The Panama Papers – What Will Come of This Massive Leak?

Yesterday, Sunday 3rd April, social media started buzzing with a breaking story that actually began over a year ago. An individual, not identified at the time of writing (although, surely, the name will come out before long) approached the German daily newspaper Suddeutsche Zeitung with an offer of data from an International Panama-based law firm, Mossack Fonseca. As with other law firms based in tax haven jurisdictions, Mossack Fonseca ran a thriving business setting up local vehicle companies used in international finance.  Panama’s main attraction, from this point of view, is its stringent secrecy laws. It is therefore of interest to publicity-shy private clients, banks unwilling to disclose corporate clients and structuring information and, you might think, a whole host of undesirables from tax evaders to corrupt politicians and officials, fraudsters and drug barons. The startling thing, and the reason why the Suddeutsche Zeitung rapidly called on the greater resources of the International Consortium of Investigative Journalists (ICIJ) as had happened with other major stories, such as the HBC “Swiss Leaks” story, is the sheer quantity of data. Some 2.6 TB of data, representing 11.5 million records involving 214,000 offshore companies, showing the dealings of 140 significant politicians and public officials including 12 current or past “world leaders” and dealings with 33 people “blacklisted” due to sanctions, suspicions of terrorist activity or drugs trafficking and covering a long period from 1977 right up to 2015 so, unlike many past leaks of this type, the data does include recent and current activity.

This immediately raises a number of questions. First, how much of this activity was actually illegal? Not as easy a question to answer as you might think. Illegal where, for a start? In Panama? In other countries indicated by the information? And are the persons and entities involved in the activity subject to the jurisdiction of the countries where laws may have been broken? David Cameron would doubtless say that the offshore fund Blairmore Holdings, Inc. managed by his late father, Ian Cameron, was a perfectly legitimate vehicle and that all due taxes were paid in all relevant jurisdictions: he will have to explain why it was necessary to use Panama rather than any other country, though. Accounts used to handle the proceeds of the Brinks-Mat gold robbery facilitated by Panamanian vehicles supplied by Mossack Fonseca may be harder to explain. If the King of Saudi Arabia is asked to explain Panamanian vehicles used by him he could reasonably say that he dictates what the laws of Saudi Arabia are and, if he is not subject to taxes (which he is not) and his actions are legal in his own country, what business of anyone else is it?

Secondly, is this just the tip of the iceberg? What about all the other secrecy jurisdictions and all the other law firms and accountants? Indeed, the likes of (in order of size) Maples and Calder of the Cayman Islands, Appleby of Bermuda, Carey Olsen and Mourant Ozannes of the Channel Islands, Walkers of the Cayman Islands, Ogiers of Jersey and Harney Westwood & Riegel of the British Virgin Islands will be having a busy morning, I imagine, fending off numerous calls from clients who were going to use a Panamanian Company supplied by Mossack Fonseca and have suddenly decided at the last minute that that is a terribly bad idea and some other offshore jurisdiction might be better. Because activity of this nature will certainly continue. The revelations are, indeed, the tip of a much larger iceberg.

Thirdly, what are the political consequences? There have already been calls for the resignation of Sigmundur David Gunnlaugsson, the Icelandic Prime Minister who seems, according to the Panama data, to have owned, with his wife, an offshore company holding millions of dollars worth of bonds issued by Icelandic Banks that were later bailed out as a result of the financial crisis. Petro Poroshenko, the Ukrainian President who has campaigned against corruption, has explained that a BVI holding company established for him, and its subsidiaries in Cyprus and Holland, were not included in his 2014 election disclosures because they had “no assets”. President Putin, on the other hand, does not seem to feel the need to explain anything. An adviser told the ICIJ that he would not be replying to any “honey-worded queries”about transactions including a $200m loan the interest on which seemed to be payable to one of his oldest friends, a concert cellist, as these would contain questions that have been “asked hundreds of times and answered hundreds of times”. So that’s all fine, then. At least 8 current or former members of China’s politburo will be reluctant to explain why their family members have offshore companies provided by Mossack Fonseca: luckily, not being elected, they probably will not have to. Mossack itself should know all about regimes of questionable legitimacy: the founder, Jurgen Mossack, was the son of a German nazi member of the Waffen-SS, Erhard Mossack, who settled in Panama after the Second World War and also worked for the CIA at a time when it was most active in trying to destabilize a number of latin american regimes.

Finally, what are tax authorities and regulators actually going to do about all this? In the short term, what action will be taken against individuals and the advisers themselves whose activities have been so graphically exposed and, in the long term, what is to stop the next scandal, and the next after that? What is the solution to the abuse of “offshore”? The response to the last one, the “Swiss Leaks” HSBC data, was disappointing in the UK. Just one prosecution from data on approximately 6,000 clients leaked to HMRC. Really? Only one case of evasion worthy of prosecution? Let’s hope, despite, HMRC’s stretched resources, they manage to make a little more progress in relation to UK taxpayers this time. Public pressure will demand it, as will the greater activity that other regulators around the world will undoubtedly show, as the politics keep the Mossack story on the front page in their own countries. And what about the law firm itself? The data show that its employees created backdated records to erase traces of a  crooked accountant who had acted as a nominee director for companies set up in the Caribbean by Mossack, destroyed documents when accused of complicity in money laundering in Brazil and concealed the firm’s ownership of a US branch to evade a US Court Order. As far as systems and controls are concerned, the data shows clear failings in “Know Your Customer” due diligence and, not least, data security. The Solicitors Regulation Authority has never seen the need to be critical of the London office of the firm though, apparently.


It clearly is not enough, however, for regulators and tax authorities to announce enquiries and mutter about “lessons to be learned” “cracking down” and “doing all it takes” if the only result is another slap-on-the-wrist fine followed by business-as-usual for the offshore community. It is time to ask some more difficult questions. Why are advisers not liable for the activities of their clients? The answer to the defence “how was I supposed to know” is, surely, “because you were the person in the best position to investigate properly”. Why cannot regulators and tax authorities do a better job of obtaining information than investigative journalists? Why do offshore jurisdictions not do a better job of regulating activity in their back yard? Because turkeys do not vote for Christmas, that’s why. Jersey cannot make a living by growing potatoes and flowers, and the Bermudan game-fishing and golf industries won’t pay the rent. Why, actually, are offshore jurisdictions allowed to exist at all? If UK forces invaded the channel islands and made them subject to the same laws as the rest of the UK or treated the British Virgin Islands as a county of England with its own Members of Parliament, who would be the losers? And where would all the money go? Is the end game of national self-determination that we end up being governed by world groupings and organisations that look like FIFA? The crux of the problem is that “onshore” states are run by people who, as has been shown in this latest leak and will doubtless be shown time and again in the future, use “offshore” extensively for their own personal benefit and who believe that no action to eliminate this sort of activity will be politically acceptable or effective except to drive the activity to some other country where the colonial “parent” country has less influence: we are not, unfortunately, all in this together and, at this rate, we never will be.

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