A global industry of specialty lawyers, bankers, and agreeable local officials has spread through poor and island nations, British colonies, fee-hungry U.S. states, and other business-friendly outposts. They sell secrecy so corporations, criminals, and public officials can avoid much larger tax payments, sometimes legally. The Panama Papers, millions of stolen digital documents leaked to a German newspaper, Süddeutsche Zeitung, and shared through the donor-funded International Consortium of Investigative Journalists, have lifted a bank-secrecy veil to show how a large Panama-based law firm, Mossack Fonseca & Co., helped leaders of Russia, Pakistan, and other countries, plus gun-runners, drug dealers, soccer bureaucrats, and private citizens, hide money from taxes and disclosures. The firm says it cooperates with investigators and drops clients it finds aren’t honest. This exposure comes as tax avoidance by multinational corporations is once again a presidential campaign issue – and as digital technology, by making it easier to catch and spread data once hidden in paper files, gives whistle-blowers and tax collectors a new edge.
“This is very unusual in terms of the size and scope. But it also fits in a larger way with what has been going on,” says Peter Hardy, a former federal criminal tax prosecutor, now a partner at corporate-defense firm Ballard Spahr L.L.P. in Philadelphia. Beginning with Swiss banks identifying once-secret U.S. customers under threat of criminal prosecution in the late 2000s, and continuing with the federal Foreign Asset Tax Compliance Act requiring foreign banks to tell which U.S. taxpayers have accounts, it’s been getting harder to hide money in offshore havens. The Panama Papers publicity “will push this further,” Hardy says. “The irony is that while the U.S. has been very aggressive in suggesting other countries become more transparent to the U.S. taxing authorities, the U.S. is finding that it is regarded as a tax haven for foreign investors” who export money here to avoid paying taxes at home, Hardy adds. American centers for foreign tax cheats include Nevada and Wyoming, where corporations can more easily operate with no owners identified or questions asked. Delaware, also a tax haven, doesn’t ask for names, either. But it charges companies a franchise share tax, so the private agents who service corporate clients there must know who the company owners are – and can be forced to tell in criminal cases. Delaware partisans say this keeps the state attractive for legal tax avoidance, but discourages fraud. Mossack Fonseca has affiliate offices in Nevada and Wyoming, but not Delaware. “No special reason,” says Mossack Fonseca spokeswoman Ana Heeren. Offshore tax avoidance is among the rare issues that seems to attract bipartisan backing in Congress. U.S. Reps. Carolyn Maloney (D., N.Y.) and Peter King (R., N.Y.) in January sponsored a bill that would force all states to register corporation owners.
Maloney and King praised Global Witness, a British investigative nonprofit whose staff went undercover, asking 13 New York lawyers how to illegally move foreign public funds to the U.S. “All but one of the lawyers had suggestions,” it reported. Tom Clancy’s novel Commander in Chief portrays a Russian leader who hides billions in the British Virgin Islands, a popular banking-secrecy center patronized by such firms as Mossack Fonseca. “These law firms in various so-called bank-secrecy jurisdictions provide services to all kinds of people,” says Thomas W. Ostrander, partner at Duane Morris L.L.P. “Having offshore structures is not improper, not unethical, not illegal. The questions that arise are: Are you reporting [to tax agencies] the existence of these structures and the money earned from them? If you do, these are kosher. They run afoul when they are used to hide income from the taxing authorities, business partners, or soon-to-be ex-spouses.” Ostrander says too many clients still think foreign banks will keep their secrets safe. “I tell them, ‘What about some whistleblower?’ ” Efficient digital information has become easier to steal, and modestly paid service employees find it easier to pass clients’ secrets to regulators and the public. Milwaukee fraud-recovery lawyer Brian Mahany says he’s been approached by three potential clients notified by Mossack Fonseca of the data breach and “very worried that their names may be in the files that were hacked.” By waiting until later this spring to move most of the Panama Papers online, the reporters consortium is effectively giving U.S. tax avoiders who are clients of the Panama firm time to report their possible wrongdoing to the IRS and other tax agencies, making penalties less likely. “Once the list is public,” Mahany told me, “the IRS won’t make deals.”
Authorities across the globe have opened investigations into the activities of the world’s rich and powerful after a cache of leaked documents from a Panamanian law firm showed possible wrongdoing using offshore company structures. The “Panama Papers” have cast light on the financial arrangements of high profile politicians and public figures and the companies and financial institutions they use for such activities. Among those named in the documents are friends of Russian President Vladimir Putin and relatives of the leaders of China, Britain, Iceland and Pakistan, and the president of Ukraine. Leading figures and financial institutions responded to the massive leak of more than 11.5 million documents with denials of any wrongdoing as prosecutors and regulators began a review of the reports from the investigation by the U.S.-based International Consortium of Investigative Journalists (ICIJ) and other media organizations.
Following the reports, China has moved to limit local access to coverage of the matter with state media denouncing Western reporting on the leak as biased against non-Western leaders. France, Australia, New Zealand, Austria, Sweden and the Netherlands are among nations that have commenced investigations, and some other countries, including the United States, said they were looking into the matter. Mossack Fonseca, the Panamanian law firm at the center of the leaks, has set up more than 240,000 offshore companies for clients around the globe and denies any wrongdoing. It calls itself the victim of a campaign against privacy and claims media reports misrepresent the nature of its business. In a printed statement given to Reuters by a staff member at Mossack Fonseca’s Hong Kong office on Tuesday, the firm said it has never been charged with or formally investigated for criminal wrongdoing in its nearly 40 years of operation. “We do not advise clients on how to operate their businesses. We don’t link ourselves in any way to companies we help incorporate,” the firm said in the statement. “Excluding the professional fees we earn, we don’t take possession of clients’ money, or otherwise have anything to do with any of the direct financial aspects related to operating these businesses.”
Mossack Fonseca also said it supports international initiatives requiring greater transparency of newly incorporated companies and trusts and has implemented such measures as part of its own due diligence. The staff at the office declined to answer questions. The Hong Kong government said in a statement that its Inland Revenue Department has taken note of the recent release of the documents and will take “necessary actions” based on any information it gets. It will not comment on individual cases or disclose the course of action because of secrecy provisions in Hong Kong tax law, the government said.
Credit Suisse and HSBC, two of the world’s largest wealth managers, on Tuesday dismissed suggestions they were actively using offshore structures to help clients cheat on their taxes. Both were named among the banks that 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, according to ICIJ. Credit Suisse CEO Tidjane Thiam, who is aggressively targeting Asia’s wealthiest for growth, said his bank was only after lawful assets. Speaking at a media briefing in Hong Kong, he acknowledged the bank uses offshore financial structures, but only for very wealthy customers with assets in multiple jurisdictions and did not support their use for tax avoidance or allow them without knowing the identities of all those concerned. “We do not condone structures for tax avoidance,” he said. “Whenever there is a structure with a third party beneficiary we insist to know the identity of that beneficiary.”
Separately, HSBC said the documents pre-dated a thorough reform of its business model. Both banks have in recent years paid large fines to U.S. authorities over their wealth management or banking operations. Credit Suisse agreed in 2014 to pay a $2.5 billion fine for helping rich Americans evade taxes. HSBC agreed in 2012 to pay $1.92 billion in fines, mainly for allowing itself to be used to launder Mexican drug money. The reports on leaks also pointed to the offshore companies linked to the families of Chinese President Xi Jinping and other powerful current and former Chinese leaders. Chinese Foreign Ministry spokesman Hong Lei, when asked if the government would investigate tax affairs of those mentioned in the Panama Papers, told reporters at a daily news briefing the ministry would not comment on “these groundless accusations.” Searches for the word “Panama” on Chinese search engines bring up stories in Chinese media on the topic, but many of the links have been disabled or only open onto stories about allegations directed at sports stars.
The Global Times, an influential tabloid published by the ruling Communist Party’s official People’s Daily, suggested in an editorial on Tuesday that Western media backed by Washington used such leaks to attack political targets in non-Western countries while minimizing coverage of Western leaders.