Welcome to Panama

panama-canal

Register Today for Investigating on the InternetMay 18-19 2016 RVACFES Seminar!

The headlines about the “Panama Papers,” the gigantic trove of offshore records that surfaced this week, were all about the famous names connected to secret financial accounts: Russia’s Vladimir Putin, Ukraine’s Petro Poroshenko, China’s Xi Jinping, Syria’s Bashar Assad, Saudi Arabia’s King Salman and more.

But on second glance, most of the names weren’t too surprising. You didn’t really expect the world’s autocrats to keep their money at home, where it could be seized by whoever came next, did you? (And in some cases, the autocrats’ names weren’t really there; the accounts were held by family members or friends — in Putin’s case, an old classmate, a cellist with $2 billion.) What was more striking was the industrial scale of the money transfers: almost 215,000 offshore shell companies, more than 14,000 clients, more than 11 million documents — and uncounted billions of dollars. That and the fact that the business of moving secret foreign money isn’t confined to steamy tax havens like Panama. Some of the money in the Panama accounts ended up in the United States, invested in real estate and other assets from Miami to Las Vegas. The firms that transferred the funds included major European banks headquartered in Switzerland, Luxembourg and London. And most of the shell companies formed by the Panamanian law firm Mossack Fonseca were set up in the British Virgin Islands, a possession of Britain. “Those shell companies are being formed to buy property and open bank accounts in safe places — places like New York and Los Angeles,” said Sarah Chayes, a former U.S. advisor in Afghanistan who now works on global efforts to combat corruption. “What that law firm did is just one step in a chain of corruption services,” Chayes told me. “And the next level outward includes people in the United States — lawyers, real estate brokers, other agents.”

Indeed, the United States is an active competitor in the “corruption services” business. Nevada, Wyoming and South Dakota have all passed laws making it easier to set up shell companies — and harder to identify the real owners. Bankers say that has actually prompted a flow of foreign assets from traditional tax havens such as Zurich and Bermuda to less elegant banking centers like Reno and Sioux Falls. “How perverse that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour,” Swiss lawyer Peter Cotorceanu wrote in legal journal. “That giant sucking sound you hear? It is the sound of money rushing to the USA.” Some people think that “rushing” is actually good news for the American economy. High-end real estate brokers from New York to Beverly Hills have seen a flood of buyers from Russia, China and the Middle East. “Wouldn’t it be great if we could get all the Russian billionaires to move here?” Michael Bloomberg said in 2013, when he was mayor of New York. But if there are short-term benefits to anonymous money, the long-term picture is far less sunny. At least some of that money is undoubtedly the product of corruption in other countries. And corruption is one of the main drivers of instability and terrorism around the world, including the rise of groups such as Islamic State. “Corruption is a radicalizer because it destroys faith in legitimate authority,” Secretary of State John F. Kerry said in a speech earlier this year. “No one knows that better than violent extremist groups, who regularly use corruption as a recruitment tool.”

Corruption also robs poorer countries of money for economic development. One respected research group, Global Financial Integrity, estimates that corruption costs developing countries at least $1.1 trillion a year — more than all the foreign aid and direct investment they receive from the rest of the world. There’s no easy fix. Nobody’s suggesting that corruption can be eliminated. But there are at least two things the United States can do to make it harder for foreign investors to evade taxes or conceal the proceeds from corruption. One is a practice European countries have already begun: Establish a “beneficial ownership registry” of the true owners of shell companies. In most countries, the registry is designed to be easily accessible to any government agency investigating a violation of the law; in Britain, it’s intended to be open to the public. A second, less ambitious reform: Require lawyers, real estate brokers and registered investment agents to follow the “know your customer” regulations that apply to U.S. banks. Thanks to energetic lobbying, those industries are exempt from the federal requirement to report dubious inflows of foreign money. The Obama administration will have a chance to work on both of those ideas soon; British Prime Minister David Cameron is holding a global summit on corruption next month. Cameron has a personal stake in a successful outcome. His late father, Ian Cameron, ran an offshore investment fund to help wealthy British clients avoid paying taxes in Britain. His name turned up in the Panama Papers, too.

Some History

The two men came together in an era of political and economic uncertainty in Panama: One a reserved German immigrant whose father served in the armed wing of the Nazi party, the other a gregarious, aspiring novelist whose family opposed Panama’s military dictatorship. With the nation still under the sway of Gen. Manuel Noriega, the pair merged their small law firms in 1986, creating what would become a powerhouse of secretive offshore banking for the elite. Over the next three decades, Jürgen Mossack and Ramón Fonseca expanded their practice to a staff of 500, with affiliate companies around the world and a client list of the powerful, the famous and, sometimes, the infamous. In January, a prosecutor investigating the sweeping corruption in Brazil publicly called their law firm “a huge money launderer.”

The partners had become very wealthy, and Mr. Fonseca leveraged the firm’s success to gain an influential role in the upper ranks of politics. He told associates that he wanted to clean up the government, serving as a special adviser to President Juan Carlos Varela until the corruption scandal in Brazil forced Mr. Fonseca to resign this year. In an interview, he said that entering politics was, in part, a way of giving back. “I believe in sharing the pizza,” he wrote. “At least to give others one slice.” The firm, Mossack Fonseca, was built on assurances of bulletproof privacy for its clients. But its operations were laid bare this week by a vast leak of millions of documents that have helped expose the proliferation of shell companies and tax havens for the world’s wealthiest people. The revelations have already prompted Iceland’s prime minister to step aside and spurred criminal investigations on at least two continents. The leak has also brought more scrutiny to Panama’s financial and legal sectors, just as the country’s leadership was trying to shed its longstanding reputation as a haven for the loot of the criminal and corrupt. In February, Panama was removed from a watch list maintained by an international agency that sets standards to combat money laundering and terrorism financing, but it remains under scrutiny as a haven for tax evaders. Panama’s president has vowed to cooperate with any judicial investigations stemming from the leaked information, which could put him in the awkward position of allowing an inquiry into his former adviser. Mossack Fonseca has denied that it committed any wrongdoing, and Mr. Fonseca proclaimed his firm’s innocence.

“At the end of this storm the sky will be blue again and people will find that the only crime is the hacking” of the firm’s documents, he said in an hourlong interview conducted over the messaging platform WhatsApp. But some in Panama who know Mr. Fonseca say the leak’s contents are at odds with how he has tried to portray himself and his role in the country. Carlos Guevara Mann, a fellow party member and former government official, said he had once asked Mr. Fonseca, already a successful novelist, why he would bother with politics. The lawyer, he recalled, told him that he wanted to set straight the nation’s human rights record. “When you match that conversation with the fact that the firm was providing services to all of those notorious human rights violators — Qaddafi, Mugabe, Assad and Putin — it really is repugnant,” Mr. Mann said. Among the leaked documents was an email exchange obtained by the International Consortium of Investigative Journalists, in which the firm’s top partners realized they had worked for years with clients from Iran who had been listed on a sanctions list published by the United States government and the United Nations. “This is dangerous!” Mr. Mossack wrote in an email to Mr. Fonseca and others at the firm. “A red flag should have been raised immediately.” Mr. Mossack placed blame for the oversight on employees in the law firm’s London office who were “not doing their due diligence thoroughly, (or maybe none at all).” The leaks have roiled Panama’s legal and banking sectors, bedrocks of the country’s economy, and chilled Panama’s business class. The country’s bar association has come to the firm’s defense, saying the leak amounted to an attack on the country’s reputation. “Terrible damage is being done to them, to all lawyers and their country at large,” José Alberto Alvarez, the association’s president, said in a news conference on Monday. Continue reading the main storyMr. Mossack placed blame for the oversight on employees in the law firm’s London office who were “not doing their due diligence thoroughly, (or maybe none at all).” The leaks have roiled Panama’s legal and banking sectors, bedrocks of the country’s economy, and chilled Panama’s business class. The country’s bar association has come to the firm’s defense, saying the leak amounted to an attack on the country’s reputation.

The rise of Mossack Fonseca coincided with the emergence of Panama as a capital of the worldwide offshore banking industry. The increasing flow of global capital across borders during the 1970s and 1980s fueled a market for lawyers and accountants capable of sheltering the money, and Panama was primed to take advantage of the boom. Beginning in the early 1900s, its station as a trade and shipping center — at the intersection of two continents and at the convergence of the Pacific Ocean and the Caribbean Sea — made it an obvious candidate for offshore accounting. International ships flew the Panamanian flag to take advantage of its advantageous corporate tax structure, which some experts say was copied almost directly from the state of Delaware. “Because it has always been at the center of international trade, it was a natural fit for things like offshore finance and international offshore tax planning,” said Victor Fleischer, a professor at the University of San Diego School of Law. “I don’t know if it is justified or not, but people have always thought of Panama as a little bit shady.” The firm was aggressive and nimble, capable of responding to an evolving regulatory landscape. Its reputation flourished. But other Panamanian law firms joined the fray, too, including larger and more prominent practices than Mossack Fonseca.

“All the important Panamanian law firms have a division like this,” said Roberto Eisenmann, the founder of the newspaper La Prensa in Panama. In fact, Mossack Fonseca is just one of countless firms around the globe dedicated to a worldwide industry that harbors trillions of dollars and may deprive nations of as much as $200 billion in tax revenues each year, tax and legal experts say.Mossack Fonseca’s founding partners bought large homes in exclusive neighborhoods in Panama City as well as luxurious weekend retreats. Growing up, their children borrowed the company plane and took friends on trips.