news organisations covering the Panama Papers have been at pains to point out, shell companies are perfectly legal. So is offshore banking. Indeed, as is so often the case when it comes to global finance, the true scandal is that these activities are legal at all.

new matilda, hsbcMossack Fonseca’s files show that the firm worked with a who’s who of the world’s largest banks, including Deutsche Bank, HSBC, Société Générale, Credit Suisse, UBS and Commerzbank. The involvement of banking giants solves the problem of how to get your money out of Panama: as long as you get it to a Panamanian bank that does business with, say, UBS, you can pretty much withdraw it at any ATM in the world.

As we know from a range of recent investigations, while these institutions might be too big to fail, they’re not too big to launder dirty money. HSBC, for instance, admitted to laundering nearly $900 million for the Mexican drug cartels in 2012. It paid a massive $1.9 billion fine to US authorities. UBS was into more traditional crime. During much of the 2000s, a director of private banking at UBS was literally smuggling diamonds.

It’s no surprise to see the involvement of these massive banks in the Mossack Fonseca papers, because secrecy jurisdictions are in fact crucial parts of the modern global finance system. A 2012 estimate of the wealth tied up in secrecy havens put a figure of $21 trillion on it. That’s trillion, with a ‘t’. If estimates like this are anywhere near accurate, money flows in and out of secrecy jurisdictions account for perhaps half of all global trade.

As Vox’s Matt Yglesias points out today, “even as the world’s wealthiest and most powerful nations have engaged in increasingly complex and intensive efforts at international cooperation to smooth the wheels of global commerce, they have willfully chosen to allow the wealthiest members of Western society to shield their financial assets from taxation (and in many cases divorce or bankruptcy settlement) by taking advantage of shell companies and tax havens.”

Take the United Kingdom. It’s the world’s fifth largest economy, a founding member of NATO, an anchor of the free world, and the former imperial power of a quarter of the world’s surface. But the UK is also one of the world’s most diligent money laundries.

The UK’s complex network of crown colonies and dependencies are among the world’s most notorious secrecy havens. There’s a reason the British Virgin Islands have that word “British” in them: the islands are actually an overseas territory of Great Britain, with various financial powers devolved to them.

Nicholas Shaxson is the author of a book about tax havens entitled Treasure Islands. As he points out in a media release for the Tax Justice Network today:

While the focus is currently on Panama, one of the world’s sleaziest tax havens, it is important not to forget that it is just part of a bigger global system. The United States is a big player in the game, hosting vast sums in foreign-owned assets in conditions of strong secrecy. The United Kingdom runs a global network of Overseas Territories and Crown Dependencies that includes some of the world’s biggest tax havens — including Cayman, the British Virgin Islands, Bermuda and Jersey.

As Shaxson’s book establishes, some of the world’s biggest tax havens are barely a hundred kilometres from Washington, D.C.: in the state of Delaware, which remains one of the most popular places for global corporations to incorporate, and which also has lax standards of financial disclosure.

The Panama Papers show that the ‘problem’ of secrecy havens, tax evasion and international money laundering is one that rich-world politicians and banking regulators aren’t particularly keen to solve.

The government seems unconcerned that the Panama Papers reveal that Wilson Security, a multinational paid millions by the federal government to help lock up innocent asylum seekers, appears to be run by a corrupt Hong Kong businessman.

Indeed, we’re seeing little evidence that the Coalition government of Malcolm Turnbull has any real interest in cracking down on tax secrecy. Despite teaming up with the Greens in December to pass stronger tax disclosure laws, the results of the new regulation have proved disappointing.

As one of Australia’s most respected forensic journalists – the Australian Financial Review’s Neil Chenoweth –  wrote in March, the new laws only affect private companies with more $200 million in income. “The data released this week doesn’t shed a lot of light on anything,” Chenoweth lamented, pointing out that plenty of money was still able to be hidden simply by splitting money up into various private companies with less than $200 million in income. “It looks like the Greens were duded,” he concluded.

Of course, the real duds are ordinary Australian taxpayers. They don’t have the advantage of sophisticated financial planning or offshore Panamanian law firms. They must pay for Australia’s defence, schools, roads and hospitals, while the mega-rich pay little or nothing.

Ben Eltham is New Matilda's National Affairs Correspondent.