Panama, the offshore tax haven now exposed

Panama, the offshore tax haven now exposed

Recent revelations have uncovered some of the wealthy individuals and organisations who skirt the law by sheltering wealth from their country’s tax authorities by using an offshore tax havens ? in this case in Panama. A huge cache of data 11.5 million documents leaked from the Panama law firm Mossack Fonseca is now in the hands of the International Consortium of Investigative Journalists; who, as determined ferret-like investigators have a habit of delving deeply and then deeper still to uncover the information their profession compels them to seek. Already the identities of the world’s mandarin elite, the individuals, organisations, and governments, are surfacing.

Are offshore structures legal?

Using offshore structures is legal and many are used for legitimate reasons. In countries such as Russia and Ukraine, for example, businesses tend to place assets offshore to defend them from "raids" by criminals, and to get around hard currency restrictions. Offshore structures can be legitimately used for inheritance and estate planning in UK law, where there is a distinction between tax avoidance and tax evasion: criminals seek tax-evasion strategies.

UK law

The General Anti-Abuse Rule (GAAR) operates in the UK, but is no good if there are not enough people enforcing it or bringing cases to trial to help define it. The UK Government says it is coming down hard on tax avoidance; and the anti-avoidance legislation in the UK, the increased investigative workforce, and other measures is having an impact, but are the authorities throwing money at the wrong sort of "criminals"? It is glaringly obvious that nothing specific or concrete has been put in place to crack down specifically on offshore tax havens and the people who use them.

The Common Reporting Standard due to come into force next year will allow tax authorities agreed by forty-seven leading countries to share data on individuals, but only when specifically requested. Many, many pundits, analysts, and finance and legal experts are suggesting that the way forward is to come to a global agreement to stamp out tax havens altogether. That is unlikely to happen.

New legislation in the UK

David Cameron has said that the UK will crack down on "the corrupt, criminals and money launderers" that take advantage of anonymous company structures. The UK government is to set up a central register detailing the beneficial owners of offshore companies. From June 2016, for the first time, UK companies will be statutorily obliged to file a register of "significant" owners with Companies House. But the problem is that offshore tax havens such as Mossack Fonseca are protected in law within their own jurisdiction.

About Mossack Fonseca

Mossack Fonseca is a Panamanian law firm with a worldwide operation, the world’s fourth biggest offshore law firm with "a global network with 600 people working in 42 countries" according to its website. It has franchises worldwide that act as separately owned affiliates with exclusive rights to use the Mossack Fonseca brand and sign up new customers. The firm operates in tax havens in Switzerland, Cyprus, and the British Virgin Islands, and in the British crown dependencies Guernsey, Jersey, and the Isle of Man.

Despite Mossack Fonseca pleading that the companies it incorporates are not used for tax evasion, money-laundering, terrorist finance, or other illicit purposes, it is known that terrorist groups, drug cartels, and other such illegal operations habitually hide money offshore. Why then would they not do so in Panama using Mossack Fonseca? According to the journalist Ken Silverstein in 2014, Mossack Fonseca "attracted a long line of ‘dirtbags’ and dictators who used Panama to hide their stolen loot, including Ferdinand Marcos, ‘Baby Doc’ Duvalier, and Augusto Pinochet". He continues, "When Manuel Noriega, commander of the Panama Defence Forces, took power in 1983, he essentially nationalised the money-laundering business by partnering with the Medellin drug cartel and giving it free rein to operate in the country".

How has Panama become one of the world's best-known tax havens?

According to a Norwegian study of 2013, Panama’s history as a tax haven begins in 1919 when she started to register foreign ships to help American Standard Oil avoid US taxes and regulations. Once other US ship owners heard about this then of course they followed, some seeking to avoid the higher wage and better working conditions imposed by US legislation. Of relevance also is that US passenger ships were able to serve alcohol to their customers during Prohibition in Panama without breaking the law.

From this point on, Panama extended the principles it had applied to shipping (minimal requirements regards tax, regulation, and disclosure) to offshore finance. According to the Norwegian study, "Wall Street interests helped Panama introduce lax company incorporation laws, which let anyone start tax-free, anonymous corporations, with few questions asked".

The Panama landscape in the 20th and 21st centuries

Offshore finance had a relatively modest profile in Panama until the 1970s, when world oil prices surged. Around this time, Panama passed laws entrenching corporate and individual financial secrecy so that the names of corporate shareholders were not required to be publicly registered and strict confidentiality laws and regulations were put in place. In addition, strict banking secrecy laws were imposed, whereby financial institutions are prohibited from giving information about offshore bank accounts or account holders. In contrast to the lax rules governing transparency of ownership, a Panamanian court order was put in place to be used in conjunction with investigations into terrorism, drug trafficking or other serious offences, but not for tax evasion.

By the 1980s the Panama Canal and its free trade zone attracted businesses; and these businesses attracted more than 100 international banks with offices in Panama City. Panama’s attempts to position itself as a legitimate offshore banking centre was damaged, however, by growing criticism about the influence of the narco-businesses there. After the US invaded Panama in 1989 and overthrew Noriega, his successor, Guillermo Endara, a civilian and lawyer, improved Panama’s international image, but accusations that the country’s financial system permitted money laundering, fraud, and international tax evasion persisted.

What makes Panama different from other tax havens today?

Panama has no tax treaties with other countries, which provides an extra layer of protection for foreigners. There are no exchange controls in Panama either, and so there are no limits or reporting requirements for money transfers in or out.

A tax-specialist barrister Jolyon Maugham told the BBC that tax havens "don’t serve any purpose for the global economy". He continued, "Panama is a … uniquely ugly place to site your assets ... notable only for the extreme and unattractive secrecy that it offers." Apparently, Panama makes available "an especially strict form of secrecy, a type of opacity of ownership, and (if the reports of backdating are correct) a class of wealth management professionals some of whom have especially compromised ethics. You go to Panama, in short, because, despite its profound disadvantages, you value these things."

If, as the barrister suggests one goes to Panama specifically because one values "compromised ethics," "secrecy," and "opaque" company ownership laws, then two further attributes of Mossack Fonseca stand out. From one perspective their hard-line refusal to cooperate with international transparency initiatives and, from another angle, the firm’s winning attitude to the fierce competition of the business of legal avoidance arrangements, which is providing the services and secrecy clients seek. Together these two attributes make for a reputation that as Pascal Saint-Amans, director of the OECD’s centre for tax policy has said, "From the standpoint of reputation, Panama is still the only place where people still believe they can hide their money."

Panama has "zero tolerance" for illicit financial activities?

Once the story broke about the leaked Mossack Fonseca documents, Panama’s current President Juan Carlos Varela said his government had "zero tolerance" for illicit financial activities. However, the cache of documents from the law firm Mossack Fonseca suggests a rather different hyper-tolerance to illicit financial activities. They show how the company has helped clients launder money, dodge sanctions, and evade tax.

Operating within the law?

Mossack Fonseca says it has operated beyond reproach for forty years and never been accused or charged with criminal wrongdoing. The law firm says that offshore companies are used for legitimate purposes, and adds that it conducts thorough due diligence and regrets any misuse of its services. The firms says it has always complied with international protocols to ensure the companies it incorporates are not used for tax evasion, money-laundering, terrorist finance or other illicit purposes.

Conclusion: Panama, the offshore tax haven now exposed, only one of many tax havens globally, there are many more …

The leaked documents reveal the many ways the rich can exploit secretive offshore tax regimes. Twelve national leaders are among the 143 politicians, their families, and close associates from around the world known to have been using offshore tax havens. How many other tax havens of a similar ilk are to come? This first glimpse into the black box of offshore tax havens is surely causing unwanted scrutiny of the entire industry. Quite apart from the "really bad guys", already at least two members of the House of Lords and our own Prime Minister’s family are in the general line-up for this scandalous tableau.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.